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What the Inflation Reduction Act means for green energy in the US
22/3/2023
8 min read
Feature
Signed into law on 16 August 2022, the Inflation Reduction Act (IRA) is the US’ most significant climate legislation and the single largest investment in renewable power in the nation’s history. Sara Siddeeq reports on what the Act means for the US.
Over the last few decades, the US has lagged behind in clean energy production. The nation has experienced an 80% decrease in solar manufacturing over the past 10 years, while China has emerged as the dominant player in the solar supply chain. China is also the leading wind energy producer, renewable energy investor and minerals producer required for clean energy.
China’s monopoly has limited the US’ opportunities to diversify clean energy supply chains, foster more competition, create domestic manufacturing jobs and mitigate geopolitical risks.
In response, the IRA provides the US with $369bn of funding to support a more rapid transition to renewable energy. It introduces several new provisions while resembling elements of the Build Back Better Act (BBBA) and building on measures included in the Bipartisan Infrastructure Law. It is designed to revolutionise the renewable energy landscape by building in incentives that promote technological innovation and domestic manufacturing.
Through this legislation, Congress aims to reduce emissions while positioning the US as a global leader in the clean energy industry.
Tax credits for green energy
The revamped renewable tax credits under the IRA are expected to accelerate renewable generation, especially solar, over the next decade. Under the IRA, Wood Mackenzie predicts solar capacity installation could increase by 67% by 2032.
Most critically for the utility-scale clean power industry and the nation’s energy future, the IRA extends the production tax credit (PTC) and investment tax credit (ITC) for renewable energy projects constructed before 1 January 2025. These programmes have been the foundation of the US’ solar and wind power growth, marking a significant boost for these sectors.
By meeting the requirements for bonus adders, clean energy projects can qualify for higher tax credit rates than what the current market offers. The purpose of these bonus adders is to incentivise developers to pay prevailing wages, generate employment via apprenticeships, and create projects in communities disproportionately affected by emissions and climate change.
Under the IRA, the range of ITC value a project can qualify for is between 6% and 50% for utility-scale projects, and up to 70% for projects under 5 MW, in contrast to the current law’s 26% rate. Additionally, the range of PTC values a project can receive spans from $5 to $30 per MWh, compared to the current PTC rate of $26/MWh.
The Bill means that energy storage systems (ESS) – including energy storage projects paired with renewable generation and standalone ESS – are also eligible to receive the ITC and bonuses for the first time. The tax credits for standalone ESS will make battery storage deployment more financially attractive at commercial and industrial facilities.
According to David Mintzer, Energy Storage Director at UL Solutions: ‘Providing an investment tax credit for standalone storage is the single-most important policy change in the IRA – period.’ He states: ‘This one change sets up all of the other energy storage advantages gained from the new law. Those of us in the BESS [battery energy storage system] industry have been waiting for this to happen for more than 10 years.’
From 1 January 2025, the existing ITC and PTC will be substituted with new technology-neutral credits based on emissions. This indicates that any qualified electricity-generating facility with an expected greenhouse gas (GHG) emissions rate of zero or less will be entitled to the credit, extending the eligibility for tax credits beyond wind and solar. This will remain in place until 2032 or when US electricity sector emissions are 75% below 2022 levels – whichever is later.
New funding
In addition, the IRA provides funding to increase domestic manufacturing, strengthen the supply chain and ultimately lower the cost of vital components of the clean energy transition. The notion behind these additions is decreased reliance on imports and increased energy independence while lowering emissions.
Advanced manufacturing tax credits are accessible for the production and sale of qualifying elements, such as inputs for batteries, solar panels and wind turbines. Separate funding is available for retrofitting auto manufacturing facilities to produce electric vehicles (EVs). Furthermore, the Act provides funding for President Biden’s Executive Order, authorising the use of the Defense Production Act to increase domestic manufacturing of critical minerals, heat pumps, electrolysers, transformers and insulation.
The IRA provides funding to the Department of Energy to support transmission buildout. This entails $2bn in loans for transmission deemed a ‘national interest corridor’ and $760mn to help plan, permit and facilitate interstate transmission lines.
The IRA’s expansion of the ITC includes a higher credit value for waste energy recovery property and newly added eligibility for combined heat and power (CHP) systems. Both systems now qualify for a 6% base credit that can increase to 30% if labour requirements are met and include the stackable domestic content and energy community 10% bonus adders, potentially resulting in a 50% total credit.
Edison Energy’s Senior Policy Analyst Matt Donath commented: ‘The increased tax credit for waste-to-energy recovery projects offers an alternative solution for industrial facilities and commercial properties to enhance their resiliency and reduce their emissions.’ Moreover, the ITC’s inclusion of cogeneration systems at the same credit level as renewable and other clean energy projects highlights the importance placed on reducing emissions in the industrial sector.
A renewables future with renewed certainty
By extending tax credits for 10 years and introducing new tax credits for emerging technologies, the Act should bring some much-needed certainty to the renewables sector. Prior to the Bill, uncertainty related to solar tariffs, energy policy, supply chain bottlenecks and rising project costs due to inflation resulted in delayed or cancelled projects. But the IRA will shift that momentum by reducing the costs of renewables, building confidence to invest in clean energy projects and increasing the availability of projects to corporate buyers.
During the first half of 2022, the US onshore wind industry experienced a notable slowdown in installations. This was in part due to developers waiting for policy updates, in addition to rising equipment costs and supply chain disruptions. While it will not resolve supply chain issues, the IRA’s tax credit extension will alleviate some of the financial uncertainty that has been holding back many developers. It could result in a 43% increase in incremental wind capacity additions by 2030. This should help the industry recover some of its lost momentum in the face of ongoing supply chain challenges.
European response to the IRA
The European Union’s (EU) response to the IRA has taken three forms. Firstly, the EU has engaged in negotiations with the US to modify the legislation and has made attempts to persuade the US government to extend subsidies to EU companies working in green industries. While commercial EVs now qualify for IRA tax credits, EVs sold for private use remain excluded, and the US appears reluctant to make further concessions.
Secondly, temporary measures have been implemented while more comprehensive policies are debated. The European Commission (EC) has proposed an extension to the temporary relaxation of state-aid restrictions, which were introduced to help member states support domestic industries affected by the COVID-19 pandemic and later extended to counter the economic impacts of Russia’s war against Ukraine.
Ursula von der Leyen, EC President, has also proposed a Green Industrial Plan to strengthen the EU’s green industrial base and support the transition to net zero. The plan includes four key targets: predictable and simplified regulations, quicker access to finance, upskilling workers, and open trade for resilient supply chains.
In the UK, EV manufacturers fear the IRA will make them less competitive, with global investment likely to be drawn to the US due to the tax credits on offer. Arrival, a start-up in electric vans, has abandoned plans to start production in the UK in favour of a factory in the US, for example, while Jaguar Land Rover has not yet committed to carrying out its planned production scale-up in the UK. The UK’s hydrogen industry is also at risk, as many of the £1.1bn worth of hydrogen projects may relocate if the government does not match US support.
Transformational growth
The US’ renewable energy market has already seen exponential growth in recent years, but the initiatives in the Bill are set to supercharge deployment – particularly in offshore wind and solar power – over the coming years.
By 2030, roughly 40% of the country’s electricity is expected to come from wind, solar and energy storage. A report by American Clean Power (ACP) indicates that the current clean power operating capacity in the US is more than 211 GW, meaning that the IRA could result in approximately 750 GW of operating clean energy capacity by the end of the decade. Adding 550 GW of new utility-scale clean energy means generating enough electricity to power the equivalent of 110 million homes across the US. In fact, there could be enough clean power generated in 2030 to meet the electricity needs of the nation’s nine biggest energy-consuming states.
The US’ renewable energy market has already seen exponential growth in recent years, but the initiatives in the Bill are set to supercharge deployment – particularly in offshore wind and solar power – over the coming years.
The rate of clean energy installations is anticipated to accelerate throughout the next decade as a result of the IRA. With stable policies in place, we can expect annual wind, solar, and energy storage capacity installations to reach more than 50 GW by mid-decade, before climbing further to over 90 GW by the end of the decade – more than tripling the 28 GW installed in 2021.
This tremendous growth in clean power is expected to yield substantial economic benefits and generate numerous job opportunities in the renewable energy industry. According to ACP’s projections, implementing the IRA could result in the creation of 550,000 new job positions in the clean energy sector, more than doubling the current workforce in this industry.
Measures in the IRA are expected to drive an estimated 40% reduction in economy-wide emissions by the end of the decade, relative to 2005 levels, positioning the US to meet President Biden’s climate goals of substantially lowering GHGs by 2030 and reaching net zero by no later than 2050. In the electric sector alone, clean energy resources are expected to cut emissions to just one-third of 2005 electric-sector emissions levels by 2030.
A monumental step forward
The IRA represents a significant leap towards achieving a more sustainable and carbon-neutral future and is a landmark moment in the US’ energy transition. It will undoubtedly have wide-reaching benefits for renewable energy in the US over the next decade.
However, swift action in Congress is imperative to ensure these critical investments in the US’ energy future progress and reach their maximum potential. ‘We don’t get to call it a day and go home now,’ Alexandra Adams, Senior Director of the non-profit Natural Resources Defense Council’s Federal Affairs team, commented.
And she’s right; the IRA is only the first important step.