How the US government’s Inflation Reduction Act impacts energy transition
US President Joe Biden signed into law the Inflation Reduction Act (IRA) on August 16, 2022. The law calls for investments of $437 billion over the 10 years from 2022 to 2031, of which $369bn is allocated towards energy security and climate change.1 This article highlights some of the key areas within energy transition that are impacted by the IRA, a topic that we have focused on in previous articles.2
Highlights of the act
The clean energy part of the package touches almost every sector within energy transition and calls for about $270bn of investments in the form of tax credits. Broadly, the tax incentives are structured in two tiers: providing a base rate and then a bonus if certain wage and apprenticeship requirements are met. More clarity from the Internal Revenue Service (IRS) is needed on what that exactly entails. For specific sectors, there is an extra incentive based on location, such as a wind farm in a low-income community or where a coal-fired plant has been retired. There are also incentives for domestic manufacturing in other sectors.
Estimated Energy Transition Spending in IRA (2022-2031)
Key highlights for some of the major sectors within energy transition include:
1. Renewable Energy: Wind, solar, and storage tax credits account for about half of the $270bn in investments. There are two important aspects to this:
a. The phasing out of these credits is now linked to total emissions in the US (over five years once the US sector emits 75% less carbon than in 2022) rather than over a fixed period. This provides an enormous amount of visibility and longevity to these projects.
b. A new system gets phased in where all generators of zero-carbon energy would get compensated similarly
2. Nuclear: The US nuclear fleet is recognised for its low carbon profile that creates a price floor for every MWh generated, as well as creating a ceiling that recognises the current high power price environment.
3. Hydrogen: A tax credit of $1/kg is provided for blue hydrogen and $3/kg for green hydrogen — green hydrogen differs from blue in that it is produced with renewable energy and thus largely eliminates emissions. Some estimates have put blue hydrogen at parity with grey hydrogen (derived from natural gas and produced from fossil fuels), with green hydrogen becoming cheaper than grey hydrogen after utilising the credits.3
4. Electric vehicles: The $7,500 credit on certain new EVs, including fuel-cell vehicles, and the removal of the manufacturer-level cap has been continued. However, half of the credit is based on domestic mineral content and half on domestic battery manufacture. Stricter rules are also applied that exclude high-income buyers and pricier models.
1. https://democrats.senate.gov/imo/media/doc/inflation_ reduction_act_one_page_summary.pdf.
2. The Coming Hydrogen Fuel Energy Revolution, Investing in Sustainable Growth Newsletter, October 2020. Air Products: Enabling Sustainability, Investing in Sustainable Growth Newsletter, October 2021.
3. Bernstein research: US Renewables and Hydrogen: An Analysis of the ground-breaking Inflation Reduction Act’s clean energy proposals; Deepa Venkateswaran; August 1, 2022.
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