TOPIC #5
Inflation Reduction Act of 2022: Decarbonization or Bust
A summer surprise from Congress ushers in a new era of sweeping federal energy and climate policies.
Unprecedented Amounts of Federal Funding Could Dramatically Reshape the U.S. Energy Landscape
- In late July, Senators Schumer (D-NY) and Manchin (D-WV) emerged from clandestine meetings to announce an unexpected agreement to pass sweeping energy and climate legislation.
- By using the budget reconciliation process, the legislation quickly passed through the U.S. Senate and U.S. House of Representatives along party-line votes.
- Less than three weeks later, President Biden signed the Inflation Reduction Act of 2022 (IRA), which represents an investment of $369 billion in energy and climate spending over the next 10 years.
- The IRA is expansive even in comparison with past major funding legislation such as the American Recovery and Reinvestment Act of 2009 (the Great Recession stimulus package) or the Infrastructure Investment and Jobs Act passed in late 2021 (see Figure 5.1).
Figure 5.1: Selected Federal Climate-Related Spending (1990-2027 Projected) (Inflation Adjusted)
Source: Rocky Mountain Institute
KEY TAKEAWAYS
The IRA is an unprecedented $369 billion in federal energy and climate funding that will dramatically transform the energy industry.
By using multiple levers available to the federal government, the legislation is designed to lower costs of carbon-free technologies, accelerate the rapid decarbonization and energy transition, and shape domestic industrial policy.
Success in this new policy environment will require energy companies to identify and prioritize IRA funding, prepare and organize for increased complexity, and closely monitor ongoing developments.
The IRA is an unprecedented $369 billion in federal energy and climate funding that will dramatically transform the energy industry.
By using multiple levers available to the federal government, the legislation is designed to lower costs of carbon-free technologies, accelerate the rapid decarbonization and energy transition, and shape domestic industrial policy.
Success in this new policy environment will require energy companies to identify and prioritize IRA funding, prepare and organize for increased complexity, and closely monitor ongoing developments.
Applying Multiple Levers Available to the Federal Government
- The IRA will impact the energy industry through four primary levers:
– Tax Credits: Extends and modifies existing tax credits—i.e., the renewable production tax credit (PTC) and the investment tax credit (ITC)—and creates new tax credits (i.e., clean electricity PTC/ITC)
– Appropriations: Provides funding to a variety of programs across more than a dozen federal agencies
– Loan Guarantees: Expands current and authorizes new lending authority through the DOE Loan Program Office (LPO)
– Fossil Fees: Increases royalty payments on fossil leases on government land and creates a new methane emissions fee, which focuses on “excess” methane emissions
- At a high level, most of the tax credits and appropriations fall into categories and appropriation amounts shown in Figure 5.2 at right. In addition, the IRA includes $2 billion in transmission financing.
- One notable detail in the IRA is that clean electricity tax credits will not begin to expire until the later of (a) 2032 or (b) when greenhouse gas (GHG) emissions from electric generation decline 75% compared to a 2022 baseline.
- Meanwhile, the most overlooked program may be the new Energy Infrastructure Reinvestment Program, administered through the Department of Energy’s LPO.
– The IRA authorizes $250 billion in lending authority for this new program.
– Through the program, the LPO may offer direct loans or loan guarantees for projects that:
- Retool, repower, repurpose, or replace energy infrastructure that has ceased operation
- Enable operating energy infrastructure to avoid, reduce, utilize, or sequester GHG emissions
– Lending authority for existing LPO loan guarantee programs was also increased through the IRA.
Figure 5.2: Overview of IRA Tax Credits and Investments
The IRA boasts $369 billion in energy and climate change spending over 10 years
Note: As of Sept. 13, 2022.
Source: S&P Global
Some Key Themes Illuminate the “Where” and “How” of Legislative Impacts
- The IRA is designed to place a clear emphasis on the following themes:
– Lower Costs: Previous attempts to address climate change relied on “sticks” such as cap-and-trade mechanisms or the controversial Clean Power Plan. The IRA, however, focuses overwhelmingly on “carrots” by offering incentives and investments designed to significantly lower the cost to manufacture and deploy carbon-free technologies, deploy energy efficiency measures, and electrify buildings. The handful of “sticks” include the increase in royalty payments on fossil leases and the introduction of the methane emission fee.
– Reduce GHG Emissions: The law accelerates rapid decarbonization and the energy transition by deploying unprecedented policy support in terms of dollars and duration (i.e., 10-year time horizon). Further, the law provides incentives and investments across the entire energy supply chain— raw materials, manufacturing, deployment, and consumer adoption—for both existing technologies (e.g., new wind, solar, and storage and existing nuclear) and more nascent technologies (e.g., small modular reactors, hydrogen, and carbon capture).
– Drive Industrial Policy: To ensure long-term energy security and economic growth, the IRA links numerous provisions, incentives, and bonus credits to domestic content requirements and prevailing wage and apprenticeship requirements. The law places an emphasis on building domestic supply chains for solar, wind, battery storage, and electric vehicles.
- Some early analysis of the IRA suggests that lower costs will drive a significant increase in capital expenditures and that the legislation will result in a steep decline in forecasted GHG emissions (see Figures 5.3 and 5.4).
Figure 5.3: Annual Capital Investment in Energy Supply-Related Infrastructure (in 2022 U.S. $ Billions per Year)
Source: Princeton REPEAT Project
Figure 5.4: U.S. Greenhouse Gas Emissions (2005-2030 Projected) (Net Million Metric Tons CO2e)
Source: Rhodium Group
The Post-IRA “New Normal” Will Require Patience and Persistence
- The massive scope and scale of the IRA changes everything for the energy industry.
- At a basic level, shifts in technology economics may require companies to reexamine existing strategies and business plans since many assumptions may now be outdated.
- Success will also require energy companies to adapt to a new public policy landscape. Figure 5.5 below summarizes some suggested approaches for energy and utility companies.
- As more details emerge, traditional thinking and paradigms may prove ineffective in the new policy and regulatory landscape.
Figure 5.5: Approaches to Navigating Post-IRA Environment
IMPLICATIONS
By providing unprecedented federal energy and climate funding, the IRA will quickly and radically alter the energy industry. Energy companies will need to adapt as some planned activities or investments may no longer make business sense while new opportunities may become available or increasingly attractive.
Energy companies will need to remain patient and persistent—especially in the coming months—as the implementation and utilization of the law will not be without challenges and growing pains. Despite possible growing pains, the IRA may become one of the most important pieces of energy legislation ever enacted.
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On the Inflation Reduction Act of 2022
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