IRA IS IN HIGH GEAR AS ENERGY TRANSITION PROCEEDS

IRA IS IN HIGH GEAR AS TRANSITION TO LOWER GREENHOUSE GAS EMISSIONS IS UNDERWAY; IMPLEMENTATION RISKS CONTINUE

The Inflation Reduction Act (IRA) has gone into full gear reflecting the Biden Administration’s priority to encourage the U.S. to move towards use of cleaner energy and lowering greenhouse gas emissions. The rollout of IRA has contributed to the Nation’s current economic expansion and job creation.   The IRA, following the implementation of the Infrastructure Investment and Jobs Act, which also included clean energy provisions, has budgetary authority of $369 billion for clean energy investment. Despite the clear focus, there are still challenges to IRA implementation and meeting its aims.

Wide Array of Incentives to Reach Goal 

It is unmistaken the clean energy direction of the IRA.  Progress is being made from grants to cities to reduce carbon pollution by electrifying the transportation and building sectors of the economy, to new energy efficiency programs and tax credits for residential homeowners. There has been a major expansion in solar and wind energy development through private sector investment through direct and transferred tax credits. Also, major new developments in clean energy manufacturing and new clean power generation capacity projects such as green hydrogen generation; alternative fuel vehicle refueling, carbon capture, small zero-emission modular nuclear units and battery storage projects, among other initiatives.

The clean energy investment expansion related to IRA can be seen not only in direct expenditures on the federal grant programs but in the encouragement of new private investment. A report by E2 in January 2024, that had tracked IRA-related announcements, showed that through the end of 2023, 274 large-scale projects had been announced in 41 states and Puerto Rico, with almost 100,000 jobs created and $110 billion in capital investment since IRA was approved. Manufacturing projects have accounted for many of the private sector projects. For example, the largest announced project is the Waaree Energies $1 billion project to construct a solar factory in Brookshire, Texas. AESC is investing $800 million to build a new electric vehicle gigafactory in Florence County, South Carolina. 

States and cities have ramped up their participation in clean energy programs incentivized by IRA.  Some examples of the awarded grants for municipal clean energy projects through IRA thus far include Lansing Board of Water & Light’s   clean energy bond financing structure is being done to maximize the clean energy investment tax credit Lansing was eligible to receive. The Port of Duluth, a leading destination for Midwest US wind energy cargo is expanding its port facilities to expand that use. Yakama Nation tribes received $32 million from DOE to accelerate a project to transform open-water irrigation canals into a ground pipeline system that generates hydro and solar energy; and the Memphis Zoo received IRA funds for the Memphis Area Climate Action Plan. Funds will support a site assessment and installation of rooftop solar on publicly owned zoo buildings.  Palmdale, CA will launch two initiatives to deploy electric vehicles and clean energy infrastructure. The Your Ride is EPIC Program will distribute wall-mounted plug-in EV chargers for eligible households.

For 2024, more clean energy projects are in the application stage. The below link is a description of the numerous IRA programs accepting applications such as climate pollution control grants, tribal energy resilience projects and rural energy for America program. 

https://www.whitehouse.gov/cleanenergy/inflation-reduction-act-guidebook/

Additionally, on March 8 the Department of the Treasury and the Internal Revenue Service (IRS) released final rules on key provisions in the IRA on two new credit delivery mechanisms—elective pay (otherwise known as “direct pay”) and transferability. This will be the first-time public-sector entities will be able to take advantage of clean energy tax credits for projects where the US Treasury will send the municipal or non-profit entity a direct payment for the cash value of the tax credit, they would have received had they had a taxable liability. The tax credits are available for tax years 2023 to 2033. 

While Progress is Being Made to Meet the Intended Target of Lower Greenhouse Gas Emissions, Implementation Risks Are Present 

The Initial significant scale of the IRA effort is already being slowed by the lingering inflation impact on project construction costs and supply chain constraints which has dampened the certainty of meeting the expected greenhouse gas reduction goal as displayed in the below EPA estimate.

More daunting an impact on progress would be political efforts to restrain the IRA spending should the US Congress pull back and focus on the overall federal budget deficit. With regards to public sector participation, some local officials have expressed reluctance about participation due to concerns that in the future a new sequestration process like the one that affected Build America Bonds could be implemented. 

Another risk is should the Biden Administration be replaced as a result of  the Presidential election in November 2024. Different federal policies to favor fossil fuel interests could be implemented that may compromise the current federal priority to lower greenhouse gases making IRA ineffective.

Another broader industry risk that is developing is as IRA funds significant new solar and wind renewable energy projects, the energy that is produced is intermittent and the facilities have low-capacity factors. For example, for solar, the average capacity factor is less than 20%, and at times the electricity is not available should there be cloud cover or weather events. This creates electric system reliability issues. Already delays in connecting new renewable facilities to the grid by the region’s transmission operators because of concern about reliability have become a major issue. Battery storage systems, new transmission lines and addition of clean capacity generation such as green hydrogen, may provide answers to balancing the grid, but a slowdown in implementation of these initiatives due to siting and technology risks linger. 

Conclusion:

The IRA appears to be a consequential effort to move the US to cleaner energy lowering greenhouse gas emissions in the process which should have benefit to mitigate climate risk. The economic benefits of expanding US manufacturing and job creation are also positive factors. The aggressive push to date to get IRA projects funded and into construction is by all measures impressive. But how well the known implementation risks are overcome will make a difference in meeting the intended objectives. 

Dan Aschenbach, AGVP Advisory and in partnership with Municipal Financial Solutions Associates (MFS)