Inflation Reduction Act’s Renewable Energy Subsidies: Reaching “Net-Zero” and Spurring “Green” Investments

Posted on Feb 9, 2023

Lauren Aboodi

I. Inflation Reduction Act’s Renewable Energy Tax Credits

The Inflation Reduction Act (IRA), effective August 16, 2022, in part, emphasizes investing in and promoting clean energy through targeted tax subsidies. The IRA’s goal is “building a better America and delivering on President Biden’s vision to make sure the United States—powered by American workers—remains the global leader in clean energy technology, manufacturing, and innovation.”[1] The Environmental Protection Agency has called the IRA “the most significant climate legislation in U.S. history” as it incentivizes the transition to a “cleaner energy economy.”[2] One of its aims is to put the United States on course to have greenhouse gas (GHG) emissions reduced by 40 percent below 2005 levels by the year 2030.[3]

Under the IRA, $369 billion is invested in modernizing the U.S. domestic energy system, importantly, providing tax credits for the construction of domestic renewable energy facilities.[4] Notable credits include the Production Tax Credit (PTC) [5] and the Investment Tax Credit (ITC)[6], both of which extend tax benefits to wind projects that begin construction before December 31, 2024. Before the IRA was passed, the PTC had expired and, for projects starting construction in 2022, the ITC had begun a phase out.[7] The IRA extends the timeline, value, scope, and flexibility of these credits, while also improving access and efficiency.[8]

II. Reaching Decarbonization Goals by Harnessing Wind and Solar Power

As demonstrated by the enactment of the IRA, the Biden-Harris administration is committed to funding clean energy.[9] On December 8, 2021, President Biden signed an executive order aiming to “reduce emissions across federal operations, invest in American clean energy industries and manufacturing, and create clean and resilient communities.”[10] Moves by the administration to focus on the issue of climate change include rejoining the Paris Climate Accord, canceling the permit for the Keystone XL pipeline, and investing in clean energy jobs and a “green” federal infrastructure.[11]

To combat climate change, the United States, as well as many other countries, have set a goal to reach net zero by 2050, meaning that GHG emissions produced will be countered by the same amount of eliminated emissions.[12] Renewables are projected to be the fastest-growing United States power source through 2050, with an estimated 14 percent growth of wind power between 2010 and 2050.[13] Many studies on reaching full-scale decarbonization in the United States include a huge emphasis on growing domestic production of renewable energy in the form of wind power.[14]  

III. IRA’s Potential Effects on the Investing Landscape

U.S. subsidies can lead to greater investments in domestic renewables.[15] During a stakeholder roundtable on investor perspectives on climate change, clean energy, and the IRA, U.S. Secretary of the Treasury, Janet T. Yellen, emphasized the IRA’s ability to give certainty to investors, and introduced new incentives that will help scale-up new renewables’ technology and build cleaner supply chains.[16] Secretary Yellen also focused on how the success of the IRA requires capital investments from various sources like large global firms, community based institutions, and pension funds.[17] According to a report by Energy Innovation,  a sufficiently funded IRA has the ability to increase the U.S. GDP by 0.65 to 0.77 percent in 2030 because of its contribution to the growth of production and construction in the renewable energy sector.[18]

Many energy companies including American Electric Power Co. Inc., Duke Energy Corp., and Consolidated Edison Inc., are looking to utilize the benefits the IRA presents for renewable generation projects and unload some of their assets to gain capital accordingly.[19] Scotiabank director of U.S. utilities and power shared that while, “the investment and production tax credits for new wind and solar projects will not necessarily improve returns for existing merchant power…they will increase the value of planned projects.”[20] According to Forbes, following the announcement of the IRA’s signing, approximately $28 billion has been invested in new manufacturing, primarily in the following sectors: electric vehicle, battery, and solar manufacturing.[21] The ultimate impact of the IRA will likely not be determined for several years, but it is already pushing investors to contemplate “greener” investments and reap the benefits of the IRA’s tax incentives. [22]

 

[1]Building A Clean Energy Economy: A Guidebook to the Inflation Reduction Act’s Investment in Clean Energy and Climate Action, CleanEnergy.gov (Jan. 2023), https://www.whitehouse.gov/wp-content/uploads/2022/12/Inflation-Reduction-Act-Guidebook.pdf; Inflation Reduction Act, Pub. L. No. 117-169, 136 Stat. 1818.

[2] The Inflation Reduction Act, United State Environmental Protection Agency, https://www.epa.gov/green-power-markets/inflation-reduction-act.

[3] Bella Isaacs-Thomas, What the Inflation Reduction Act Does for Green Energy, PBS News Hour (Aug. 17, 2022), https://www.pbs.org/newshour/science/what-the-inflation-reduction-act-does-for-green-energy.

[4] The Inflation Reduction Act Drives Significant Emissions Reductions and Positions America to Reach Our Climate Goals, U.S. Department of Energy (Aug. 2022), https://www.energy.gov/sites/default/files/2022-08/8.18%20InflationReductionAct_Factsheet_Final.pdf.

[5]  “The [PTC] allows owners and developers of wind energy facilities to claim a federal income tax credit on every kilowatt-hour (kWh) of electricity sold to an unrelated party for a period of 10 years after a facility is placed into service.” Production Tax Credit and Investment Tax Credit for Wind Energy, Office of Energy Efficiency and Renewable Energy, https://windexchange.energy.gov/projects/tax-credits#:~:text=The%20Production%20Tax%20Credit%20(PTC,facility%20is%20placed%20into%20service.

[6] “[T]he ITC is a one-time credit based on the dollar amount of the investment and is earned when the equipment is placed into service.” Id.

[7] Mike O’Boyle et. al, Implementing the Inflation Reduction Act: A Roadmap for State Electricity Policy, Energy Innovation (Oct. 2022), https://energyinnovation.org/wp-content/uploads/2022/10/Implementing-the-Inflation-Reduction-Act-A-Roadmap-For-State-Policy.pdf.

[8] Id.

[9] Biden-Harris Administration Announces $550 Million in Clean Energy Funding to Benefit and Lower Costs for More than 250 Million Americans, U.S. Department of Energy (Nov. 22, 2022), https://www.energy.gov/articles/biden-harris-administration-announces-550-million-clean-energy-funding-benefit-and-lower#:~:text=Biden%2DHarris%20Administration%20Announces%20%24550,Million%20Americans%20%7C%20Department%20of%20Energy.

[10] FACT SHEET: President Biden Signs Executive Order Catalyzing America’s Clean Energy Economy Through Federal Sustainability, The White House (Dec. 8, 2021), https://www.whitehouse.gov/briefing-room/statements-releases/2021/12/08/fact-sheet-president-biden-signs-executive-order-catalyzing-americas-clean-energy-economy-through-federal-sustainability/.

[11] Scottie Barsotti, Moving Beyond Coal: The Biden Administration, Renewables, and the Future of Fossil Fuels, Carnegie Mellon University, https://www.heinz.cmu.edu/media/2021/March/moving-beyond-coal-the-biden-administration-renewables-and-the-future-of-fossil-fuels.

[12] Renee Cho, What Is Decarbonization, and How Do We Make It Happen?, Columbia Climate School (Apr. 22, 2022), https://news.climate.columbia.edu/2022/04/22/what-is-decarbonization-and-how-do-we-make-it-happen/.

[13] Peter Henderson, U.S. to spend more than $500 billion on climate over a decade under three laws, study says, Reuters (Aug. 25, 2022), https://www.reuters.com/legal/us-spend-more-than-500-bln-climate-over-decade-under-three-laws-study-says-2022-08-22/.

[14] McKinsey & Company, a global management consulting firm, developed a strategy to reach net zero by 2035 in which a scenario was created that would have new solar and onshore and offshore wind represent 60 percent of total capacity by 2035, requiring wind and solar industries to increase their annual rate of deployment roughly sevenfold. Net Zero by 2035: A Pathway to Rapidly Decarbonize the US Power System, McKinsey & Company (Oct. 14, 2021), https://www.mckinsey.com/industries/electric-power-and-natural-gas/our-insights/net-zero-by-2035-a-pathway-to-rapidly-decarbonize-the-us-power-system. Princeton University prepared a final report on potential pathways, infrastructure and impact to a “Net-Zero America.” It laid out five pathways to decarbonization, each of which included as a key pillar -- clean electricity via wind and solar generation, transmission and firm power. Eric Larson et al., Net-Zero America, Princeton University (Oct. 29, 2021), https://netzeroamerica.princeton.edu/img/Princeton%20NZA%20FINAL%20REPORT%20SUMMARY%20(29Oct2021).pdf.

[15] Huw van Steenis, American Green Subsidies Change the Investment Lands, Financial Times (Jan. 5, 2023) https://www.ft.com/content/ea92a443-ece8-4ef7-8809-a53a22f85567.

[16] READOUT: Stakeholder Roundtable on Investor Perspectives on Climate Change, Clean Energy, and the Inflation Reduction Act, U.S. Department of the Treasury (Oct. 31, 2022), https://home.treasury.gov/news/press-releases/jy1065.

[17] Id.

[18] Megan Mahajan et al., Updated Inflation Reduction Act Modeling Using the Energy Policy Simulator, Energy Innovation (Aug. 2022), https://energyinnovation.org/wp-content/uploads/2022/08/Updated-Inflation-Reduction-Act-Modeling-Using-the-Energy-Policy-Simulator.pdf.

[19] Allison Good, Inflation Reduction Act Could Help Utilities Sell Competitive Renewable Assets, S&P Global (Aug. 15, 2022), https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/inflation-reduction-act-could-help-utilities-sell-competitive-renewables-assets-71694342.

[20] Id.

[21] Silvio Marcacci, $28 Billion in New Clean Energy Manufacturing Investments Announced Since Inflation Reduction Act Passed, Forbes (Oct. 12, 2022), https://www.forbes.com/sites/energyinnovation/2022/10/12/roughly-28-billion-in-new-clean-energy-manufacturing-investments-announced-since-inflation-reduction-act-passed/?sh=2d841a716159.

[22] Huw van Steenis, American Green Subsidies Change the Investment Lands, Financial Times (Jan. 5, 2023) https://www.ft.com/content/ea92a443-ece8-4ef7-8809-a53a22f85567.