Even for the world’s largest economy, $369bn is a lot of money. That figure, the carve out for clean energy transition and climate spending in the Inflation Reduction Act (IRA), is four times larger than the US’s previous largest investment in climate action.
Even more important than the size of that dollar figure is what the law does for investor confidence. Before the IRA, US federal clean energy policymaking was known more for its variability than its largesse – clean energy deployment spikes and slumps tracked the life of federal tax credits, which were often allowed to expire or extended at the last minute for a few years at a time.
This time, Democrats in Congress learned that lesson and extended federal tax incentives for renewable energy production, residential energy efficiency upgrades, electric vehicles and clean energy manufacturing through 2032. The US clean energy industry now has something it has never had before: long-term certainty. With federal incentives available over a window of time better aligned with the one used by executives to decide whether to deploy capital, companies and investors are responding aggressively with announcements to expand existing facilities or build new factories.
Among the deals announced since President Joe Biden signed the IRA on 16 August: US solar manufacturer First Solar said it would invest $1.2bn to boost domestic production of its solar photovoltaic panels; Tesla paused plans to make batteries in Germany as incentives in the IRA make it more lucrative to build batteries in the US; and Honda and battery-maker LG Energy said they would invest $4.4bn in a joint venture to produce lithium-ion batteries in the US. Kiran Kumaraswamy, a VP with battery storage project developer Fluence, told Energy Storage News the industry is “beaming with confidence” because of IRA incentives.
First Solar CEO Mark Widmar explicitly credited the IRA with tipping the balance in favour of US expansion. The IRA for the first time creates a “long-term view and understanding of the industry, and policies aligned to that industry”, he told CNBC.
“With that level of clarity, we stepped back and evaluated the alternatives or the options of where we could go with our next factory and when we looked at it comprehensively the US was a very attractive option,” he added.
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Provisions in the IRA are expected to be especially conducive for growth in the US solar industry – both for domestic manufacturing and new power generating capacity.
“The subsidy for solar manufacturing is really very large,” Stephen Byrd, Morgan Stanley’s global head of sustainability research, said on the company’s Thoughts on the Market podcast. “It can be as high as essentially $0.17 a watt, and to put that into context, the selling price at the wholesale level for many of these products is around $0.30 a watt. So that subsidy for domestic manufacturing should result in real investment decisions in real US factories, and that will help to improve American energy security.”
He added: “What we are going to see is further innovation, further manufacturing in the US. That means more jobs in the US, that means a faster pace of innovation and a faster rate of cost reduction. So that does look to us to be a virtuous cycle that is going to benefit not just the decarbonisation of the US economy but benefit the consumer and provide jobs as well.”
Over the next decade, the IRA will lead to 69% more solar deployment, or 222GW of new capacity, compared with a no-IRA scenario, according to analysis prepared by the research company Wood Mackenzie for the Solar Energy Industries Association.
The impact of the IRA on the clean energy transition may yet be underestimated
The IRA should enable the US to reduce its greenhouse gas emissions by around 40% by 2030, according to analyses published by the think tank Energy Innovation, the research company Rhodium Group, and Princeton University’s REPEAT Project. However, it is difficult if not impossible to model the impact of intangibles like investor confidence and political momentum. A decade from now, it is more likely than not analysts will have underestimated the IRA’s role in driving the US towards net zero.
“Is the #InflationReductionAct enough to confront the climate crisis? On its own, no. But that misses the point. THIS BILL CHANGES EVERYTHING: it makes every action at every level from here on out easier, cheaper, more ambitious. It changes the fight forever,” [emphasis in original] tweeted Jesse Jenkins, an energy systems engineer and assistant professor at Princeton University.
"This is going to be more massive than people realise. If the government invests $300bn in solar, wind, batteries and heat pumps, that has the potential to unlock trillions of dollars in private sector investment in climate," Ro Khanna, a Democratic member of the US House of Representatives from California, told Politico.
“I’d argue that because the bill confers concrete benefits today to concentrated interests (& reduces costs of tech), it is likely to build momentum for more aggressive climate policy over time. This is not accounted for in the modeling exercises. We may be undercounting benefits!” tweeted Jane Flegal, market development and policy lead at Stripe Climate and formerly the senior director for industrial emissions at the White House Office of Domestic Climate Policy.
“We're bad at modeling the catalytic effects of public financing: one of several reasons that the IRA's upside is enormous!” tweeted Ilmi Granoff, a senior advisor with the ClimateWorks Foundation.
He added: “Another reason for optimism about the uncalculated upside of the IRA – we don't account for the social/political context after public investment (and steered private capital) has bought down the cost of low-carbon tech. Policy in a $100kWh battery future is different than today's!”
Just six weeks have passed since Joe Biden signed the IRA, but the law is already shaping investors’ decision-making in the US. Emboldened by the IRA, C-suite executives are greenlighting plans already under consideration or entirely new projects. Congressional Democrats have given investors the confidence to make long-term bets on the clean energy transition.
This article originally appeared on Energy Monitor.