Earlier this summer, President Biden signed into law the Inflation Reduction Act (IRA) of 2022. This act allocates $369 billion for energy security and climate change with numerous investments into climate protection, including tax credits for households to offset energy costs, investments in clean energy production, and tax credits aimed at reducing carbon emissions. With this initiative, the IRA is projected to reduce total U.S. greenhouse gas emissions 40% by 2030, bringing the United States much closer to its Paris Climate Agreement emissions reduction goals.
The roughly $370 billion allocated to energy security is significant, but public dollars are not enough to address the systemic challenges of climate change and the U.S. energy infrastructure—that will require private investment as well. In fact, current estimates suggest the U.S. needs to spend $2.5 trillion by 2030 to reach zero carbon emissions by 2050.1 Recent studies suggest that by 2030, the steps outlined in the IRA could reduce U.S. net greenhouse gas emissions approximately 30-40% below 2005 levels.2
While substantial private investment is required to make up the more than $2 trillion gap between the public funding and the required funding, this challenge presents many areas of opportunity. To reach the energy and climate goals outlined in the IRA, many different issues need to be addressed, including production costs for solar and wind electricity production, energy storage and battery technology, resource extraction for lithium ion batteries, hydrogen cell production, grid resiliency, EV production, building and construction, agriculture, carbon removal, and waste recycling, just to name a few. Investments into these areas may help investors meet their double-bottom line of earning returns while also supporting an important need.
The trend toward renewable investment is nothing new; however, the cost structure for many forms of energy production and storage has changed considerably. Case in point is the significant decline in the cost of solar and wind power over the past 12 years. In fact, renewables are now among the cheapest forms of power generation in the world, and costs continue to fall.
COST OF RENEWABLES VS. TRADITIONAL ENERGY
Additionally, renewables are now the second most prevalent source of electricity in the U.S., generating 834 billion kilowatt-hours of electricity, enough electricity to power 77 million homes a year.3
ANNUAL U.S. ELECTRICITY GENERATION (1950-2020)
These graphs demonstrate where the trends are going in regard to renewable energy and the part it can and does play in energy independence and lowering costs to the consumer.
From an investment perspective, the potential could be compelling as public dollars via the IRA combine with private capital dollars within the renewable energy, climate mitigation, and adaptation spaces. What follows are FEG’s thoughts on the bill, its potential impacts to the investment landscape, and where the renewable energy space could go from here.
As outlined in EisnerAmper, the key takeaways for corporations and investors as it relates to ESG and sustainability are as follows:
Tax Credits for Renewable Energy
In an attempt to reduce greenhouse gas emissions, the IRA includes a system of tax credits for renewable energy, including the Renewable Energy Production Tax Credit, which provides tax relief for manufacturers of solar, offshore wind, geothermal, hydrogen, and nuclear power. The IRA also includes energy loans and reinvestment financing for energy-related projects.
Reduction in Carbon Emitting Industries
The IRA also allocated $300 million for emissions reduction and carbon capture, $2 billion to reduce emissions at shipping ports, and new tax deductions for converting existing real estate assets into high-efficiency green buildings. Additionally, the act increases the tax credit for companies that build and operate carbon capture and storage facilities. Several industries stand to benefit from these provisions, including real estate, agriculture, and shipping.
Funding for Emissions Reporting
The IRA reserves $5 million for the Environmental Protection Agency to support the standardization and transparency of climate disclosures at the company level. This seeks to address the demand of the ESG investor base for standardized information regarding energy efficiency and waste management.
Funding for Clean Technology
The IRA also offers incentives for emerging clean technologies that have struggled in the past to find funding. The long-term nature of these incentives and programs should provide the clean energy industry the stability needed to fund large-scale, longstanding projects.
Electric Vehicle Support
The IRA also expands tax credits for electric vehicle (EV) purchases. Prior tax considerations provided incentives to EV purchasers in the form of tax credits, but there were caps based on the number of vehicles produced, with tax credits of up to $7,500 capped at the first 200,000 vehicles sold. However, by 2018, Tesla had already sold more than 200,000 electric vehicles, which meant they had exhausted their government allowance and buyers were no longer entitled to the $7,500 credit. The IRA lifts this cap, making EV cars eligible for the subsidy again. Another point of consideration for investors is that demand for battery storage means increase demand for lithium, a positive sign for major lithium producers.
Support for Households
The IRA aims to reduce household energy costs by offering incentives to make homes more energy efficient through a series of tax credits and rebate programs. Direct consumer incentives to purchase electric appliances, heat pumps, rooftop solar panels, electric HVAC, EVs, and more can reduce the cost of energy and decrease utility bills while making individual investments in these areas more affordable.4
The awareness and effort to address large-scale, systemic challenges within our energy production, storage and transmission grid is welcomed and perhaps overdue. The effort to modernize and reenergize will take time, commitment on behalf of legislators, and significant investment. From this investment will come opportunity as private dollars flow in to participate in a growing industry. There is opportunity to both gain energy independence through increasing energy production locally, but also to address generational challenges surrounding climate change.
1Bloomberg Green, December 2020 “Getting US to Zero Carbon will take $2.5 Trillion”
2Larson, J., King, B., Kolus, H., Dasari, N., Hiltbrand, G., Herndon, W. (August, 2022.) A Turning Point for US Climate Progress: Assessing the Climate and Clean Energy Provisions in the Inflation Reduction Act. Rhodium Group. https://rhg.com/research/climate-clean-energy-inflation-reduction-act/
3Renewable Energy. Office of Energy Efficiency & Renewable Energy. https://www.energy.gov/eere/renewable-energy
4Barrs, D. (August, 2022.) What the Inflation Reduction Act Means for ESG and Sustainability. EisnerAmper. https://www.eisneramper.com/inflation-reduction-act-means-esg-sustainability-0822/
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