A Deep Dive into the US Inflation Reduction Act and Its Impact on Renewables

On August 16, 2022, the US Federal Government enacted the Inflation Reduction Act (IRA), a significant policy set to transform the sector in substantial ways.

Marked as one of the largest US public investments in energy, this proposal seeks to offer stable incentives, steering the sector away from the short-term clean energy policies that have characterized the past three decades.

Following its implementation, a surge is anticipated in the renewables sector for US manufacturers. The policy certainty it provides is unparalleled, with an estimated investment of up to US$1.2 trillion in the US and Canada over the next decade. This investment is projected to escalate to US$3.2 trillion by 2050.

A year after the IRA became law, a webinar was hosted to evaluate its impact on America’s power market. It aimed to scrutinize potential hurdles to progress and evaluate its implications for the energy transition.

Despite common misconceptions about the IRA being a ten-year law, the tax credits it offers are likely to extend far beyond that timeframe, possibly lasting 30 to 40 years. While the legislation indicates tax credits available until 2032, there's a crucial aspect—these tax credits will endure until the US electricity sector reaches 25% of the CO2 emissions from 2022. This aspect suggests that the tax credits will be available for decades, presenting significant investment opportunities for renewable technologies like solar, wind, and storage.

Traditionally, the US tax equity market hovers around US$15 billion to US$20 billion per year. However, under the IRA, tax equity supply could skyrocket to as much as US$100 billion annually in the late 2040s. The cumulative cost of the subsidies provided under the IRA could exceed US$2.7 trillion to US$2.8 trillion, significantly larger than the current public understanding of the legislation's cost.

To meet this soaring demand, significant changes need to occur in the current market structure. The transferability market must scale up substantially, and new players beyond the established names in renewables must enter the scene.

Fundamental factors that will drive the pace of the energy transition and what can be realized through the IRA's foundations are interconnection costs, transmission, and storage development.

However, the IRA falls short in addressing critical bottlenecks that impede successful expansion of renewables capacity—namely, interconnection and transmission. The IRA doesn't tackle the need for essential transmission reforms vital to accommodate increased renewables adoption.

While the IRA sets a pathway toward achieving around 85% clean energy by generation share in the long run, it lacks provisions for necessary transmission reforms critical to facilitate expanded renewables integration.

Though some improvements have been seen in recent times, it remains to be seen if they will suffice to meet the market's needs.

The IRA will undoubtedly fuel a surge in decarbonization technologies, firmly aligning the US with its energy transition pathway. However, the speed of this transition will depend not only on overcoming interconnection and transmission challenges but also on whether storage capacity can keep pace with advancements.

Storage, particularly for solar energy, will play a crucial role in determining how rapidly renewables can be adopted. Longer-duration storage is essential, requiring batteries to last well beyond the traditional 2-4 hours. Progress toward achieving longer-lasting storage is underway, and it is imperative to accelerate this progress to support the ramp-up of renewables and expedite the journey toward the energy transition.