WILL THE INFLATION REDUCTION ACT IGNITE THE US ENERGY TRANSITION?

The new US Inflation Reduction Act (IRA) arrives trailing a large amount of tough to decipher legal terminology and a title that suggests it will help to reduce inflation. However, the Act requires those possessing the relevant expertise to read between the lines to determine exactly what areas to address.

Inflation is clearly a complex challenge that will not be solved with a single bill, even one stretching to over 700 pages. Instead it will be an iterative and adaptive process that will require the US government to listen to experts in various fields, interpolate the data, and then implement a sound strategy. Furthermore, inflation and supply chain hurdles have affected most every aspect of human life globally, and officials have a difficult task ahead, one that will necessitate focusing their attention on a diverse array of considerations, including government action and investment, innovative emerging technologies, and thoughtful leadership.

To start, the bill will increase the Renewable Energy Investment Tax Credit (ITC) from 26% to 30%, maintaining the 30% credit over the next decade. The credit would have dropped to 22% if the bill had not passed. The bill includes geothermal provisions, solar provisions, wind provisions, and adds a provision to include energy storage that can be added even if no solar or wind system exists. This could increase battery storage sales for solar installation companies in new solar installations or as a potential addition for customers with an existing solar system.

In fact, the tax credit alone is nothing new or groundbreaking when enticing residential homeowners or businesses to invest in renewable energy. More is needed to address the challenge, and the meager tax credit of 30% pales in comparison to the supply chain obstacles driving the increased cost of purchasing a solar system compared to just a few years ago. In 2021, the cost of installing solar increased by 18% for solar utility projects1.

Certainly, the race to go renewable is multi-faceted. To add to the rise in electricity costs, the price of natural gas has surged, increasing the cost of generating electricity in 2021 due to weather supply disruptions from Hurricane Ida2. Natural gas prices surged again in 2022 when the United States reduced crude oil production, causing natural gas production to slow again and create another supply shortage, not to mention Russia’s war with Ukraine.

A top supplier of crude oil and natural gas to Europe, Russia could restrict or cut off that supply as winter sets in. This would in turn cause an additional natural gas price hike, further raising electricity prices. According to the North American Reliability Council (NERC), reserve margins are thin due to drought, tornadoes, supply chain material shortages, wildfires, unexpected solar tripping, and cybersecurity attacks3.

Viewed in the round, the overall impact should consumers install solar may be more related to these other factors than the 30% tax credit. Typically, the main concern to consumers is the initial cost of the system balanced by the potential cost savings when adding renewable energy to the mix. Customers are trying to reduce their energy bills in the short-term to help fight headline inflation , while keeping electricity costs steady into the future.

Once a renewable system is installed, however, buyers are often caught unaware by the low ‘buy-back’ rates offered by regulated utilities. These entities typically ‘buy-back’ the energy at a fraction of what the customer pays when drawing power from the grid. In competitive markets, the customer will be met with very few choices for solar/home storage specific rate plans – and those that are available will likely have unfavorable terms.

Understandably, the utilities need to maintain the lines and generate electricity when renewables cannot. Despite these challenges, solar installations have nonetheless increased by 33% each year for the last ten years4.

At the same time, the IRA does provide grants and loans to enhance the transmission aspects of renewable energy. The Bill gives grants for analysis of project impacts, corridor site selection, specific regulatory legal proceedings, and efficiency planning to ensure the project succeeds. Large-scale renewable energy generation requires land in rural areas and the infrastructure to distribute the electricity through new transmission lines.

For example, the question is often posed: how can people on the Atlantic coast benefit from solar production in Arizona, where the sun shines with fewer weather-related incidents? Likewise, wind turbines are placed in locations typically far removed from large cities where heavily populated areas cannot take advantage of the energy. Increasing our transmission capability will address the most significant obstacle to the US becoming 100% renewable. 

To summarize, the United States’ renewable energy portfolio continues to grow and is used to combat the reduced energy reserve margins in high-risk states for consumers, businesses, and utilities. In the past, energy prices have been low, but over the last few years, the cost per kWh has risen tremendously. Considering the current issues, consumers, companies, and utilities are deciding to install renewables to solve their high energy costs.

The Inflation Reduction Act does help maintain the 30% tax credit for the public but does not lower inflated energy costs. The IRA does add the provision for consumers to add battery storage to their existing system which will increase battery storage sales and potentially contribute to consumer-side generation or Distributed Energy Resources (DER) if they are properly incentivized ( as we set out in our recent DER article),

Ultimately, the most ground-breaking portion of the IRA lies in its addition of the grant and loan provision to install transmission lines for renewable energy; allowing electricity to be gathered on behalf of those regions that see little sunshine. In extending the benefits of renewables to a far wider proportion of the population, this will also serve to strengthen the use case for – and reinforce public perceptions of –solar and similar energy sources.

 

Barrett Morrow is a senior consultant with CAPCO, a global management and technology consultancy dedicated to the financial services and energy industries.

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References

1  https://www.seia.org/solar-industry-research-data

2  https://www.cnbc.com/2021/09/09/natural-gas-prices-are-rising-and-could-be-the-most-expensive-in-13-years-this-winter.html

3  https://www.nerc.com/pa/RAPA/ra/Reliability%20Assessments%20DL/NERC_SRA_2022.pdf

4  https://www.seia.org/solar-industry-research-data

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