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How the US government’s Inflation Reduction Act is impacting the energy transition | Partner content

US President Joe Biden signed into law the Inflation Reduction Act (IRA) on August 16, 2022. The law calls for investments of $437 billion over the 10 years from 2022 to 2031, of which $369 billion is allocated energy security and climate change.1 This article highlights some of the key areas of the energy transition that are impacted by the ERI, a topic we have focused on in previous articles.2

The highlights of the act

The clean energy component of the package affects almost all sectors of the energy transition and requires around 270 billion dollars of investment in the form of tax credits. Generally speaking, tax incentives are structured in two tiers: providing a base rate and then a bonus if certain salary and apprenticeship conditions are met. More clarity from the Internal Revenue Service (IRS) is needed on what exactly this entails. For specific sectors, there is an additional incentive based on location, such as a wind farm in a low-income community or when a coal plant has been retired. There are also incentives for domestic manufacturing in other sectors.

Estimated energy transition expenditure in the CII (2022-2031)

Key highlights for some of the main energy transition sectors include:

1. Renewable energy: Wind, solar and storage tax credits account for about half of the $270 billion in investments. There are two important aspects to this:

a. The phasing out of these credits is now tied to total US emissions (over five years, once the US sector emits 75% less carbon than in 2022) rather than a fixed period. This gives a lot of visibility and longevity to these projects.

b. A new system is being gradually implemented in which all generators of carbon-free energy would be remunerated in the same way

2. Nuclear: The US nuclear fleet is recognized for its low-carbon profile which creates a floor price for each MWh produced, as well as creating a cap that takes into account the current high electricity price environment.

3. Hydrogen: A tax credit of $1/kg is provided for blue hydrogen and $3/kg for green hydrogen — green hydrogen differs from blue in that it is produced from renewable energy and therefore largely eliminates emissions. Some estimates put blue hydrogen on par with gray hydrogen (derived from natural gas and produced from fossil fuels), with green hydrogen becoming cheaper than gray hydrogen after the credits are used.3

4. Electric vehicles: The $7,500 credit on certain new electric vehicles, including fuel cell vehicles, and the removal of the cap at the manufacturer level have been maintained. However, half of the credit is based on domestic mineral content and the other half based on domestic battery manufacturing. Stricter rules are also applied which exclude high-income buyers and more expensive models.

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Footnotes

1. https://democrats.senate.gov/imo/media/doc/inflation_reduction_act_one_page_summary.pdf.
2. The Coming Hydrogen Fuel Energy Revolution, Investing in Sustainable Growth Newsletter, October 2020. Air Products: Enabling Sustainability, Investing in Sustainable Growth Newsletter, October 2021.
3. Bernstein Research: Renewables and Hydrogen in the United States: An Analysis of the Cutting Inflation Act’s Groundbreaking Clean Energy Proposals; Deepa Venkateswaran; August 1, 2022.

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