Inflation Reduction Act Breakdown

The recently passed Inflation Reduction Act (IRA) is a truly historic achievement in fueling the energy transition. It will provide nearly?$370B in climate and energy investment?over 10 years, equating to?6x more investment in climate action?than all US legislation from 1998-2008, and 4x more than the 2009 Recovery Act's climate provisions. The combination of direct investment, tax credits and loan programs seek to?reduce US greenhouse gas emissions by 40%?below 2005 levels by 2030, cutting about a billion tons a year in carbon by 2030.

The economic outcome may be even greater, with?$3.5T in expected new cumulative capital investments?over the next decade and the creation of?9M new American jobs. The timing couldn’t have been better, as this year global investments in clean energy?are expected to exceed?those in fossil fuels, thanks to a?lower price tag?than dirty alternatives in 90% of the world. In the United States, investments in clean tech have?roughly quadrupled?since 2017 and in?Texas solar output has grown 39-fold?in just six years. Globally,?renewable output has grown fourfold?in the past decade. The future will be even brighter.

During the Obama years, the government attempted to address climate change by punishing the cost of dirty energy with a cap-and-trade system, which ultimately failed. In a move that experts are praising, the IRA instead relies on the strategic choice of carrots rather than sticks, subsidizing clean energy to establish a level playing field for all forms of energy instead of making fossil fuels more expensive. Previously,?China has moved far more quickly to support the energy transition. In 2021 alone, China spent nearly $300B on the energy transition compared to $120B from the US. The IRA will no doubt boost private investments in the US and should begin to onshore these valuable supply chains, but it will take years to begin to match the capacity China has built over the past decade.?

This strong show of support for the transition, taken in combination with other recent legislative wins, will open the floodgates for new energy investment. The deployment of electrification assets will be kicked into overdrive, while opening a new frontier of opportunities for digital technologies. At Intelis, we anticipate surging demand for digital enterprise tools to orchestrate this new energy paradigm. As investors focused on technologies that accelerate the energy transition, we have an active role in ensuring the future envisaged by this bill comes to fruition. Given our vantage point, we wanted to highlight the most significant provisions of the IRA and areas we expect to benefit as a result:

Renewable Generation Deployment

The IRA will revamp the tax incentives that have already dramatically driven down the cost of renewable generation in recent decades. These credits come in two forms; the Investment Tax Credit (ITC) which lowers the upfront capital cost of clean power, while the Production Tax Credit (PTC) incentivizes renewable electricity output. Historically, wind power was able to utilize the ITC or PTC, while solar only qualified for the ITC. These credits have been quite effective, but entities that are exempt from federal income tax, like nonprofit co-op utilities or public institutions like the Tennessee Valley Authority or state-owned utilities,?which provide nearly 25% of American power generation, were not eligible for these credits. This overhaul is crucial to accelerating the energy transition by further enhancing the economic performance of future renewable generation developments.

• New Tax Credits:?Now?both solar and wind can qualify for either the ITC or PTC, meaning that solar projects will be able to utilize the PTC as the ITC-eligible upfront capital costs continue to fall further. The 30% Investment Tax Credit (ITC)?will be extended through 2024, along with new credits for carbon capture, clean hydrogen and some nuclear technologies. In 2025, these tax credits change to emissions-based, technology-neutral tax credits available to any power generation that’s net-zero, potentially a lifeline to fossil fuels if they can demonstrate robust carbon capture. Interconnection costs are also included in ITC-eligible project costs.?
• Extended for Stability:?These tax credits will remain in place?until 2032 or when the U.S. achieves a 75% reduction?in greenhouse gas emissions from 2022 levels, at which point they would phase down over several years. This long-term stability removes one of the biggest risk factors for the sector, which had historically driven boom and bust cycles in anticipation of credits ending.
• Stackable Additional Credits:?Another key tax feature is the ability to?stack additional tax incentives?on top of a base ITC of 30%. Power producers can add on: an additional 10% ITC (or a 10% increase in equivalent PTC), by using a certain percentage of steel, iron and manufactured products produced in the U.S.; 10% for facilities in census tracts with retired coal infrastructure, or that had high employment levels by the coal, oil or natural gas industry post-1999; and 20% for small wind and solar projects in low-income communities.
• Wage Requirements:?For projects over 1 MW, 80% of the base ITC and PTC hinges on using apprenticeship programs and?paying prevailing wages?for project construction and operations, for 5 years for the ITC and 10 years for PTC. For example, the ITC base of 30% would drop to 6% if wage requirements are not met.
• New Ways to Monetize:?Power producers will now have the?flexibility to use either the ITC, the PTC or sell credits to unrelated third parties for cash. Previously, a tax investor buying a credit was required to have an ownership interest in the facility receiving the credit, complicating the process and slowing deployment, but now these credits can be sold directly to anyone with tax liabilities. The direct pay option also creates the option for non-tax-paying entities to receive the credit as a cash payment from the Treasury Department—basically turning the ITC and PTC into a grant for those organizations.?

THE IMPACT:?Taken together, power operators have more options than ever to maximize their facilities’ economic potential, accelerating renewable energy and battery storage deployment. Stable, long-term policy will unlock clean energy for utilities and developers, while government funds will be spent more efficiently, so that millions of Americans can enjoy cleaner air and cheaper electricity. Estimates show that the bill will boost installed solar and onshore wind capacity in the US by 40% by 2030, with an extra 155GW of capacity expected to come online this decade, with more than?$270B in additional project investments?attracted in the next eight years. Ultimately, the?national energy mix is set to shift?to 45% of electricity from zero-carbon sources by 2023, and 62% by 2040. At this point in 2021, those same projections had the U.S. hitting 46% zero-carbon in 2040. Many digital tools will be necessary to deploy and integrate these assets at the speed and scale required.

Battery Build Out

Battery suppliers will now be eligible for billions of dollars in federal loans and tax credits to spur additional electrification investments as the US attempts to scale domestic supply maintain pace?with rapidly expanding demand. The IRA measures come after President Biden had earlier this year?invoked the Defense Production Act?to step up US production of battery minerals?and lower the nation’s reliance on foreign supply. The Department of Energy?had also dedicated $3.2B of funding as part of the Bipartisan Infrastructure Law to develop the country’s battery supply chain, with the bulk of funding being made available to mid-stream processing to cathode, anode and battery cell production.

• New Storage Credits:?Standalone battery storage finally?qualifies for the 30% Investment Tax Credit?to lower the capital cost of equipment. Historically, battery storage was only eligible for the ITC when paired with solar.
• Battery Cell Manufacturing:?The government will provide a tax credit of $35kWh for each U.S.-produced battery cell,?nearly 35% of today's average cost?of producing a battery cell.?
• Battery Assembly Incentives:?There's also a $10/kWh tax credit for U.S.-produced battery modules which would cut about?1/3 off the cost of assembling?an EV battery pack.?
• Domestic Production Stipulation:?The bill also includes a?10% Advanced Manufacturing production tax credit?across the lithium-ion supply chain, which would help ease the cost burdens facing battery manufacturers and automakers. The credit begins with the production of critical minerals and extends midstream for cathode and anode materials. The bill says not less than 40% of the critical minerals used in batteries should be extracted and processed in the US or with a free trade agreement?partner or recycled in North America. It includes provisions to ramp up this requirement to 80% in 2026.?

THE IMPACT:?Suppliers and auto OEMs stand to benefit. Ford could get a?$3B tax break?for the twin factories it's building in Kentucky, which will be able to produce 86GWh worth of batteries annually. Domestic supply chain measures will help companies like Redwood Materials, which is investing?$3.5B in Nevada?to onshore cathode and anode processing, which is currently done mostly overseas. The further buildout of both standalone storage and vehicle batteries will increase the need for sophisticated battery management systems and innovative AI-driven performance analytics to maximize hardware performance. Load forecasting, peak shaving, capacity reserves, and black start capabilities are all impacted by the integration of battery storage, requiring software to operate optimally.

Passenger EV Affordability

The legislation adds new rules that determine which electric models, and which consumers, qualify for the $7,500 tax subsidy that has been in place since 2009. These measures will go a long way to further bolster the industry, which has already?invested more than $100B?to increase production of electric vehicles in North America.

• Production Cap Revoked:?The?200,000 vehicle manufacture cap will go away, providing an immediate boost to companies that already hit their cap to trigger a phaseout of the $7,500 tax credit on their EVs. Companies like Tesla and GM had reached the limit years ago, as well as Toyota this summer, while Ford and Nissan were approaching the mark.
• Used EV Credit:?For the first time, used EVs will be eligible for up to?$4,000 in tax creditsuntil the end of 2032.?
• Receiving Credits Upfront:?Beginning in 2024, a consumer may transfer the new or used EV credit to a dealer, enabling buyers to?receive the credit as a rebate at the point of sale.
• Boosting Production:?The bill includes $2B in grants to retool existing auto plants to make clean vehicles, and up to?$20B more in loans to build new factories?from the Advanced Technology Vehicles Manufacturing (ATVM) Loan Program.?
• Supply Chain Requirement:?The legislation essentially?eliminates from the subsidy any vehicle that?gets any of its battery raw materials and components from China, and sets minimum thresholds for the value of battery components that must be manufactured or assembled in North America. EVs meeting the critical mineral requirement will be eligible for a $3,750 tax credit and those meeting the battery component requirement will be eligible for an additional $3,750 tax credit, totaling the full $7,500.?
• Sticker Price Limits:?Cars?priced above $55,000?wouldn’t be eligible for the subsidy. The limit for SUVs, pickup trucks and vans is $80,000.?
• Consumer Income Limits:?Consumers with?household incomes above?$150,000 for individuals and $300,000 for married couples wouldn’t qualify.

THE IMPACT:?These measures appear to be tilted towards the benefit of established auto OEMs and may disadvantage start up brands targeting the expensive luxury end of the consumer market, the same strategy that Tesla had successfully employed to break into the mass market. The bottom line is that the new supply chain requirements will be challenging to meet in the near term but are necessary to shift reliance away from foreign countries. Of the 72 models that qualify for the credit today,?70% would become ineligible?as soon as the measures take effect, creating the need for a massive supply chain realignment. Passenger EVs with sophisticated operating systems present the opportunity for a trove of new data to be accessed and utilized. These new sourcing provisions will enhance demand for digital solutions that enable supply chain transparency, thereby ensuring sourcing and assembly location requirements are met.

Commercial?Fleet Electrification

The IRA includes sizable new incentives for commercial electric vans, trucks and buses. Medium- and heavy-duty trucks currently make up less than 5% of vehicles on U.S. roads but?account for 25% of total transportation greenhouse gas emissions.

• Commercial Vehicle Credits:?A new tax credit of?30% of the cost of commercial EVs, up to a maximum of $7,500 for light-duty vehicles and $40,000 for medium- and heavy-duty vehicles. There are no battery or mineral sourcing requirements.
• Heavy Duty Incentives:?The law also provides?$1B in grants for clean heavy-duty vehicleslike school buses and garbage trucks, as well as other grants, such as $3B to reduce air pollution at ports, that could help boost heavy-duty EV adoption.?
• USPS Funding:?The bill includes?$3B to boost the U.S. Postal Service's zero-emission vehicle?(ZEV) goals with $1.3B for the purchase of zero-emission delivery vehicles, as well as $1.7B for the purchase, design, and installation of the infrastructure to support zero-emission delivery vehicles at Postal Service facilities.

THE IMPACT:?These incentives will catalyze medium- and heavy-duty electric vehicles from Tesla, Freightliner, BYD, Mercedes, and Lion, electric school buses, electric transit buses, as well as fire engines, trash trucks, and replacements for many of the other diesel-powered vehicles of American society. Software solutions that utilize fleet telematics to optimize routing to enable more efficient operations will be demanded.

Charging Infrastructure Expansion

The legislation enhances federal tax credits for charging equipment that had expired earlier this year. With electric vehicles appearing to have crossed the tipping point into mass market adoption, these measures are essential to ensure that charging infrastructure grows in lock step to provide adequate coverage, speed and range to consumers.

• Refueling Property Credits:?The legislation boosts the?30% tax credit for construction of EV charging stations?to a limit of $100,000 per charger, up from $30,000 per site currently, and extends the program by a decade, while removing the per location limitation.
• Wage & Equity Requirements:?Workers employed in the construction of the facilities must?meet new prevailing wage and apprenticeship requirements?or the credit is reduced to 6%. Companies can only use the credit for chargers installed in a census area?where the poverty rate is at least 20%?or where the median family income in the area is equal to or less than 80% of the statewide median family income.
• Individual Residential Chargers:?Individuals are eligible for a 30% tax credit?on the installed cost of an EV charger, with a max credit of $1,000. The individual tax credit is applicable in any community.
• V2G Enabled Equipment:?The bill includes?bidirectional charging equipment?for vehicle-to-grid uses which aren’t common yet, but several pilots are under way by utilities, fleet operators and charging and tech companies.

THE IMPACT:?Companies switching their commercial fleets to EVs and businesses installing large amounts of EV equipment are the most likely to benefit. Some estimates expect?$1.7B in tax credits for chargers?or other alternative-fuels equipment to be claimed over a 10-year period. Managed charging, which analyzes patterns for the cheapest times to charge, will be a key method for integrating so many vehicles without straining the grid and drawing massive demand charges. The inclusion of bidirectional charging equipment in the incentives will further spur the possibilities around vehicle-to-grid charging, requiring sophisticated communications, monetization, and AI/ML layers to achieve.

Innovation Ecosystem

The bill goes beyond tax incentives by directing new streams of public finance to the energy transition in an act to rally private energy investment in the sector. This funding will enable the Department of Energy to stretch each public dollar much further.

• Federal Green Bank:?The nation’s?first federal green bank will be established with $27B?to support its mission to help poor and middle-class homes switch to clean energy.
• Massive Loan Funds:?As much as?$250B in loans and guarantees for energy infrastructure?will flow through the Department of Energy’s Loan Programs Office.?

THE IMPACT:?The benefits to innovation from the green bank and Energy Department loans will be substantial, with some estimates suggesting they could?catalyze 10x as much private capital. This windfall of additional capital should support the creation and growth of numerous energy tech companies.

Fossil Fuel Actions

The impact from this bill on the oil and gas industry is limited, but that was by design. Polluters are facing a new fee on excess methane emissions. However, the bill includes some industry compromises as supported by Senator Manchin.

• Methane Leak Fee:?Leaks from oil and gas wells, pipelines and an array of other infrastructure would lead to?fees rising to as much as $1,500 a ton in 2026?for some operators. The new bill would also offer incentives for the industry to clean up.
• Manchin Demands Provision:?The bill requires?more leasing of federal lands and waters for oil and gas projects?which Senator Joe Manchin demanded. Experts say that it will have only a modest impact in terms of greenhouse gas emissions.?

THE IMPACT:?Overall, the IRA is expected to?subtract at least 24 tons of carbon emissions for each ton of emissions that the oil and gas provision adds. The charge on natural gas that is wastefully polluted represents one of the limited sticks in this bill, nudging the industry toward more sustainable practices. Emitters will continue to seek solutions in leak detection, emissions monitoring and carbon accounting in light of these measures.

Spotting the Exit

There has already been a massive surge of interest in green energy funds after the momentum around the Inflation Reduction Act. Investors have already?poured $425.5M into U.S. renewable energy exchange-traded funds through Aug. 12, compared with $112.8M in July. Although this may inflate asset prices in the near-term, long-term reversion to the mean should settle at a higher equilibrium point than public clean energy stocks traded at just a few months ago. This may establish the initial conditions of a robust and favorable long-term exit market for today’s energy tech startups.?

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