Inflation Reduction Act - What is it and How it impacts the Energy industry explained.

While we celebrate the first anniversary of the Inflation Reduction Act (IRA) this week, we must understand that this act is designed to impact everything from the energy industry to transportation to insulin prices, individual tax credits, and corporate taxes.

What is in the Inflation Reduction Act of 2022?

In short, this act directs new federal spending toward reducing 
carbon emissions, lowering healthcare costs, and funding the IRS.        

The Inflation Reduction Act includes a broad range of legislation targeting different sectors of the economy. In short, this act directs new federal spending toward reducing carbon emissions, lowering healthcare costs, and funding the IRS. Among its most prominent provisions are [1]:?

• An expansion of Medicare benefits to include free vaccines, insulin prices capped at $35 a month, and a ceiling for prescription drug prices at $4,000 in 2024 and $2,000 in 2026
• Cuts in the cost of home energy?
• Investments into clean energy and tax breaks meant to reduce carbon emissions by 40% by 2030
• A new 15% minimum corporate tax and a 1% fee on stock buybacks
• Expanded IRS tax assistance and enforcement through an investment of $80 billion over the next 10 years
• Extension of the Affordable Care Act's federal subsidies to 2025. These subsidies lower the cost of premiums for enrollees.?

The Inflation Reduction Act is just the first step in a long process the country must undergo to meet its climate goals. This has kicked off a stunning boom in clean energy.

This (IRA) has kicked off a stunning boom in clean energy.        

Effects of IRA on the Energy Sector

IRA includes many Substantial federal funding for energy-related provisions to address climate initiatives. This includes investment and production tax credits for clean electricity resources, tax credits for energy storage and carbon capture, and tax credits to maintain existing nuclear plants. This legislation channels an approximate sum of $400 billion from the federal budget toward advancing clean energy. The overarching aim is to achieve a substantial reduction in the country's carbon emissions by the conclusion of this decade.?

These funds will be disbursed using a combination of methods, including tax incentives, grants, and loan guarantees. The most significant portion of the funds is allocated to bolster clean electricity and transmission efforts, closely followed by investments in clean transportation, which encompass incentives for electric vehicles (EVs).

Energy Infrastructure: To combat climate change, there is a need to transition from fossil fuels to renewable energy sources like solar, wind, and hydropower. This transition requires significant infrastructure changes to accommodate the decentralized nature of renewable energy production and the intermittency of sources like solar and wind. The Loan Program Office of the US Department of Energy is set to receive an approximate sum of $12 billion. This funding will enable a tenfold expansion of its current loan authority and the establishment of a fresh loan initiative, limited to $250 billion. The primary purpose of this program is to enhance, repurpose, or substitute energy infrastructure.

Private Investment: Out of the total $394 billion allocated for energy and climate initiatives, a significant portion takes the form of tax credits. Predominantly, corporations stand as the primary beneficiaries, with an approximate value of $216 billion in tax credits. These credits are strategically crafted to stimulate private investments within the realms of clean energy, transportation, and manufacturing. Notably, many of the tax incentives outlined in the legislation operate as direct payments. This signifies that an entity can claim the entire sum, irrespective of whether its tax obligation falls below the value of the credit.

Consumer incentives: Around $43 billion in IRA tax credits have been designated to reduce emissions through enhanced affordability of electric vehicles (EVs), energy-efficient appliances, rooftop solar panels, geothermal heating systems, and home batteries. Starting in the year 2023, EVs that meet the criteria will be entitled to a tax credit of up to $7,500, while new and used vehicles will qualify for credits of $4,000. Home upgrades meeting the eligibility criteria can receive tax credits amounting to a maximum of 30 percent of the overall expenditure, with an annual cap of $1,200. Meanwhile, for heat pump installations, the credit is subject to an annual cap of $2,000.

Linked Conditions:?

• To contribute to the development of more robust and varied talent pipelines in the fields of science, technology, engineering, and mathematics (STEM), manufacturing facilities are granted complete eligibility for IRA tax credits only when they fulfill stipulated conditions such as prevailing wage and apprenticeship prerequisites.?
• Numerous IRA tax incentives also encompass conditions that promote domestic production or procurement. For instance, to access the complete consumer credit for electric vehicles (EVs), a certain percentage of critical minerals in the battery must have undergone recycling within North America, or their extraction or processing should have taken place in a nation that maintains a free-trade agreement with the United States. Additionally, the battery must have been manufactured or assembled within North America.

Waves observed up to this point:?

• Plans for more than 100 new clean energy manufacturing facilities have been announced in the U.S. since last August [3]. It is anticipated that renewable energy producers will accelerate the construction of projects in the United States at a significantly quicker rate than initially projected. Global companies are investing substantial amounts of capital into American ventures centered around solar, wind, battery technology, and EVs. These firms are devising strategies to expand the reach of emerging technologies such as green hydrogen.?

Global companies are investing substantial amounts of capital into 
American ventures centered around solar, wind, battery technology, and EVs.        

• On the government front, the U.S. Environmental Protection Agency [4] has put forth rigorous regulations about vehicle and power-plant emissions, aiming to enhance the efficacy of the law in reducing emissions. Additionally, the Department of Energy has provided groundbreaking loans for clean technology initiatives.

Department of Energy has provided groundbreaking loans for 
clean technology initiatives        

• Concurrently, various states have enacted ambitious clean-energy targets and their subsidy programs. The Inflation Reduction Act has even prompted foreign governments to emulate these actions by introducing subsidies for renewable energy within their nations.

All these actions are expected to significantly impact one of the most crucial aspects by lowering emissions from the United States, which has historically been the most significant contributor to CO2 emissions.

A recent study published in the journal Science [5] examines nine distinct models and concludes that climate law has positioned the nation on a trajectory to reduce emissions by approximately 33 to 40 percent below 2005 levels by 2030. While this falls short of achieving the objective to halve emissions by 2030, the analysis emphasizes that it represents a substantial improvement compared to what the country would have achieved without the law.

However, the projected outcomes remain uncertain. The United States might not reach the targeted emissions reduction levels if the current momentum loses steam, or it could surpass these targets through the exponential growth of renewable energy sources.

The analysis emphasizes that it represents a substantial improvement 
compared to what the country would have achieved without the law.        

Undoubtedly, this influx of subsidies is poised to accelerate the transition to a cleaner U.S. energy mix at a pace that was previously only a distant aspiration for climate advocates.

However, the actual rate of progress will hinge on the speed at which the government can allocate the funding, the swiftness with which companies can expand to leverage these funds, the readiness and capacity of consumers to invest in electrifying their lifestyles, and the level of opposition the law's execution encounters from both politicians and local communities.

While these factors have already begun to unfold over the previous year, a significant amount more is yet to unfold in the upcoming years, decisively shaping the legacy of the law and thereby this country.

1 What's in the Inflation Reduction Act and how it could affect you (usatoday.com)

2 What’s in the Inflation Reduction Act (IRA) of 2022 | McKinsey

3 https://www.canarymedia.com/articles/clean-energy-manufacturing/the-remarkable-upsurge-in-usclean-energy-manufacturing-in-charts

4 https://www.science.org/stoken/author-tokens/ST-1277/full

5 https://www.canarymedia.com/articles/clean-energy-manufacturing/suddenly-the-us-is-a-climate-policy-trendsetter