Notes of Jesse Jenkins lecture: “Can the Inflation Reduction Act put the United States on the path to net-zero?”

[These are my notes of a guest lecture by eminent US energy systems wonk Jesse Jenkins, delivered to a roomful of keen energy nerds at the University of Melbourne on 18 December 2023. There were a lot of great slides, which I have largely missed alas.]

Part One: the US Inflation Reduction Act

Exciting few years for US climate policy – snuck through a last minute deal with a coal state senator to achieve the biggest climate response in the US ever.

My group contributed studies on what would be needed as leg was drawn up, and launched the REPEAT project to use same energy system tools to keep evaluating impact of law as it is being implemented. We’re tracking the law and proposed regulations under it.

So where does the legislation take us, what gaps remain, and what is needed to align with US climate goals?

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IRA and IJA put full financial might of USG behind energy transition. Very few forces are as powerful as the purse strings of the US Treasury.

We’ve had state policies and on-off tax credits for selected techs or sectors. That doesn’t give us the supply chains or workforces for bigger change.

Now clean energy is on sale for all Americans – decisions on vehicles, heat homes, industrial processes – we need cleaner choices and one or two durable infrastructure turnover cycles before 2050, even for home boilers. So need interventions across the economy that make cleaner choices better financially.

So you can tax carbon and raise the cost of pollution. We tried that in USA and the legislation didn’t even get taken up in the Senate after passing the House.

So we’re trying the other path, to make clean energy cheaper through tax credits and other incentives.

The estimate is that well over half a trillion dollars will be provided through these laws in the ten year scoring window, and some more thereafter.

Much of the cost of clean energy is now borne on the tax base, by an increase in the corporate minimum tax and better enforcement of tax laws on current cheats.

We now have long term tax credits for 30-50% of the cost of all forms of clean energy, and in place for the long term, focussed on a 75% reduction in electricity sector emissions; when that benchmark is reached, the incentive phases down.

So likely all new generation through 2030s, maybe early 2040s, will benefit.

We also keep the foundation of existing clean energy through incentives.

Clean hydrogen rules are being finalised now and we expect guidance next week – the world’s most generous subsidy, up to $3/kg;

CCUS incentive up to $85/t

Incentives for personal vehicles, tied to friendshoring and onshoring for critical minerals and batteries.

Incentives and rebates for low and middle income households for electrification of homes and businesses;

RD&D investments in DACC, advanced geothermal, advanced nuclear

Incentives for transmission lines and CO2 pipelines.

So the full weight of Uncle Sam’s thumb is on the scales to shift energy choices.

But that’s not the only objective of IJA and IRA. Key is to drive down real cost of these techs over time. Efforts to date have driven deep reductions in underlying costs of batteries, solar and wind. The scale up process drives experience curves (learning by doing, R&D, innovation and more. This will help with techs that won’t drive much reduction today, but be important later on (DACC, H2, advanced nuclear etc).

This aspect has the most global impact by spilling over benefits to lower costs worldwide.

IRA is also trying to build out domestic manufacturing of solar, wind, EV, battery supply chains. There are direct credits for supply in the US and demand side pull by making credits available or more generous for US- and friend-based supply chains. Reducing dependence on China for strategic reasons and to build domestic support for transition.

There are also health benefits – reducing emissions generally also reduce particulate pollution and benefits those communities who have suffered the most; there are special incentives to reduce pollution in these communities and improve their access to capital.

And there are also communities that are dependent on fossil extraction, processing or use, and the law is trying to drive investment in clean energy to these places. 10% bonus in credit value for defined energy communities; set aside in Clean Energy Manufacturing Credit for coal communities.

In total, hundreds of billions of investment in clean economy will be made across the US.

So how’s it working?

It’s over a year since IRA passed. We’ve had about $225b investment in clean economy, $64b in the third quarter of 2023 – so it’s accelerating, capacity to deliver investments and product is growing.

Emissions outcomes? US emissions have fallen for about a decade, from 6.6Gt in 2995 to 5.6Gt in 2021. We estimates 2% annual declines in absence of new law. With IRA and IJA we estimate the pace of decarbonisation doubles. That falls short of the 50% 2030 goal and net zero by 2050; most of the incentives expire in mid 2030s and the effect peters out. It can’t be the last word, but it buys us time; reduces costs; makes it easier for regulators to make new rules because the cost of clean energy is lower. My group found New Jersey could double its progress to its goals at no higher state cost, and it’s in the process of updating its executive orders to that end.

The CBO is not strong on energy forecasting, and CCUS is particularly likely to be underestimated, but CBO estimates are a decent reference point. They point to large spend under each element of the laws.

REPEAT estimates substantial; emissions reductions across all major sources.

There are major gaps though, even in the power sector (1Gt by 2030) – most of it coal. The law doesn’t really differentiate between dirtiness of coal versus gas – compared to a cost optimised net zero pathway, it is a bit blunt. Coal should be the first and easiest to replace with a mix of renewables and gas.

There is more to be done! And more is being developed, including in the States which are stepping up. The US EPA is developing a plan for emissions from existing coal plants, which would require emissions reductions but allow for CCUS; our analysis suggests it would greatly accelerate coal retirements.

The EPA Methane Pollution Fee will also greatly speed methane reductions.

And vehicle fuel efficiency standards are being strengthened greatly. The vehicle and power plant rules won’t make much difference to 2030 but much bigger impacts will be had by 2035.

The reauthorisation of the Farm Act will be a chance to address NOX and other emissions. On industrial decarbonisation there is a policy gap around clean heat and otherwise – we lack a strategy today and need to develop one.

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Now: the electricity sector must get ready for growth. Historically we had strong sustained demand growth, then that flattened off 2006-2022. As we drive electrification demand will grow, on top of AI and data loads and onshored manufacturing. We estimate 2%/yr growth over next decade, and 4.5%/yr from 2036-50. S curve trends in techs mean big loads start really growing, including DACC. We haven’t seen growth like that since the postwar era.

Not only do we need to meet that demand growth, but transition all current US generation. We need to build 1.5x all current clean generation by 2030, then more than that again by 2035, then 2x all current generation by 2050.

So we need to be a country that can build things of importance again. We’ll need to smash deployment records every year. A vast step up in deployment.

The US EIA projects solar deployment next year will be double the historic peak – so its ahead of schedule.

Wind is lagging behind – our peak was 15GW in 2020, this year we project just 7GW. So on average OK but we wish wind was growing as fast as solar.

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We’ll need a bigger grid. We estimate 75k miles of HV transmission, enough to run NY-LA 15 times, over next decade.

It can seem absurd. But we’re a big country with big buildouts in our past. 1978-99 we expanded transmission 2% per year, our model says we now need 2.3% per year. We can reduce that a bit by strategically locating storage to get more use out of transmission.

But in past decade we did only 1% per year. So we need to do much better. In our model if we constrain transmission, we lose nearly half of the emissions reductions from IRA – because we’re increasing demand without clean energy keeping pace. High price of failure!

So we’ve done a lot, likely to drive $7t+ of private investment. But to make the most of it we need to be in nation building mindset. The way we’ve done things for 30 years maybe isn’t fit for purpose. So we need to find ways to build at the pace we need to without the injustices of past high-growth periods. We can’t build like that but we do have to build.

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Q&A part one

·?????? Q: Are there landholder objections to transmission in USA?

o?? A: yes, this is a big challenge. There are lots of veto points for individual voices, usually those insiders who know the process best. There are efforts at permitting reform, but the biggest thing is to consolidate the process. A broad economic stake in progress helps, but we need clear quick guidance from the permitting systems. Big conversation now about institutional and process reform that gives voice, but reduces veto points.

·?????? Q: Role of energy efficiency?

o?? A: traditionally EE was about saving generic kilowatt hours of equal value. That’s changing, focussing on the right hours – eg solar abundance or wind. Electrification is a twofer – much more efficient processes and use of cleaner energy without primary efficiency losses. But we need to think about how to encourage people to charge at work. Confident we can get demand side improvements done, but the federal law largely doesn’t focus on this – States have a big role here.

·?????? Q: How tied is IRA to Biden and Bidenomics? Will it get dismantled?

o?? A: Bidenomics is about a broader interventionist economic approach, which is underway. Not sure anybody outside wonkish circles knows what that means. But IJA, BIF, and CHIPS passed on a bipartisan basis. IRA did not and is more vulnerable. But the majority of the economic benefits go to Republican states and repeal is difficult – both houses of Congress, lots of pressure from industry not to repeal. Texas had a mini preview run of this – an effort to kneecap renewables was defeated by a strange coalition of oil and gas people, general business interests, enviros, landowners who banded together. If Trump wins re-election despite everything, that bodes poorly for our democracy and not much may be safe.

·?????? Q: economic nationalism is potent within the US but what does it mean for global just transition?

o?? A: there is no just transition if the US doesn’t reduce emissions and we won’t unless it’s in domestic interests. The law will drive down real costs of clean energy and potentially produce oversupply too (Australia benefitting from EV extra supply from China as a knock on effect, eg). Yes some countries may struggle to compete with large industrial strategy. But that was already true – see China’s 15 year push in this space.

·?????? IRA gives a roughly ten year runway for US climate and energy policy. Assume it all sticks through the politics of the coming decade. It doesn’t last forever and ambition keeps rising. What’s your best guess on what comes next??

o?? A: cost of a subsidy approach is very large. Many techs will get cheaper, have a large market share, and I hope we transition to a regulatory or pricing regime. Pricing works well where we have two equivalent substitutes. But there’ll be other techs that will be immature and need a subsidy driven approach – especially in industry where you can’t increase costs without competitiveness loss and leakage risk.

o?? [I heroically did not launch into a paean to CBAM at this time, but of course I did mention it directly after]

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Part two: Australian lessons and options

The US IRA model is analogous for Australia:

Clean electricity supply – retire coal at record pace, deploy renewables, maintain gas capacity while using it less and less. The gas is important – the things we don’t like scale with how much we burn, not how much capacity sits there. The capacity helps us retire coal faster. That’s the case in the US and appears to me to be the case in Australia too based on NZA and ISP24d. Your current deployment of renewables is about 1/5 of what’s needed to be on track for net zero.

New gas capacity has a high burden of proof to show that it’s needed in particular places and times – it may be able to establish that. But these plants are not valuable if not actually firm – we’ve seen in USA that there are problems. Texas, Eastern grid – lost 1/3 thermal capacity to forced outages. If firm plants aren’t firm, people die. So if we’re going to rely on them we need to ensure the firm fuel infrastructure is there. In our model we’re finding that the assumption of drawing on a full pipeline doesn’t hold by 2040. Storage or firm gas supply payments shift the capital costs and may boost the relative attraction of other options like electricity storage. US is big and probably needs more options like CCUS, advanced nuclear (maybe not for Australia) and advanced geothermal, and long duration energy storage.

Households. IRA has a range of strategies to influence household energy consumption. Australia likewise needs comprehensive incentives to reduce upfront costs – upfront investment to reduce fuel costs over time makes sense, but households have high discount rates. Shifting the weighting through rebates or concessional finance can make a big difference.

EVs will have big cost reductions and the US strategy is to buy the reductions faster and hope that the upfront sticker price crosses over by decade’s end.

Tradespeople – need to upskill and change incentives so that what’s on the back of the truck already is clean when your boiler needs urgent replacement.

We’re projecting first sustained drop in oil and gas demand in the USA ever. EVs, heat pumps, efficiency kill the old trend.

Both the US and Australia are net fossil exporters. I’ve heard about energy security all my life; Ukraine showed the limits of that. Clearly you’re better off with security of supply, but we’re tied to a global market and the price of gas and fuel skyrocketed in New Jersey too. We won’t be secure as long as we’re tied to globally traded energy commodities.

I know there’s been a lot of focus on H2 in Australia and that will play a role, as in USA and Chile and others. But critical minerals are the real opportunity. Coal and gas exports are projected to be about $100b/yr for Australia, but at current market share lithium would by $80b by 2035 and nickel, cobalt, copper would be more on top. There’s a huge chance to replace fossil exports with critical minerals, with more value add and comparative advantage than in hydrogen (which would be nice too).

The places with greatest economic strength will be those with abundant low cost renewables. You can electrify directly or create molecules for process heat. Australia is in a great position to do this, so much land and low population. You can build new heavy industries around renewable clusters. I’m on the board of Rondo Energy who are exploring cluster options around the world. You’ve focussed on heavy industry, but don’t sleep on not-so-heavy industry,

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Q&A part two

·?????? Q: Nuclear?

o?? A: I’ve been a long time supporter of nuclear; if you take a broad view of its risks it stacks up well. But there are real questions whether it can contribute economically. We tried a nuclear renaissance in the mid 2000s, it went horribly – several failures, one built will provide big clean power but as USD$150/MWh. And our leading NuScale project pulled out due to doubling cost via interest rates and input costs.

o?? IRA helps with strong tax incentives and loans. Now they have to deliver. At the earliest it won’t be til the early 2030s. In Australia it might be interesting in the long term but you can’t count on it in the medium term.

o?? Nuclear has most value in densely populated countries with poor renewables potential – SK, JP, maybe India. Australia is the exact opposite. Not as critical here.

·?????? Q: Transport emissions trends, and what about air travel?

o?? A: transport is still rising but we expect it will fall in next decade.

o?? There are air travel techno fixes but they’re expensive. This is a truly hard to abate sector. Jet engines and fuels have miraculous energy density. But a range of techs can help with shorter distance s- hybrid electric and fully electric aircraft are relevant, and most travel is 500km or less in most places. I’ve a student working on this now, there are interesting engineering challenges. Maybe we just use fossils for long term travel in the long term as the highest best use of those, and offset with renewable powered DACC.

o?? Flying is an amazing thing, people want to fly, we won’t stop that. Need to give better choices, won’t shame our way out of this.

·?????? Q: CCS – how’s that looking?

o?? A: Industry has to prove it. We have robust supportive policy. There are many applications, this is not one tech but systems engineering in many different contexts. Ethanol refining, cement kilns, gas fields. In combustion it’s probably viable in some applications – subsidies are enough o get power going in USA if you’re close to storage. We’ve demonstrated technical details in every application but not at commercial scale.

o?? So could look completely different in 10 years re commerciality and scale. Probably won’t have same learning rate as solar, but could take scale and become important.

·?????? Q: Carbon removal?

o?? A: Enhanced weathering is very interesting. But any time you’re dealing with an open ecosystem, there’s a lot we don’t know about about third order effects. Lots of uncertainties, but we should work on it.