One year on: America’s Inflation Reduction Act is closer to reshaping the US clean energy industry

On 16 August last year, US President Joe Biden signed the landmark Inflation Reduction Act (IRA) into law. With almost $400bn in direct funding and tax credits allocated to clean energy development, the IRA was set to have a profound impact on America's path to net-zero emissions.

But one year on, we want to examine whether changes are in fact happening and whether they are going far enough. In this article, we take a look at what effects the IRA has already had since its enactment last year, and what the outlook is for America's decarbonisation journey over the next decade.

Of the nearly $400bn dedicated to the energy transition, $260bn will be in the form of tax credits to support not only relatively more established clean energy technologies such as wind, solar, battery storage, electric vehicles (EVs), and nuclear, but also emerging technologies such as hydrogen, carbon capture and storage (CCS), and advanced biofuels.

Meanwhile, there is also significant direct funding available through government agencies such as the Department of Energy (DoE) in grants ($82bn) and loans ($40bn), which will be crucial in readying the technologies for private investment and widespread adoption across different sectors. For instance, the DoE recently announced roughly $6bn in grants to fund the decarbonisation of the most energy-intensive manufacturing sectors such as steel, cement, and chemicals.

The generous financial support from the IRA is already attracting soaring investment and project development plans. The DoE’s Loan Program Office has been reviewing more than 140 clean energy financing and guarantee requests totalling approximately $121bn.

In the power sector, $271bn of investment was announced during the first 50 weeks of the IRA becoming effective to develop utility-scale wind, solar, and storage projects, manufacturing facilities, supply chains, and others in North America. For project development, there was 185 GW of clean power capacity announced during those 50 weeks, which is equal to almost 80% of the current clean power capacity in the US. For manufacturing, 83 clean energy announcements were made during the same period – this would create a total of 76 GW of manufacturing capacity.

The US EV industry is also seeing huge investment announcements. By the end of July, the IRA had attracted $72bn in private-sector investment announcements. Notably, investment plans happen not just in EV manufacturing, but along the entire value chain, including battery manufacturing, recycling, and raw minerals. Several car manufacturers have also updated business strategies to ramp up EV production in the next few years.

In the hydrogen industry, 6.5 million tonnes per annum (Mtpa) of low-carbon hydrogen (blue hydrogen with CCS) capacity and 2.4 Mtpa of renewable (green) hydrogen had been announced as of January 2023 to come online in North America by 2030. This is a rise of 30% and a 3.5-fold growth compared to their respective capacities announced as of May 2022 before the IRA. And the total announced capacity of 8.9 Mtpa of blue and green hydrogen is almost the level of today’s 10 Mtpa of (mostly grey, non-clean) hydrogen production in the US. To note, the 6.5 Mtpa of blue hydrogen project announcement accounted for more than 70% of the world’s total. This is partly because of the stronger policy support and consequently a stronger growth momentum in CCS in the US, which is a key technology in producing low-carbon blue hydrogen.

Considerable progress has also been made in CCS and advanced biofuels (particularly sustainable aviation fuels, or SAFs). The US is traditionally leading in CCS development as Section 45Q tax credits for the technology had been in existence pre-IRA, and then it got another bump under the IRA. The DoE has also awarded $23.4bn to 16 projects in 14 states with locally tailored technical assistance to develop CCS technologies.

The US has also recently ramped up efforts to advance direct air capture (DAC). The DoE announced in August that two DAC projects in Texas and Louisiana would receive as much as $1.2bn in support. As for SAFs, the US is also in the lead. The IRA’s $1.25-1.75 per gallon of bioSAF tax credits is stimulating supply, putting the US in a position to drive SAF production capacity growth over the next few years.

The key to the smooth implementation of the IRA is clear rules on who is eligible to get what amount of tax credits or other types of funding. To address uncertainties, the Internal Revenue Service (IRS) and the Treasury Department have been working to publish detailed guidance throughout the past year. Some of the guidelines include:

These rules – despite the need for more refining – are useful for project developers and investors to determine tax credit eligibility, estimate revenue streams, evaluate project outlook, and advance investment decisions and project development. They are also reshaping the structure and components of the US clean energy supply chain, which will be discussed further below.

Nevertheless, the guideline setting remains a work in progress, and market players in certain clean energy areas are still waiting tentatively for new guidelines. For instance, the IRS and Treasury have not yet released guidance on hydrogen tax credits. For now, two major uncertainties remain: how renewable electricity (used to produce green hydrogen) is measured and how the carbon intensity of hydrogen delivery is calculated. This determines how clean a hydrogen project is and consequently how many tax credits the project can get. The more quickly guidance rules are out, the faster the projects will be expected to move to their next stages.

With decade-long tax credits and funding, the IRA is set to have a profound, long-term impact on the US. This means more clean energy will be produced, and supply chains will look significantly different than they do now.

Through strict eligibility rules for the highest levels of tax credits, the IRA aims to strengthen the US domestic supply chain of raw materials used for low-carbon technologies, with EV and renewable energy tax credit guidelines incentivising at least parts of the supply chain to reside in North America (originated, manufactured, assembled, or recycled). This move is to counter China’s dominance in the clean energy industry, as the country now accounts for 77% of the global battery cell manufacturing capacity, 88% of solar PV manufacturing capacity, and an average of 50% of wind and electrolyser manufacturing capacity.

These requirements are already leading EV manufacturers to explore vertically along the EV value chain. In January this year, General Motors (GM) announced a joint venture with mining company Lithium Americas to gain exclusive access to lithium from a mining site in Nevada, US. Ford will receive a $9.2bn loan from the DoE, the largest single loan in the DoE Loan Programs Office history, to develop battery plants in Tennessee and Kentucky in collaboration with battery company SK Innovations. Tesla, BMW, VW, Hyundai, Honda, and others are also investing in battery manufacturing.

The renewable power industry is not yet officially affected by the domestic component Notice of Intent, but partnerships are nevertheless emerging to build assembly capacity in the US. In May, US solar company Invenergy and Chinese solar panel manufacturer Longi collectively announced the plan to build the US’s largest solar factory in Ohio, at a capacity of 5 GW. Similar moves are also being made by other international companies like Hanwha Q Cells, Vikram Solar, Jinko Solar, etc. One risk to note is the additional cost of geopolitical complexities. The US has restrictive tariffs in place against Chinese solar cells and might impose tariffs on Southeast Asian countries to discourage China from rerouting exports.

In the long term, these provisions will create a more mature domestic clean energy supply chain. However, it would take time and be expensive. It is estimated that the US will need to invest almost $120bn in lithium-ion, solar PV, electrolysers, and metal refining to meet domestic demand by 2030.

Eventually, when a robust low-carbon energy supply chain is established, when emerging technologies become largely competitive with carbon-intensive options, and when infrastructure hubs scale up the adoption of clean technologies, the US will be making significant progress toward decarbonisation. A recent research paper published by Science suggests that the US will likely slash emissions by 43-48% by 2035 under the effects of the IRA.

However, this forecast means the US will be well behind its commitment under the Paris Agreement to cut emissions by 50-52% by 2030 – and a delay in meeting this interim target could mean that the US risks missing its goal to become net zero by 2050.

Corporates and investors are watching whether the IRA will survive in the long term. If Republicans take control of Congress, and a Republican president is elected in 2024, the IRA could be at risk of being repealed, as signalled by some current criticism of the law. But even then, bipartisan support for certain cleaner technologies, especially carbon capture and storage (CCS) and blue hydrogen, is unlikely to go away. Since the IRA entered into force, more than 80% of the pledged investment in clean energy and semiconductor manufacturing announced is specifically toward Republican congressional districts. With significant potential for revenue generation and job creation, this should give IRA clean energy tax credits enough stability through the elections.

The IRA, with its lucrative incentives to attract project developers and investors worldwide, has drawn concerns and action from other economies. As a response, the EU has proposed the Net-Zero Industry Act and the European Critical Raw Materials Act, but since it is unclear how much funding there will be and where it will come from, these policies might not be able to provide incentives as high as those of the IRA. On a positive note, countering policies can level the playing field for faster clean energy adoption worldwide, but the risk is that domestic requirements under these policies could lead to a certain extent of clean energy supply chain deglobalisation.