Love it or hate it, the Inflation Reduction Act has been the law of the land since President Biden signed it last August. And it’s already survived its first real political test, as Republicans in the House of Representatives backed off demands for effective repeal in agreeing to raise the federal debt limit ceiling.
My August 2022 Conrad’s Utility Investor feature article “What Energy’s Grand Bargain Means for Utility Earnings” highlighted the key provisions of the Act, which at the end of the day is an attempt to return to the “all of the above” energy policies predating the Trump Administration. And target beneficiaries of the roughly $370 billion of tax credits and subsidy range from regulated utilities and battery manufacturers to carbon capture projects of super major oil companies.
It’s fair to say the lack of energy infrastructure permitting reform is still a bottleneck for many potential IRA-incentivized projects. The NIMBY or “not in my backyard” impulse has been getting stronger over the past decade for pretty much anything to do with fossil fuels, including development of carbon capture. And it’s now heating up for new wind and solar projects as well.
Winning needed permits for new electricity transmission lines is arguably as problematic now as for oil and gas pipelines. Only a specific provision in the federal debt limit deal, for example, was able to revive work on the 94 percent-complete Mountain Valley Pipeline. And it took a multi-year court battle to get a 145-mile Canada-to-New England power line back on track this year for developer Avangrid
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To pass Congress this year, energy permitting reform will need bipartisan support. That means liberalizing rules for renewable energy and fossil fuels projects, a step culture warriors on both right and left are sure to oppose.
The IRA as it stands now, however, has already been an unqualified success in one major respect: The “multiplier effect” on private sector investment.
When the federal government directly invests in projects, it crowds out efforts of companies and individuals that don’t have the luxury of effectively unlimited budgets. By contrast, the IRA is designed specifically to accelerate investment already being made by the private sector. And early indications are it’s succeeding to an extent no government effort has since World War II.
Exhibit A is ongoing construction of new U.S. manufacturing capacity, particularly for solar panels and advanced batteries. “Reshoring” was already happening to some extent. That’s the result of post-pandemic supply chain disruption and escalating tensions in the U.S./China trade relationship, which resulted in punitive tariffs for imports. But since the IRA became law, manufacturers have announced new solar panel projects with nearly seven times the capacity of currently operating facilities.
And despite this month’s record low for global prices, more capacity is on the way. Next month, for example, Italy-based power producer Enel SpA (ENEL, ENLAY) will likely start building a U.S. facility capable of producing 6 gigawatts of new solar panels annually. That’s nearly equivalent to the country’s entire production capacity pre-IRA.
The economics of long-term advanced battery manufacture are more complex, as accelerating demand from the power grid and for transportation comes up against supply concerns for key minerals like copper and nickel. Nonetheless, there’s an ongoing U.S. building boom for new battery production capacity that would increase output to nearly 1,000 GWh per year by 2030, compared to 55 GWh/year in 2021.
All this building has set off industry alarm bells of potential over-supply, and financial ruin for weaker companies. But what’s effectively a race to the bottom for manufacturers is a massive plus for deployers like NextEra Energy
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NextEra will update guidance in late July. Following its announcement, I expect U.S. electric utilities across the board to announce expanded investment plans for solar, battery storage and other technologies advantaged by the IRA. And though energy prices will be the main driver of their results, oil and gas producers and midstream companies will do the same with carbon capture and renewable fuels.
The IRA also conveys considerable benefits to nuclear energy. Plants already in operation will enjoy a $40 to $43.75 per megawatt hour “revenue floor” through 2032. That’s huge plus for both regulated utility operators like NextEra and merchant producers like Constellation Energy (CEG). It also means a potential cash windfall for Dominion Energy (D), should its ongoing strategic review include selling the Millstone plant (Connecticut).
Benefits from the IRA are less clear for developers of advanced nuclear, given the high cost of completing Southern Company’s (SO) Vogtle and the nascent state of small modular reactor development. The U.S. Energy Information Administration reports nuclear’s levelized cost of energy (LCOE) including tax credits is more than twice onshore wind and 67 percent above solar plus storage.
Nuclear power is available when the sun isn’t shining and the wind’s not blowing. And despite long-term concerns about supply, fuel costs have historically been far steadier than often-volatile natural gas and coal prices.
Neither advantage is fairly reflected in LCOE calculations. Nonetheless, IRA tax credits and subsidy for nuclear is clearly an attempt to reverse long-standing private sector aversion to investment—rather than leaning into an ongoing trend. And odds of nuclear subsidy generating a real multiplier effect are therefore less than what we’ve seen thus far for renewable energy.
The culture war is now firmly entrenched in energy policy debate. That means the IRA will face more political challenges in coming years. Where there is a multiplier effect, however, it will be progressively more difficult to repeal the tax credits. And that means powerful long-term upside for investors who buy and hold the surprisingly bargain-priced best in class beneficiaries.
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