The IRA turns two this year. What's working and what isn't?

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How effective are the incentives for boosting renewable energy projects and meeting climate goals?

Contributed by Kingsley Asare, advisory manager, Hitachi Energy

The Inflation Reduction Act (IRA) represents the most significant action Congress has taken on clean energy and climate change in U.S. history, with more than $369 billion earmarked for projects intended to help the country meet carbon goals outlined in the Paris Agreement. More than a year after it became law, it’s clear that the IRA has led to significant progress in the effort to decarbonize the U.S. power sector, hopefully by 40% by 2030.

That said, some bottlenecks still need to be worked out if we are to see the full optimization of the law’s incentives. Let’s take a look at seven of the incentives outlined in the law and explore how they are working one year later to meet the country’s decarbonization goals:

1. Tax credit extension

Tax incentives for clean energy projects have been around for more than a decade – usually active for a year or two before being extended. Despite the start-and-stop nature of the timelines, the incentives have worked extremely well – particularly in the wind and solar industries, which have seen significant growth.

However, long-term uncertainty around whether the incentives would be extended has hampered larger, more complex projects that hinge on having certainty that tax credits will be available over the multiple years required to take a project from an idea to an operating facility. The IRA has provided long-term certainty for the credit by extending these tax incentives until 2032 at least.

In particular, these assurances have led to a dramatic increase in large offshore wind projects developments off the Northeast and Mid-Atlantic coasts and a rapid acceleration of solar projects in California and Texas, the country’s largest producers of solar energy. In Texas, utility-scale solar generation has been on track to double capacity over the past two years.

2. Tech neutrality

The IRA made a concerted effort to offer incentives for renewable energy technology outside the conventional sources of solar and wind. This has led to increased investment in new, emerging clean energy technologies such as energy storage, clean hydrogen, and offshore wind.

Even nuclear energy projects – once a third rail for renewable energy proponents – are eligible for the tax credits, and for the first time in decades, we’re seeing interest in adding to our nuclear power capacity. Extending these tax credits to all clean energy technology has boosted innovation throughout the industry and is leading to the development of creative solutions to climate change.

3. Tax credits for carbon capture

One of the main beneficiaries of the tech neutrality clause in the IRA has been the carbon capture industry. The ability to claim tax credits has led to many carbon capture research projects in Texas, Louisiana, and throughout the Midwest. In West Virginia, a soon-to-be-retired coal plant is investing in the technology as a potential way to stay in operation. While it’s only been a year since the IRA passed, we’ve seen an increase in permissions for carbon capture projects as research and development moves to the testing phase.

4. Local labor incentives

The IRA makes a portion of its tax credits available only to organizations that use local labor to construct clean energy projects. While some predicted that the provision would hamper permitting, it has had the opposite effect by incentivizing companies to build in areas with existing expertise. Investing in areas that are already strong in traditional energy sources, such as coal and oil, has helped transition the workforce and made these communities more economically competitive.

5. Energy community bonus credits

Along the same lines, provisions in the bill to align new projects with those sitting at retiring capacity due to age, economic, or environmental concerns, have boosted investment in communities built around coal and oil. Building projects in these communities are more likely to get buy-in from locals and less likely to experience delays due to visual issues or other perceptions. This also means that transmission infrastructure is already in place, helping to defray costs that have been rising due to inflation and supply chain issues.

6. Local supply chain bonus

The IRA also provides an additional 10% tax credit if equipment and other resources are manufactured or sourced locally. Designed to promote long-term local manufacturing and development, this incentive has further boosted local supply chains in areas where clean energy projects are getting off the ground.

7. Transferability of tax credits

Traditionally, tax credits primarily benefit large companies with an established tax history. A provision enabling the transfer of tax credits to other organizations holds the promise for new companies and startups to take advantage of them by simply selling the credits to a partner, investor, or other third party. Getting smaller, leaner companies involved in renewables can boost innovation and investment while creating more liquidity in the market.

With success comes challenges

The success of these IRA incentives has created immense demand for clean energy projects around the country and, unfortunately, several unintended consequences. The biggest challenge has been a bottleneck in the interconnection queue, created as new renewable energy generation providers petition utilities and regulators to join the national grid. Generators are required to submit an impact report. With generators now waiting in yearslong lines to put clean electricity on the grid, the incentive to accelerate project completions is diminishing.

Another challenge revolves around supply chain bottlenecks due to geopolitical issues between the U.S. and China where much of the world’s supply of solar panels are manufactured. Additional incentives to develop domestic supply and local supply chains would alleviate these bottlenecks, but it will take time. Inflation is also contributing to supply chain issues as prices outgrow project cost projections. More flexibility around how credits are applied will help defray these unexpected costs.

Permitting is also slowing renewable energy projects as environmental concerns, community apprehension, and good old-fashioned NIMBYism cause delays. Educating residents and other stakeholders while streamlining the permitting process would go a long way in accelerating the development of these projects.

Arguably most disruptive, however, is the impact that flooding the market with renewables is having on the reliability of the energy market. The aptly named “duck curve” is pricing out traditional energy production sources, which provide the flexibility and control required to ensure real-time matching of supply with demand. Balancing this supply and demand will take careful planning by utilities and operators using data-driven analytics powered by better visibility and control into the electrical grid. The more utilities can predict and automate a response to the supply and demand balance, the more reliable our electrical grid will become.

A clear path ahead

It’s clear that the IRA is helping the U.S. transition to clean energy and meet its climate goals. Long-term certainty around tax credits, a push to develop emerging technologies outside of solar and wind, incentives to develop local workforces and expertise, and a drive to reuse existing energy infrastructure are causing a massive increase in renewable energy production – even just a year after the IRA was signed into law by President Biden. However, as with any public works project of this size, roadblocks threaten progress. Working together, politicians, regulators, utilities, and energy producers can solve these issues and bring us closer to a carbon-neutral society.