Nearly a year has passed since the Inflation Reduction Act (IRA) was signed into law. With an array of new and extended tax incentives for renewable energy and related technologies, the IRA has the potential to unleash unprecedented growth.
But the new law has also laid bare a range of important challenges, some new and some long-standing, that must be overcome to achieve the clean energy transition at the heart of any successful effort to address the climate challenge.
As part of the effort to better understand the promise and problems in the ongoing energy transition, the American Council on Renewable Energy (ACORE) surveyed some of the most prominent renewable energy investors and developers to gain their perspectives on near- and mid-term growth. The results reflect broad confidence that is likely to be realised in rapid renewable energy investment and deployment, even as work continues to overcome important headwinds.
Every single investor surveyed perceived the US as a more attractive place for renewable energy investment.
One of the most notable findings was that, for the first time since ACORE began undertaking annual surveys six years ago, every single investor surveyed perceived the US as a more attractive place for renewable energy investment than other leading countries over the next three years. Even as other nations are now pursuing efforts to enact similar policy platforms, it is evident that the US has successfully reestablished itself as a key leader in the renewable energy transition.
In fact, an impressive 84% of surveyed investors plan to increase their US renewable energy investment by 5% or more in 2023. What’s more, reflecting a new trend that would have been inconceivable prior to enactment of the IRA, 38% of investors now plan to invest in clean energy manufacturing facilities here in America.
Persistent challenges remain
Despite the remarkably positive outlook for renewable investment in the US, persistent challenges could impede the momentum for clean energy growth. Supply chain constraints, trade restrictions, interconnection queue delays, and insufficient transmission capacity are significant headwinds identified in the survey as leading to delays in deal flow, longer lead times, and increased project costs.
Progress on these issues has, to date, been uneven. While a flurry of recent announcements has signaled that efforts are underway to expand our domestic manufacturing base of renewable energy components, trade policies are limiting access to key elements of the global supply chain that our sector, like much of the American economy, has long depended upon.
Meanwhile, the effort to update and expand our outdated electricity grid hinges on pending action at the Federal Energy Regulatory Commission (FERC), and potentially also in Congress. Almost 2,000GW of renewable energy projects that could be enhancing grid reliability, lowering electricity costs and reducing emissions are stuck in the logjam of interconnection queues around the country.
The root of the problem is the absence of a comprehensive transmission planning process that accommodates these new resources. We need a better system in place to determine where we build transmission lines to deliver this new clean power, and we need this sorted out quickly. To deliver renewable energy to the areas of the country with the highest demand, we’re going to need to double our current transmission capacity by 2040 and complete a network of new interregional lines that better connect the various regional transmission organizations.
Legislation has recently been introduced to address these vital issues, including three bills from Sen. Martin Heinrich that would provide an investment tax credit for transmission, streamline FERC backstop siting authority and improve interregional transmission planning.
FERC is also working toward the completion of an interconnection process reform rulemaking that could help, but unfortunately, the Commission is not operating at full capacity. Restoring FERC to a full complement of five commissioners is critical to unlocking these transmission reforms and advancing the energy transition.
Tax equity must triple
Survey participants also agree that the tax equity market – which plays a key role in monetizing tax credits – must nearly triple in size from the current $18-20bn annually to meet the heightened post-IRA demand. The Department of Treasury’s latest guidance on the transferability and direct pay provisions in the IRA offers crucial help. The newfound ability to transfer renewable tax incentives will support the monetisation of over $50bn per year in tax credits, which is more in line with the investment level needed to achieve the Biden administration’s clean energy targets.
When ACORE released its first investor survey five years ago, US policy uncertainty was cited by a majority of respondents as a hurdle for continued growth across the industry. The federal policy stability provided by the IRA now puts America in a position to deliver on commitments to accelerate the transition to renewable energy.
Today, there is clear optimism and market momentum, but serious challenges must first be resolved to realise the bill’s full potential. And, as the apocalyptically smoky skies that blanketed the Northeast a few weeks ago made clear, it is more important than ever that these obstacles are addressed in short order to start delivering the pollution-free renewable energy future that the American people want, and that scientists say is essential for a climate-safe future.
Gregory Wetstone is President and CEO at the American Council on Renewable Energy