Long-term clarity but short-term uncertainty. That’s what the US clean energy industry faces as President Joe Biden’s administration moves carefully to enact the nation’s landmark $369bn climate law that he signed last August.
“This is a major tax reform bill. Normally, it takes 18 to 24 months to do implementation, guidance on what those tax provisions look like. We intend to do far better than that,” said John Podesta, the White House official overseeing the “whole-of-government” effort to bring the Inflation Reduction Act (IRA) into force.
Administration officials have been deliberately vague about potential sequencing for release of guidance, citing complexities of implementing the law’s 135 separate programmes and workload challenges across cabinet agencies leading the effort.
These are Department of Energy (DoE), Department of Treasury, and Internal Revenue Service (IRS), its tax collection arm that also regulates the federal tax code.
“I can’t speak to a timeline,” said Seth Hanlon, deputy assistant secretary for tax and climate policy at Treasury, who steers more than 100 experts, mostly economists and tax attorneys that do the analysis that informs development of tax policy.
Working around the clock to provide as much guidance as soon as possible and still getting it right.
“We’re kicking into overdrive at this point knowing the IRA is a historic piece of legislation and a top administration priority,” he said. “Working around the clock to provide as much guidance as soon as possible and still getting it right.”
The White House’s strategy is to provide guidance as early as possible for provisions of the law that broadly affect financing of projects, according to Podesta. “We want to see that money get invested and get moving,” he said. Still, progress has been slow.
“From an execution standpoint, there are still many known unknowns,” said Credit Suisse in a research note to clients, noting IRS guidance is critical for investors that want to qualify projects for electric vehicle, investment, manufacturing, and production tax credits.
Failure to meet requirements such as domestic content and other specific criteria can significantly reduce the benefit of individual tax incentives.
Thus far for renewables, IRS has issued preliminary guidance for apprenticeship and prevailing wage requisites, and bonus tax credits for projects located in so-called energy communities – brownfield sites, former coal-fired generating plants, or mine locations, and certain “statistical areas” tied to fossil activities.
The industry continues to have questions and is seeking further clarifications that the agency plans to answer later this year when it releases final and more formal proposed regulations.
At Treasury, stakeholder feedback factors heavily both on substance of guidance and timing priority for release. After numerous stakeholder meetings and requests for comments on IRA language, it received more than 4,000 replies.
“It has been incredibly helpful to understand how people in the private sector and market are viewing development of new technologies and industries, and existing industries. How markets will be restructured,” said Hanlon.
Treasury missed the 2022 deadline set under the law to issue guidance on battery sourcing rules, a high-profile issue that affects consumer eligibility for electric vehicle tax credits.
“It’s complicated,” said Podesta, prompting industry discussion over how well the administration will meet other hard due dates.
“Of course, there are statutory deadlines,” added Hanlon, reminding clean energy investors that the IRS must get fully ready to administer the many tax provisions in the 725-page law and this will influence timelines.
The administration estimates IRA’s tax credits are worth about $246bn over the initial decade with $123bn in federal spending for climate-related activities.
Private estimates by Brookings Institution, Credit Suisse, and Goldman Sachs suggest a far higher level of climate spending of two to five times more than advertised. One big reason is the tax credits are uncapped. Guidance issued thus far also suggests that federal agencies will interpret the law’s language in ways to maximise subsidies and accessibility.
The IRA gives DoE a major role in driving carbon reduction and broader energy transition by providing an additional $100bn in lending authority for its existing loan programmes.
DoE will also manage a new initiative with up to $250bn in loan guarantees for projects that repower, repurpose, and replace disused fossil fuel and petrochemical infrastructure, or avoid, capture, and reduce greenhouse gas emissions from those in operation.
Clean power developers, investors, and supply chain companies will be the main beneficiaries of this unprecedented bounty of federal financing opportunities, investments, and other support.
Vestas anticipates 125GW of new US offshore and onshore wind capacity by 2030, while Solar Energy Industries Association forecasts $600bn in solar investment through 2032.
Supportive industry stakeholders also stand to benefit and are adding pressure for acceleration of rulemaking. For example, poorer rural, tribal, and urban communities envision cleaner air, economic development, and jobs.
This year and next
White House assurances aside, lack of visibility on implementation has left energy storage, solar, and wind project developers, their lenders and suppliers caught between enthusiasm over how the law will broadly drive growth opportunities and caution about greenlighting investment this year and perhaps 2024 until they see the fine print.
“In the short-term, it is a little awkward waiting for the guidance. For deals to crystalise, PPAs, supply contracts, the details matter,” said Jack Thirolf, head of public policy and institutional affairs at Enel North America. “We need to work through this liminal period a little.”
Ray Wood, managing director and head of global natural resources and energy transition group at Bank of America (BoA), the number two US financial institution by assets, said his team meantime is pushing ahead.
“We got long-term goals that are very consistent with what has been articulated with the IRA. We haven’t stopped to wait for guidance. We continue to work on transactions,” he said.
Wood argued the clean energy industry “has never been more exciting,” and the total US addressable market is “really incredible,” adding that IRA has prospects to bring down the cost of capital which will drive deployment.
The law will also expand access to green financing, in part by introducing a feature called “transferability,” which enables the sale of credits for cash to any business – at a likely discount to incent participation - with income tax liability, not just equity investors in a project.
This will significantly expand the pool of eligible investors, which in turn should reduce the discount developers now receive for credits and thus improve their returns, according to Credit Suisse.
This and other potentially far-reaching IRA provisions will impact clean energy lending practices such as due diligence with risk-taking, how much capital to deploy, and what constitutes acceptable returns.
While we want to rush out and catalyse transformation, we have to run all those traps.
“We need to respond to what is the accounting treatment for these commitments that we haven’t quite seen before? What is the capital treatment for these? How will the regulators view these commitments?” said Wood.
“While we want to rush out and help catalyse industrial transformation across power, transport, and basic industries, we have to run all those traps,” he added.
For example, IRA allows taxable entities to claim a tax credit for clean hydrogen, carbon capture, and advanced manufacturing production credits (AMPC) in cash from the government for the first five consecutive years.
This could reduce reliance on tax equity, a form of financing against the tax benefits widely used by large battery storage, solar, and wind projects. BoA and JP Morgan Chase together dominate the US tax equity market.
“We don’t think this means the end of tax equity. We think this is a new tool in the toolbox. We anxiously await the guidance,” said Wood.
Even as full clarity is awaited, the US clean energy industry is far from stalled, with $150bn in capital investment for utility-scale energy storage, solar, and wind generation and manufacturing facilities announced or planned in the US since the federal climate law took effect last August, according to a recent report from American Clean Power Association (ACP).
The IRA and manufacturing
A core IRA focus is to strengthen US supply chains through a “renaissance in American manufacturing” that can help meet future clean energy demand the law’s provisions will turbocharge.
“One fundamental change of the last 18 months is that we have moved from a global view of the supply chain of different components to a much more domestic approach. The IRA has many features, but supporting domestic manufacturing is a key one,” Gabriel Alonso, CEO of 547 Energy and former head of EDP Renewables North America, told a recent webinar organised by Norton Rose Fulbright.
“The shift will not be immediate, but supply chains will look very different in a few years,” he added.
The biggest national shortcomings as seen by Biden’s Democrats are materials and components for electric vehicle batteries, solar panels, and wind turbines for offshore.
The law provides $10bn funding for a new manufacturers tax credit – 30% of the capital investment in new or upgrade factories to build specified clean energy components.
The AMPC, which is uncapped and applies to per unit of component across battery, solar, and wind supply chains, as well as critical minerals, is eligible for direct pay. Credit amounts vary.
“I see it largely as levelling the playing field with lower-cost imports. We were largely phasing out our US manufacturing footprint,” Laura Beane, president of Vestas North America, told the webinar.
“Our larger, newest turbines have not been manufactured in the US simply because it is so much cost to manufacture here. These incentives are critical for keeping manufacturing in the United States,” she said.
Rival GE Renewable Energy wants to invest to meet future demand for its turbines, calling IRA a “game changer,” affirmed Chrissy Borskey, a senior executive director who leads its government affairs and policy team.
“We’re not stopping either but we need a little more certainty. We also understand the complexity, the difficulty, and timing. The 18-24 months is real. There has to be something as an industry we can start thinking about. This is what we need today, in the next three months. We are going to have to prioritise,” she said recently.
For GE, domestic content and AMPCs, which have synergies that could facilitate guidance release, are among its priorities. So are prevailing wage and apprenticeships given as early as the third quarter it will need to meet those requirements for projects.
Borskey said while GE’s number one priority with IR guidance is onshore wind, an established business with the US its top market, offshore is a major growth opportunity but with its own singularity.
“We’re going to have to potentially request guidance that is significantly different than what we’re used to because of these unique characteristics,” she said, such as size and complexity, to ensure the deployment and success of these projects.