The potential impact of the Inflation Reduction Act
The Inflation Reduction Act (IRA) of 2022 will likely have a significant impact on enabling the United States to achieve climate commitments. The law directs an estimated $393 billion in climate spending to six key categories: energy, climate and environmental justice, manufacturing, land and agriculture, transportation, and water. Funding is channeled through tax investment and production credits, federal grants, and loan programs. Many of the tax credits are uncapped, meaning no limit is written into the law that restricts how much they are used. Moreover, the $40 billion in funding for loans covers subsidy costs exceeding $400 million for direct loans or loan guarantees for innovative clean energy, energy infrastructure reinvestment, and upgrading transmission lines, among others. The true magnitude of the public- sector investment could reach $1 trillion if implemented effectively.
The IRA has the potential to support a more orderly energy transition but also could introduce further risks and challenges. Key implications of the legislation for the power sector include the following: 1. accelerating the transition of the US power mix toward renewables 2. expanding the distributed solar market, with different customer segments, such as low-income customers, taking on more prominence 3. unleashing of a new stand-alone storage market for developers and asset owners 4. unprecedented expansion of US cleantech manufacturing and supply chains 5. directing investment to energy- producing regions and communities
that may be most affected by industry changes 6. accelerating of electrification and energy-efficiency opportunities, increasing the importance of serving low-income customers 7. jump-starting the hydrogen market, with a relatively higher emphasis on lower-carbon supply 8. creating a CO2 economy driven by expanded credit options 9. kick-starting production of sustainable aviation fuels, including novel power- to-liquids pathways
net-zero energy supplies (for example, scaling up production of low-carbon hydrogen); the electrification of demand, such as transportation and buildings; and the transition of the gas system to being primarily a capacity provider. These will require new policies, markets, business models, and technologies to be rapidly developed and deployed at scale. At the same time, the requirements of the transition must be carefully balanced with the need to ensure a reliable, resilient, and affordable energy supply. On its current trajectory, the United States does not seem to have found this balance. Resilience investments, where they are being made, appear
set to radically increase bills. Where they are not made, customers would face expensive and dangerous outages. The speed of the deployment of renewables remains insufficient. There appears to be little agreement on the extent to which new fossil-fuel investments would be required to ensure resilience, or how to make them as low-carbon as possible and without long-tail stranded assets. Moreover, the transition could exacerbate consumer inflation, which is already historically high. In other words, the energy transition is currently on a disorderly path.
Persisting on this path could mean that achieving the same cumulative net emissions by 2050 4 would
4 Delay in taking action could require an estimated $5.7 trillion in generation investment alone through 2050, compared with about $4 trillion for a more orderly energy transition—a 42.5 percent increase.
Accelerating the journey to net zero
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