August 16, 2023
Reflecting on the IRA: A Year of Achievements and Lingering Questions
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Just one year after President Biden signed the landmark Inflation Reduction Act (IRA) into law, the nearly $370 billion in climate and clean energy provisions have already had a significant impact on the U.S. clean energy transition. On the anniversary of its passage, we explore how the IRA has already begun to reshape American manufacturing and boost clean energy development, as well as what questions remain to fully implement the law.
IRA’s Impact on U.S. Manufacturing and Clean Energy Investment
Shortly after its passage, we wrote that the IRA represented a new green industrial policy for the U.S., and 12-months later, the numbers are backing that up. Expanded tax credits and additional funding included in the IRA have led to a boom in private investment across the manufacturing sector, specifically in clean energy components and electric vehicles manufacturing. The law’s domestic content bonuses for clean energy projects, final assembly and sourcing requirements for electric vehicles and batteries, and additional incentives for manufacturing have driven historic levels of investment.
According to an analysis of public announcements from E2, over 170 new or expanded manufacturing facilities have been announced since the IRA was passed. Additional research from American Clean Power and Bank of America shows that there is over $22 billion in planned investment in manufacturing facilities that produce clean energy components, and an additional $62 billion from automakers and their suppliers for electric vehicle production.
These announcements are expected to continue as the final pieces of IRA guidance are settled over the coming months, and as demand for these clean products continues to grow. The IRA, paired with other key pieces of legislation, like the Infrastructure Investment and Jobs Act and CHIPS Act, have led to U.S. manufacturing investment that far surpasses investment from earlier this decade, as shown below:
Figure 1. Real Total Manufacturing Construction Spending. U.S. Department of the Treasury.
Separate from investment in manufacturing investment, new and expanded tax credits have helped drive development in renewable energy projects, despite much of the IRA guidance being released well into the year. The increased value of the credits and bonuses has also played a role in offsetting rising costs caused by supply chain constraints, which have impacted projects in recent years. As the market works through these issues in the near term, the enhanced tax credits should continue to drive development and mitigate other factors leading to increased prices.
The IRA’s impact will continue to grow as planned manufacturing facilities come online, many of which are slated for 2025-2026 and beyond. The onshoring of clean energy components will help avoid supply chain constraints that raise costs and delay projects, resulting in timely project delivery to meet corporate sustainability targets in 2030 and beyond. As these new production facilities begin to produce clean energy components and electric vehicles, commercial and industrial buyers may experience lower costs for their decarbonization projects and fleet electrification due to the continued incentives and onshoring of clean manufacturing.
What Outstanding Implementation Questions Remain?
Since the IRA’s passage last August, the U.S. Department of the Treasury has worked diligently to implement the necessary tax provisions that encompass much of the financial incentives for commercial and industrial customers. While a steady stream of guidance has been released, it has often been proposed guidance, which has sometimes led to more questions than answers. This has inevitably slowed the pace of adoption, as commercial and industrial customers do not want to leave potential federal money for their decarbonization projects on the table.
The recent guidance issued by the Treasury Department on the domestic content bonus credit is a notable example. Outstanding industry concerns remain around the draft rules that would require manufacturers to disclose their profit margins to developers for compliance. Renewable developers have cited the rules as unworkable, as manufacturers are unlikely to provide this information and are not incentivized nor required to do so. To address these concerns, the renewable industry may file comments on the draft guidance and forthcoming proposed regulations to influence the Treasury Department’s final domestic content rules.
Other highly sought-after provisions are still pending the release of draft regulations, resulting in the Treasury Department missing the IRA’s statutory deadline to issue these regulations. For example, the Section 45V hydrogen production tax credit (PTC) – one of the most discussed provisions of the IRA – has a statutory deadline for Treasury to release guidance before the one-year anniversary of passage. Due to the complexity of this issue, Treasury and the U.S. Department of Energy (DOE) indicated last week that they would not be meeting the deadline, instead expecting to release guidance later in the fall.
Treasury and DOE guidance is critical for shaping the future of the U.S. clean hydrogen market, as it is expected to answer questions around the requirements hydrogen developers must meet to claim credit. These requirements are centered on what the industry has called the “three pillars” – time-matching, additionality, and regionality. Establishing these criteria is essential to ensuring hydrogen production does not lead to increased emissions. Guidance outlining the renewable procurement requirements to secure the clean hydrogen PTC is consequential to unlocking low-cost projects for clean hydrogen offtakers, as green hydrogen in the U.S. is cost-prohibitive without the federal PTC.
Other legislative and regulatory hurdles remain for the IRA to deliver its full decarbonization potential, most notably the need for transmission siting and permitting and interconnection reforms. The inability of lawmakers to include meaningful transmission policy in the IRA remains the most glaring omission in the law and is currently one of the most discussed topics in the industry.
Progress on this front is being made, as seen in recent announcements regarding interconnection reforms by the Federal Energy Regulatory Commission and DOE’s proposal to expedite the review of transmission projects on federal lands. While these are positive steps, more comprehensive reform is needed to fully unlock the potential of the IRA.
While hurdles remain, the IRA’s impact in its first year should not be understated. The billions of dollars invested in clean energy manufacturing and renewable project development in just one year shows the IRA’s potential to accelerate the U.S. clean energy transition, increasing opportunities, and lowering costs for corporate buyers with renewable and emissions reduction goals. If corporate buyers, developers, and lawmakers can align on the remaining regulations needed to fully implement the law, it stands to be one of the most transformative pieces of legislation in recent memory.
