US Inflation Reduction Act: a strong force to accelerate energy transition technologies
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US Inflation Reduction Act: a strong force to accelerate energy transition technologies

In August, the US passed a major milestone in climate policy with the introduction of the Inflation Reduction Act (IRA)1. As the largest piece of federal legislation ever to address climate change, we believe it will have a profound effect across industries for decades to come.

The act deploys sizeable tax credits for every major economic sector key to achieving wholesale decarbonisation: energy, transport, buildings and agriculture. Within each transition sector, the legislation aims to offer support across the whole value chain, from end consumers up to suppliers, with a clear intent to subsidise domestic manufacturing of these technologies.

The act primarily aims to support US manufacturers and will subsidise US-made components of renewables, batteries and electric vehicles (EVs) to reduce reliance on China. It proposes allocating more than $60 billion to onshore manufacturing across the supply chain of clean energy and transportation technologies. We think this push for supply chain localisation and the re-shoring of US manufacturing will have substantial macro and strategic implications over the next decade. Tax support to develop domestic industries, alongside an increased focus on carbon emissions and the need for more transparent/less complex supply chains, could incentivise sectors to re-shore more rapidly as a strategy to reach net zero. We view this as potentially transformative across industries, particularly for renewables and EVs.
The IRA will provide at least $369 billion to support clean technologies across multiple sectors (Figure 1) such as renewable energy, hydrogen, nuclear, carbon capture and storage (CCS) and EVs. The vast majority of the tax credits are available for around 10 years, therefore companies will have visibility over the next decade of the tax credits, which will favour the deployment of investments and projects. Credit Suisse estimates that with subsidised green financing and the multiplier effect on federal grants/loans, the total public plus private financing in that period could even reach around $1.7 trillion2.
Figure 1: IRA allocation across industries
IRA allocation across industries
Source: Credit Suisse, September 2022
This large stimulus package represents a major milestone in strengthening the climate goals and policies of the US. The package is also expected to contribute to accelerating decarbonisation in the US and reduce emissions by around 40% by 2030 – close to the 50% target set by President Biden (Figure 2). We see most of the upside coming from solar, clean hydrogen, CCS and EVs.
Figure 2: US greenhouse gas emissions and projections
US greenhouse gas emissions and projections
Source: Rhodium Group. The range reflects uncertainty around future fossil fuel prices, economic growth and clean technology costs. It corresponds with high, central and low emissions scenarios detailed in Taking Stock 2022: https://rhg.com/research/taking-stock-2022/
The meaningful extension of tax credits for renewables will provide a major boost to solar energy adoption particularly. IRA support coupled with continuing better economics could double the expansion of solar energy in the US in the next decade. However, a dependence on Asia for components, and human rights issues associated with Chinese labor, are hurdles to overcome. The growth of renewables will also contribute to the development of green hydrogen as a key power source.
In fact, we believe the IRA will be a game-changer for hydrogen (see the article “Tailwinds hasten hydrogen’s cost-competitiveness, but demand is lagging” elsewhere in this report), and for the development of CCS. We also view the sizeable extension of the 45Q tax credits for CCS projects as an important catalyst in accelerating investments in this space. These investments and incentives will benefit energy majors as key enablers of this technology given their expertise, skills and access to the required infrastructure.
Finally, the significant expansion within the IRA of EV tax credits for consumers will further support the adoption in the US. The extension of the $7,500 credit for new EV purchases and the introduction of a $4,000 credit for used EV purchases are vital in accelerating the supply and demand over the next couple of years . In addition, narrowing the subsidy to vehicles that met certain domestic requirements will be very beneficial for US automakers.
Icon of climate change policies

Climate transition engagement: Climate policies

Company: NextEra Energy

Sector and country: Utilities, US

Why we engaged

We wanted more insight regarding the impact of the US Inflation Reduction Act (IRA), as well as the implementation of forced labour rules on the solar supply chain in the US.

 

How we engaged

Our utilities industry equity analyst organised a series of calls with US solar companies on this topic. The call with NextEra was joined by the RI analyst as well as Portfolio Managers.

What we learnt

The company sees the potential for a US supply chain to form in next two to four years given manufacturing incentives from the IRA. In particular, community solar is likely to play a more significant role than rooftop solar in the evolution of the electric grid given its scale advantages and increasing popularity.

The company also sees bright prospects for the adoption of renewables in the US with tax incentives facilitating the addition of significant extra renewable capacity. NextEra expects that as a result of IRA the energy transition could happen twice as fast over the next decade.

The company also sees bright prospects for the adoption of renewables in the US with tax incentives facilitating the addition of significant extra renewable capacity. NextEra expects that as a result of IRA the energy transition could happen twice as fast over the next decade.

Outcome

The call provided valuable insight on the broader developments impacting the US solar industry and NextEra’s position within this. We concluded that the company is relatively insulated from the forced labour rules and very well positioned to seize the expansion and growth within solar energy in the US.

16 November 2022
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US Inflation Reduction Act: a strong force to accelerate energy transition technologies

1 https://www.energy.gov/lpo/inflation-reduction-act-2022
2 Credit Suisse, US Inflation Act, a tipping point in climate action, 2022
3 Summary of the Energy Security and Climate Change Investments in the Inflation Reduction Act of 2022

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In the Middle East: This document is distributed by Columbia Threadneedle Investments (ME) Limited, which is regulated by the Dubai Financial Services Authority (DFSA). For Distributors: This document is intended to provide distributors’ with information about Group products and services and is not for further distribution. For Institutional Clients: The information in this document is not intended as financial advice and is only intended for persons with appropriate investment knowledge and who meet the regulatory criteria to be classified as a Professional Client or Market Counterparties and no other Person should act upon it.
Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.

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Important information

For use by professional clients and/or equivalent investor types in your jurisdiction (not to be used with or passed on to retail clients). This is an advertising document. This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services.
Investing involves risk including the risk of loss of principal. Your capital is at risk. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. Risks are enhanced for emerging market issuers.
The securities included herein are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable. The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be appropriate for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either.
Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This is an advertising document. This document and its contents have not been reviewed by any regulatory authority.
In Australia: Issued by Threadneedle Investments Singapore (Pte.) Limited [“TIS”], ARBN 600 027 414. TIS is exempt from the requirement to hold an Australian financial services licence under the Corporations Act and relies on Class Order 03/1102 in marketing and providing financial services to Australian wholesale clients as defined in Section 761G of the Corporations Act 2001. TIS is regulated in Singapore (Registration number: 201101559W) by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289), which differ from Australian laws.
In Singapore: Issued by Threadneedle Investments Singapore (Pte.) Limited, 3 Killiney Road, #07-07, Winsland House 1, Singapore 239519, which is regulated in Singapore by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289). Registration number: 201101559W. This advertisement has not been reviewed by the Monetary Authority of Singapore.
In Hong Kong: Issued by Threadneedle Portfolio Services Hong Kong Limited 天利投資管理香港有限公司. Unit 3004, Two Exchange Square, 8 Connaught Place, Hong Kong, which is licensed by the Securities and Futures Commission (“SFC”) to conduct Type 1 regulated activities (CE:AQA779). Registered in Hong Kong under the Companies Ordinance (Chapter 622), No. 1173058.
In Japan: Issued by Columbia Threadneedle Investments Japan Co., Ltd. Financial Instruments Business Operator, The Director-General of Kanto Local Finance Bureau (FIBO) No.3281, and a member of Japan Investment Advisers Association.
In the USA: Investment products offered through Columbia Management Investment Distributors, Inc., member FINRA. Advisory services provided by Columbia Management Investment Advisers, LLC. Collectively, these entities are known as Columbia Management.
In the UK: Issued by Threadneedle Asset Management Limited. Registered in England and Wales, Registered No. 573204, Cannon Place, 78 Cannon Street, London EC4N 6AG, United Kingdom. Authorised and regulated in the UK by the Financial Conduct Authority.
In the EEA: Issued by Threadneedle Management Luxembourg S.A. Registered with the Registre de Commerce et des Societes (Luxembourg), Registered No. B 110242, 44, rue de la Vallée, L-2661 Luxembourg, Grand Duchy of Luxembourg.
In Switzerland: Issued by Threadneedle Portfolio Services AG, Registered address: Claridenstrasse 41, 8002 Zurich, Switzerland.
In the Middle East: This document is distributed by Columbia Threadneedle Investments (ME) Limited, which is regulated by the Dubai Financial Services Authority (DFSA). For Distributors: This document is intended to provide distributors’ with information about Group products and services and is not for further distribution. For Institutional Clients: The information in this document is not intended as financial advice and is only intended for persons with appropriate investment knowledge and who meet the regulatory criteria to be classified as a Professional Client or Market Counterparties and no other Person should act upon it.
Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.

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