A year after the Biden administration’s biggest legislative coup, the Inflation Reduction Act is shifting the tectonic plates of America’s sprawling energy sector.
Private capital and federal loans are flowing to clean energy projects at increased speed, from battery manufacturing in South Carolina to solar polysilicon production in Washington state.
The Department of Energy reported Tuesday that U.S. companies built more new solar generation than natural gas in the first half of this year. A July analysis from Cox Automotive said that U.S. EV sales set an all-time quarterly record, and were up 48 percent from the same period last year.
That’s happening while the Energy and Treasury departments continue to mull pivotal tax breaks in the law for clean energy technologies, including emerging ones like “green” hydrogen. The broad sweep of credits, paired with federal grants in the 2021 infrastructure law and the CHIPS and Science Act signed into law last year, are forming the backbone of President Joe Biden’s push to develop a “Made in America” green economy.
“The magnitude of clean energy investment has increased substantially. And that includes very notably clean energy manufacturing,” Kevin Book, a managing director of ClearView Energy Partners LLC, said in an interview. “The environment for investment has been improved considerably by government incentives. There’s no question about that.”
U.S. manufacturing growth beat out the global average at the end of 2022 for the first time in years, according to the Atlantic Council. Many experts say energy manufacturing is in vogue again in the U.S. because of the law, even if overall manufacturing totals are declining month on month.
On the face of it, the investments might seem destined to run headlong into conservative opposition to the law.
Republican primary candidates have repeatedly attacked the IRA — a law that passed without any GOP votes. They argue the IRA balloons the national debt while increasing the price of fossil fuels — all in order to subsidize products like EVs that are favored by wealthy Americans. Conservative think tanks are also developing far-reaching battle plans that would shutter DOE offices and stifle momentum on renewables, electric cars and other clean-tech adoption.
Republican opposition to the law’s tax incentives is not across the board, though.
In June, for example, the House Ways and Means Committee passed a bill that curtailed some key Inflation Reduction Act tax incentives but left the lion’s share untouched.
The boom in clean energy projects is taking place in many Republican strongholds like the Southeast, Midwest, Texas and elsewhere. That fact may change the political calculus for Republicans, suggested Book.
“If you’re trying to win elections, then I think talking about jobs can sometimes be very persuasive, especially if those jobs are showing up,” said Book.
Right now, much of the globe is grappling with extreme heat tied to climate change. European scientists say July was the hottest month in documented history. But if fully implemented, the Inflation Reduction Act is unlikely to usher the U.S. past the finish line of climate goals.
A recent report from Princeton University’s REPEAT Project suggests the Inflation Reduction Act and the federal-grant-heavy infrastructure law together are poised to slash U.S. emissions 37 to 41 percent below 2005 levels by 2030. Those reductions would still fall short of the Biden administration’s Paris Agreement commitment of at least a 50 percent cut to U.S. emissions by 2030.
There are many other unknowns about the law’s effects. The projected emission cuts could be significantly less than expected, pending factors such as an available supply of workers to build clean energy installations, according to analysts. The Princeton researchers concluded that about half the potential carbon reductions from wind and solar projects would evaporate unless the U.S. doubles the current rate of transmission build-out, for example.
For Democrats, that means there’s more work to do in the halls of Congress on policies like renewable permitting, if emission cuts are to be achieved. But in a divided Congress approaching an election year, virtually none of that work is likely to get done.
Here’s six issues to watch with the law as it remakes the energy sector:
The ‘Made in America’ boom
Since the law’s passage, the allure of new and expanded tax incentives has enticed a slew of announcements for U.S. energy factories.
A single Ohio-based manufacturer, First Solar Inc., is eyeing nearly 8 GW of new production capacity within the last year — more than the country’s entire 5GW panel capacity in 2022, according to the National Renewable Energy Laboratory. First Solar has said it expects its planned factories to benefit from IRA credits.
In the past year, solar manufacturers unveiled proposals that could lead to some 87 gigawatts of solar panel capacity, according to estimates from the Solar Energy Industries Association.
Across the solar sector, companies have also pledged to start producing 38 GW of solar cells and 17 GW of wafers at American factories — a type of activity that is virtually nonexistent in the U.S. today.
That marks a sea change after years of import-dependent solar growth in the U.S. Solar trade groups, which have strongly opposed past efforts to slap duties on foreign solar panels, say the law is aiding in the industry’s growth.
Abigail Ross Hopper, CEO of the Solar Energy Industries Association, said last month the Inflation Reduction Act was starting to “flex its muscle and drive demand,” during the release of a SEIA report concluding that the solar industry grew more in the first quarter of 2023 than any other previous quarter in its history.
The law’s solar incentives are not bringing the technology near Biden’s targets, however.
One 2021 DOE blueprint for a carbon-free power grid in 2035 said solar may need to become the single-largest power resource to reach Biden’s climate goals, providing anywhere from 37 to 42 percent of electricity. To get there, the nation’s solar capacity would need to grow at least fivefold, according to the blueprint’s projections.
Meanwhile, the law is driving lithium-ion and other battery manufacturing.
For the first time, the law extends the Section 48 investment tax credit to stand-alone energy storage projects. Previously, that credit was only available in limited form for battery projects that were connected to solar farms.
Experts say the credit, which is likely to be used by energy companies that purchase new battery systems, is helping to spur upstream production. In Tennessee, Piedmont Lithium is planning to produce thousands of metric tons a year of lithium hydroxide, a chemical used in cathode production. LG Energy Solution Ltd. is planning to produce lithium-ion batteries in Arizona. Form Energy is set to begin producing iron-air battery systems in West Virginia.
“In the battery space, [the enactment of the Inflation Reduction Act] was an immediate change,” said Darcy Faint Bisset, a partner at Hogan Lovells. “You could not get the tax credits for stand-alone energy storage projects. Now you can.”
Lithium-ion batteries have been powering phones, appliances, consumer electronics, and electric vehicles for years. But the clean energy transition is contingent on rapid growth in the battery sector.
As of now, batteries are too heavy and expensive, and they can’t store enough energy for key clean energy applications. Experts say improvements are necessary to store more intermittent wind and solar for use when those resources flag.
With the battery blitz, the Biden administration is aiming to claw back the battery supply chain from China. The world’s second-largest economy processes roughly 70 percent of global lithium, while refining and processing about 70 percent of global cobalt.
That includes raw materials. Mining executives in the U.S. are bullish that the clean energy transition will mean more actual mining in the U.S. The Interior Department is trying to kick-start lithium production at Thacker Pass in Nevada in the face of dogged environmental opposition.
“There’s just a large amount of bipartisan momentum to incentivize electrification of the economy through battery manufacturing, and that eventually helps to move the needle on mines, both domestically, which is our preference, and also overseas,” said Rich Nolan, president of the National Mining Association, in an interview.
“We’ve seen a dramatic and probably historical increase in the interest in developing new mining projects in the U.S.,” Nolan said.
The mining sector will be buoyed by an Inflation Reduction Act tax credit that will give a 10 percent credit to mining operations. But Nolan and others have also complained that the Biden administration is striking de facto trade deals with other countries to secure critical minerals without the consent of Congress. Those minerals could be used to access the Inflation Reduction Act EV credit.
Much of the rising demand for batteries emerges from expectations for EV adoption.
Major automakers like Ford Motor Co., General Motors, Stellantis NV, Hyundai Motor Co., Honda Motor Co. Ltd., Toyota Motor Corp. and others have committed to building billions of dollars’ worth of American battery factories to support EVs sold here.
That responds partly to the Biden administration’s goals — electrifying half of all car sales by 2030 — and partly to the Inflation Reduction Act’s $7,500 tax credit for EV buyers, which requires car batteries to meet strict domestic content requirements.
More than $50 billion worth of electric car supply chain investments have been announced in the U.S. and Canada since the Inflation Reduction Act’s passage, most of them consisting of battery and EV plants, according to a database compiled by Jay Turner, an environmental studies professor at Wellesley College.
Organized labor on the fence
A report in July from Climate Power — a communications firm founded by the Center for American Progress Action Fund, League of Conservation Voters and Sierra Club — says companies have “announced or moved forward with projects” just in the past year that represent more than 170,000 new clean energy jobs.
“As the largest U.S. investment in climate and clean energy in history, President Joe Biden’s Clean Energy Plan will continue to reshape and recharge our economy for decades to come,” Climate Power said in the report. “The Made in America clean energy boom is just getting started.”
The report says the jobs are being created in 44 states, based on $278 billion in investment from the IRA through 272 new clean energy projects.
“As the largest U.S. investment in climate and clean energy in history, President Joe Biden’s Clean Energy Plan will continue to reshape and recharge our economy for decades to come,” Climate Power said in the report. “The Made in America clean energy boom is just getting started.”
Meanwhile, the Inflation Reduction Act delivered a win to many labor advocates in the form of prevailing wage and apprenticeships perks. For most clean energy credits, the law awards up to five times the base credit for companies that employ apprentices and pay prevailing wages, which are the average wages typically paid for a similar job locally.
Treasury Department officials are still finalizing guidance for those wage and apprenticeship perks.
“If these tax credits and the labor standards that are embedded with them work as intended, it will increase job quality within one of the fastest-growing sectors of the American economy — solar, wind and other clean technologies,” said Jason Walsh, executive director of the BlueGreen Alliance, an association that aims to bring together labor and environmental groups. “It will make these jobs really more careers, and middle-class careers at that.”
But the Inflation Reduction Act isn’t going over well in some labor circles. In June, United Auto Workers President Shawn Fain blasted the Biden administration for using Inflation Reduction Act loan authority to underwrite a battery manufacturing project that the union says will create “low-road jobs in Kentucky and Tennessee,” two states with “right-to-work” laws that have throttled labor activity in recent years.
DOE’s Loan Programs Office is pursuing a $9.2 billion loan to support a joint lithium-ion battery venture called BlueOval SK LLC , which is led by Ford and South Korea-based SK ON.
The UAW is so far declining to endorse Biden for reelection, with Fain writing in a May memo to members that billions in federal incentives for EVs have come with “no strings attached and no commitment to workers.”
Labor advocates say the Inflation Reduction Act failed to ensure projects would be located in areas with strong labor laws and activity.
“Certainly, some early trends suggest that manufacturers of clean energy technologies are responding to these tax incentives by locating in parts of the country where it is very difficult to organize workers into unions and where job quality — and in some cases where state environmental protections — are lower,” Walsh said.
Treasury, the new battlefront
Notwithstanding the flood of new plans from energy industries, many of the law’s key incentives have already turned contentious, even though they’ve yet to start flowing out.
For instance, the Treasury Department has yet to finalize EV guidance that will determine which EVs can qualify for all or part of a $7,500 tax credit. The outcome could determine issues ranging from the source country of EV battery materials to the role of Chinese companies in supplying car components.
West Virginia Sen. Joe Manchin (D-W.Va.), one of the law’s main Democratic authors, has scuffled with the Biden administration and environmentalists over what he has described as Treasury’s unduly permissive interpretation of domestic content requirements. For cars to be eligible for the full credit, they must be assembled in North America, and at least 40 percent of lithium and other battery minerals must be mined in the U.S. or in countries that have free-trade agreements with the U.S.
Manchin’s taken a similarly critical line on Treasury’s draft guidance for solar subsidies, particularly a bonus “domestic content” tax credit that solar developers can claim if they buy equipment from U.S. factories. And he’s sided with some solar manufacturing groups in saying the guidance released in May is too lenient and unlikely to help support domestic production of precursor components like polysilicon. Biden administration officials have defended the guidance as preliminary and said that a separate Inflation Reduction Act tax credit for the production of U.S.-made clean equipment could help incentivize U.S. production of solar-panel precursors.
Even though Manchin has threatened to vote in favor of repealing the law, this week he released a statement praising the IRA for reducing the national debt and lowering the cost of prescription drugs. But on energy policy, Manchin pledged to “continue to fight the Biden Administration’s unrelenting efforts to manipulate the law to push their radical climate agenda at the expense of both our energy and fiscal security.”
Ashley Schapitl, a Treasury spokesperson, said in a statement that the department’s implementation of the Inflation Reduction Act has focused on “creating good-paying clean energy jobs, strengthening our energy security, and tackling the climate crisis.”
She credited the law with unleashing “an investment and manufacturing boom in the United States unlike any we’ve seen in decades.”
“A year since the Inflation Reduction Act was enacted, the law has created an ecosystem in the United States that has put us in a position to go from underinvesting in the clean energy transition to leading the global clean energy transition,” she added.
Perhaps the least-expected disputes have concerned Treasury’s upcoming guidance on 45V, the first-ever production tax credit for hydrogen.
At stake is whether the new tax credit can preserve the climate credibility of green hydrogen while simultaneously encouraging production. Green hydrogen is one of several low-carbon methods of making the fuel. It is often understood as involving the extraction of hydrogen from water using renewable power.
To keep costs low and ensure constant access to electricity, many developers want to use power from the grid rather than from renewable facilities built specifically to serve hydrogen plants.
Within the past year, grid researchers and many environmentalists have concluded that using grid power could lead to so many extra emissions — stemming from the fossil fuel plants that generate power — that it would effectively erase the climate benefits of selling and using hydrogen.
Developers have pointed to other studies showing the opposite — that green hydrogen could reduce emissions overall even while tapping grid power, much like electric cars or electric heat pumps.
The Treasury Department is currently contemplating a complex series of requirements that would limit emissions by controlling when and how developers could use grid power for their hydrogen production. Industry groups representing investor-owned utilities and hydrogen companies oppose those requirements, saying they would suppress investment in green hydrogen.
“I think the people who wrote the 45V tax credit didn’t know what they were getting into,” said Aaron Bergman, a fellow at Resources for the Future, an energy and environmental policy think tank. “I don’t think it was anticipated, the level of debate between hydrogen producers and the environmental community. … It turns out to be a very hard decision, and a challenging question for Treasury to answer.”
Across clean energy sectors, Book indicated the ongoing rollout of Treasury’s guidance — along with sluggish permitting — is potentially hampering investment.
“The seeds have been planted, but there’s other parts of the garden that need tending,” said Book.
Hydrogen and CCS: Who’s interested?
The Inflation Reduction Act has also changed the conversation on low-carbon hydrogen and carbon capture, two emerging technologies that have faced cost challenges but are backed by the administration and centrists in both political parties.
On top of the hydrogen credit, Treasury is expected to release guidance on the law’s expansion of the existing 45Q credit for capturing and storing carbon dioxide.
While that process is still underway, EPA has staked its hopes for a carbon-free power sector in part on the proliferation of the two technologies. Its proposed rules for power plants would allow gas plant operators to comply by either installing carbon capture and storage units or burning low-carbon hydrogen instead of natural gas.
So far, the expanded carbon capture credit has generated scant enthusiasm among investor-owned utilities. Few have responded with plans to install CCS in time to meet the timeline laid out in EPA’s draft rules.
Derrick Flakoll, a policy associate at BloombergNEF, said many utilities are probably waiting to see what regulations they will face, including from EPA, whose rules are likely to face “immediate legal challenge,” said Flakoll.
“So it’s uncertain just how much CCS power producers would be required to install,” he wrote in an email.
Some fossil fuel advocates applaud the Inflation Reduction Act’s CCS and hydrogen provisions. But, according to the American Petroleum Institute, which fiercely opposed the law, the Inflation Reduction Act doesn’t go far enough in securing enough oil and gas to meet future demand.
“While the Inflation Reduction Act took important steps to help incentivize investment in carbon capture and storage and hydrogen, it fell well short of addressing America’s long-term energy needs,” wrote Amanda Eversole, chief advocacy officer for API, in an email. “As populations grow and economies expand, the world is going to demand more energy, not less, and the U.S. natural gas and oil industry is focused on meeting this demand while reducing emissions.”
Still, the Inflation Reduction Act’s hydrogen tax credit has begun to stimulate some investments, including developers unveiling plans for billion-dollar sites of low-carbon production of the fuel. Others have announced plans to build U.S.-based factories that make electrolyzers, a key type of machinery for green hydrogen. In Colorado, the state Legislature has instituted its own tax credits in a bid to encourage consumption of clean hydrogen.
Many policy analysts say that by bringing down the costs of making low-carbon hydrogen, the tax credit is likely to supercharge hydrogen’s rise into the energy mainstream, moving down the same path as renewables like wind and solar.
“The IRA accelerated hydrogen’s mainstream relevance by 10 to 20 years, at least,” said Dan Esposito, a senior policy analyst at Energy Innovation: Policy and Technology LLC.
Whether there will be reliable buyers for low-carbon hydrogen is unclear.
In early July, DOE said it planned to devote $1 billion in infrastructure law funds to guarantee a buyer for clean hydrogen suppliers, after industry-backed reports concluded that many potential purchasers were still reluctant to adopt the fuel.
Some analysts point to big planned purchases of low-carbon hydrogen for use in ammonia production — by major ammonia-makers like OCI Global and CF Industries Inc. — as evidence that the Inflation Reduction Act’s tax credits are already prompting change.
“Demand is there,” said Hector Arreola, principal analyst for hydrogen and emerging industries at Wood Mackenzie.
Will Congress change permitting law?
Industry groups are also looking to Congress and the administration to enact permitting changes to the law that will speed up low-carbon energy projects. Some companies say projects can’t currently be built because of litigation and federal environmental reviews that can take years.
“The big white elephant in the room is the permitting process,” said Nolan. “We’re working to fix that. We saw some improvements made in the debt ceiling deal. But there’s more work that needs to be done.”
Both Republicans and Democrats on Capitol Hill share Nolan’s desire for faster permit approvals. Republicans routinely criticize environmental laws for obstructing virtually all infrastructure projects, while Democrats say the pace of transmission line construction in the U.S. needs to speed up dramatically to electrify and decarbonize the grid.
The debt ceiling compromise in June limits National Environmental Policy Act reviews and forces agencies to work on approvals concurrently. In late July, the Council on Environmental Quality unveiled regulations to meet the new deadlines enacted in the debt bill.
Also last month, the permitting push got some renewed backing from Manchin, who called for faster approvals for both transmission and fossil fuel pipelines.
“Permitting reform is essential for more reliable and affordable energy and to make our country more secure and competitive,” said Manchin at an Energy and Natural Resources hearing just before Congress hit the exits for August recess. “Big interstate transmission lines just aren’t getting built. In 2021, we had the lowest build-out of extra high-voltage transmission construction in the last decade.
“Of course, transmission infrastructure alone isn’t enough for reliability,” he said. “We also need dispatchable generation, like coal, natural gas, hydropower and nuclear.”
Many Democrats like Senate Majority Leader Chuck Schumer (D-N.Y.), who are reluctant to expedite fossil fuel approvals, are turning to the Federal Energy Regulatory Commission to speed up transmission.
And Sen. Martin Heinrich (D-N.M.) is urging DOE to reconductor thousands of miles of transmission lines with better cables to facilitate more electricity.
Republicans and the ‘freight train’
Republican efforts to hack away at the Inflation Reduction Act’s clean energy benefits haven’t so far met success. But that hasn’t stopped them from trying.
On top of near-full repeal of the IRA in a House floor vote, GOP committees in the House have advanced measures that would slash or repeal over $10 billion in Inflation Reduction Act funds that support programs for low-income solar and other clean energy, environmental justice, home electrification, and energy efficiency, for instance.
But some analysts say that the party may be retreating from outright repeal of all Inflation Reduction Act energy programs. ClearView Energy’s Book looks at two data points to gauge Republican interest in repealing the clean energy tax provisions in the Inflation Reduction Act. The first is the “Limit, Save, Grow Act,” which passed the House in April and would nix the energy credits aside from a handful of biofuel perks.
“That was a rhetorical stance because the bill was never going to pass. Everyone knew that,” said Book.
The second data point is a much lower-profile bill spearheaded by House Ways and Means Chair Jason Smith (R-Mo.) and passed by the panel in June. The “Build It in America Act,” which is largely geared toward increasing deduction allowances for all businesses regardless of sector, takes a different — and more targeted — approach to scaling back the Inflation Reduction Act credits. The legislation only repeals the EV and renewable generation credits, leaving in place other critical breaks.
“That narrower aegis suggests that even opposition from Republicans may be sort of evolving to a targeted set of modifications, rather than outright recission,” Book said.
Spokespeople for top Republican lawmakers, including Smith and House Speaker Kevin McCarthy (R-Calif.), did not respond to requests for comment on whether the legislation would reach the House floor.
Democrats are hoping that the energy project announcements over the coming months and years will both cut emissions and insulate the Inflation Reduction Act from Republican repeal.
“In one year, this legislation is paying huge dividends for the American people, for our economy, for the environment,” said Schumer at a press conference last month. “It was a big deal last year when we announced the IRA, but it’s a bigger deal now because it’s actually happening, in every state we’re seeing it happen.”
Republicans will have another shot at repeal if they make big gains on Capitol Hill and claim the White House at the polls next year. But Hogan Lovells’ Bisset said the Inflation Reduction Act is just one factor in the clean energy transition building momentum by the day.
“It’s not just about politics, and it’s not just about one act right now. It’s a freight train that’s coming,” she said.
