Inflation Reduction Act: Accelerating the Low Carbon Transition
The Essex Global Environmental Opportunities Strategy (GEOS) team believes the US Inflation Reduction Act (IRA) will catalyze growth for clean technologies in the US and accelerate the low carbon transition. The IRA provides at least $369 billion to support the energy transition, primarily through tax credits, with key areas of focus including renewable energy, electric vehicles (EV) and charging infrastructure, low carbon hydrogen, biofuels, carbon capture, utilization, and storage (CCUS), and establishing a domestic supply chain for clean technology components. While the $369 billion headline figure is significant, many of the IRA tax credits are uncapped which means actual investment will likely be significantly higher. The IRA is expected to drive meaningful progress towards meeting the 2030 US climate goal to reduce greenhouse gas emissions by 50-52% compared to 2005 levels.
We believe the IRA strengthens the case for low carbon technologies and view IRA policies as particularly supportive for technologies within GEOS themes such as Renewable Energy, Power Technology, and Efficient Transport. We expect significant growth in US renewable energy capacity in the coming years given the extension of the investment tax credit (ITC) and production tax credit (PTC) in the IRA, coupled with the fact that wind and solar energy are already the cheapest forms of energy in many areas. This should benefit companies within our Power Technology and Renewable Energy themes providing renewable energy inputs like wind turbines and microinverters, as well as grid management software and sensors needed to integrate distributed power generation sources. The IRA should also accelerate EV penetration since the $7,500 Consumer EV tax credit will help close the sticker price gap between electric vehicles and ICE vehicles. We expect companies in the GEOS Efficient Transport theme that supply critical inputs for electric vehicles, such as lithium, electric motor components, and electrical distribution systems, will be major beneficiaries.
The IRA also provides incentives to help bring down the costs of emerging low carbon technologies such as green hydrogen and carbon capture, utilization, and storage (CCUS). While green hydrogen and CCUS are more expensive than alternatives today, both are needed to reach net-zero US emissions by 2050, especially in hard to abate industries such as heavy industry and long-haul transportation. The 45V tax credit for hydrogen production in the IRA will significantly bring down the cost of green hydrogen production and position the US as the global leader in low carbon hydrogen production. For CCUS, the enhanced 45Q IRA tax credit increases incentive prices for capturing and storing carbon and lowers the absolute capture threshold facilities must meet to qualify for tax credits. The 45Q credit will significantly improve CCUS project economics and should lead to significant growth in CCUS projects.
While we expect the IRA will drive significant growth in low carbon technologies over the next decade, the IRA’s impact is already evident today. Numerous companies have already announced domestic projects to leverage the IRA’s tax incentives including First Solar, Hanwha Q Cells, and Air Products. First Solar announced they will build a new $1.1 billion solar panel manufacturing facility in Alabama, a decision their CEO stated was heavily influenced by the IRA tax credits that encourage domestic manufacturing of solar components. Hanwha Q Cells, a South Korean solar manufacturing company, announced plans to invest $2.5 billion to expand an existing module assembly facility and build a new 3.3 GW solar components factory in Georgia. Hanwha expects to receive $875 million in annual tax credits from the IRA. Finally, Air Products will invest $500 million to build a green hydrogen facility in New York that is expected to begin operating in the 2026-2027 timeframe. We expect many other companies will announce plans in 2023 to benefit from IRA incentives as they evaluate their capital budgets and better understand the IRA provisions.
Disclosures:
This commentary is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. The opinions and analyses expressed in this commentary are based on Essex Investment Management LLC’s (“Essex”) research and professional experience and are expressed as of the date of its release. Certain information expressed represents an assessment at a specific point in time and is not intended to be a forecast or guarantee of future results, nor is intended to speak to any future periods. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties.
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