August 16, 2023, will mark the one-year anniversary of the enactment of the Inflation Reduction Act (“IRA”) (Public Law 117-169). Although there has been, and continues to be, spirited debate around the policies embodied in the IRA, one thing is not debatable; the IRA –dubbed by some as the “Green New Deal”– is among the most significant pieces of climate and renewable energy legislation is United States history. This may come as a surprise to some, considering the title of the law makes no reference to “climate,” “renewable energy,” or the like. The IRA addresses many topics completely unrelated to clean energy. However, tucked within the law are a variety of provisions that have taken the renewable energy sector by storm.
One important provision of the IRA is that it extended for ten years various forms of income tax credits available to owners of solar, wind, and other renewable facilities. This extension provides consistency and certainty that was previously lacking and has resulted in greater comfort among lenders and developers in making long-term renewable energy investment decisions.
Significantly, the law also expanded application of these tax credits to stand-alone (i.e., not tied to solar or wind plants) battery energy storage facilities and made many of the credits available (in the form of “direct payments”) to governmental and non-profit power companies (e.g., municipal and rural electric cooperative utilities) that do not generate taxable income. These changes have led to skyrocketing levels of development of utility-scale battery facilities. These battery facilities scan be used to store energy at times when renewable energy is overproducing (e.g., certain daylight hours) and release that energy back to the grid when needed (e.g., at night). Making tax credits available to power providers without taxable income has likewise led to significant expansion in opportunities for municipal and rural electric utilities to build and own renewable generation facilities.
A third notable provision of the IRA also includes a host of new tax incentives for companies (both U.S. and foreign) that choose to manufacture and/or source critical clean energy components in the United States. The objective of this provision is aimed at reducing America’s reliance on foreign suppliers (many of whom are in China) and growing the country’s skilled labor workforce.
Together, the IRA’s tax incentives can result in substantial (40% or more) reductions in cost for these projects. These cost savings have resulted in a “gold rush” of sorts within the domestic clean energy sector. According to a recent report from American Clean Power Association, U.S. clean energy investments hit $271 billion in announcements in the past twelve months. For context, this is about the same dollar amount as total U.S. clean energy investments over the eight prior years (2015-2022).
Also, in the past twelve months, 83 new U.S.-based clean energy manufacturing facilities were announced (52 solar, 14 battery, 17 wind), which are expected to create over 30,000 jobs, transforming U.S. manufacturing.
In the first year since its enactment, the IRA is on track to meet, and arguably exceed, its objectives. Activity in the clean energy sector is booming. Achieving aggressive carbon reduction goals established by the federal government and many states remains a challenge, but enactment of the IRA has proven to be a key factor in driving tangible results.