The United States’ Inflation Reduction Act (IRA) could change the landscape of energy economics with its unprecedented support for clean energy sources, says a new report.
“Incentives for clean energy in the U.S. are not new,” writes the ICF Climate Center. “What is new is the scale of the support in the IRA, providing potentially trillions of dollars of federal support over the next few decades, and its timing, coming during a period of strong momentum for clean energy and decarbonization.”
The IRA’s impact on the energy sector can be summarized in one sentence, says ICF: “clean energy economics just got a whole lot better.” This transformative impact is driven by incentives to revitalize clean energy initiatives. The existing production tax credit (PTC) for solar energy and the investment tax credit (ITC) for energy storage facilities are examples. Whereas the two credits were being phased down or restricted before the IRA, the new versions are available to all zero-emissions technologies. The IRA also contains entirely new statutes, like an incentive for existing nuclear plants that varies based on plants’ average revenues, and another for hydrogen, which varies inversely with carbon intensity.
Other measures address the social impacts of a clean energy transition. They include a labour bonus, which multiplies base credits by five for projects that pay prevailing wages and meet certain apprenticeship requirements. Two “energy justice” bonuses are also provided for small projects in low-income areas and tribal regions, and in low-income housing units or economic benefit projects, ICF says.
ICF’s new report analyzes the influence of these measures by computing the levelized cost of energy (LCOE)—”the average cost of electricity generation over the lifetime of a facility—for clean energy technologies in 2030, then compares outcomes with and without the IRA. The analysis shows the cost of all technologies declining by double-digit percentages—including established ones like wind and solar, which are already cheaper than they used to be.
The largest cost drop was reported for hydrogen, which was projected to decline by 52% to 67%. Carbon capture technology see a LCOE decline of 20% to 23% that would make it economical for the first time, ICF contends.
But the findings of the report are published with a caveat: “authors assume that policymakers will address other thorny challenges facing clean energy projects,” reports The Washington Post.
Even with such significant support, a clean energy transition will need to overcome several challenges that can’t be fixed just by throwing money at them. Even communities that support clean energy are prone to NIMBYism, or “not in my backyard” sentiments, and frequently reject or delay local clean energy projects. Increasing land scarcity could intensify those sentiments to make project siting more difficult.
Furthermore, grid interconnection deficiencies are a continual hindrance to bringing new clean energy projects online, and new transmission infrastructure must overcome market barriers and regulatory shortfalls.
“If the goal is to increase deployment of renewable energy, then this [law] is absolutely a major step in that direction,” said report co-author Shanthi Muthiah, managing director of ICF’s energy practice.
“But,” she added, “it’s one of several steps that’s needed.”