Corporate investors have a new financial incentive to invest in renewables and climate technologies that often proved economically unviable in the past.
The US’s recently passed Inflation Reduction Act doesn’t sound like it is about climate investing but it has completely changed the market for investors in clean energy.
“The clean energy incentives in the Inflation Reduction Act are a game changer in terms of what they can do to catalyse private sector investment in clean energy projects and technologies both on the manufacturing and deployment side,” says Zach Friedman, director of federal policy for Ceres, a clean energy advocacy group.
The landmark legislation, signed into law by US President Joe Biden in August, ploughs $369bn into climate tech and clean energy, the single largest investment in these sectors in the US to date.
The sheer size and scope of the act has created a new playbook for corporates seeking to invest in carbon reduction technologies. The variety of climate investments that are eligible for tax credits, as well as the length of the subsidies on offer, create the most compelling investment climate for clean tech the US has ever seen.
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The foundation of the bill’s climate investments is the expansion of clean energy production tax credits to boost investment in several sectors, including onshore and offshore wind, geothermal and solar. It also offers tax credits in areas that have previously not been covered by such incentives, including clean hydrogen and energy storage.
““It will make energy transition projects feasible for companies.”
Taha Syed Hussain, Delek Innovation
What makes the tax credits compelling for investors is their 10-year duration. Clean energy tax credits for sectors such as solar used to last for 2 years, which is often not enough time for developers to plan projects. Past tax credits also often lapsed and were not renewed. The previous solar production tax credit, for example, expired in 2006.
“Previously, we had stop and starts with the tax credit,” says Friedman. “Companies need lead times to plan projects and supply chains, so they really need 10 years ahead.”
Key energy and climate provisions
- The act extends a 30% investment tax credit for renewable energy projects that begin construction before 2025 (2035 for geothermal).
- New investment tax credits are available for energy storage technology, biogas and microgrid controllers that are placed in service during or after 2023.
- It extends the production tax credit at a rate of 1.5 cents per kWh for renewables, including wind, biomass, landfill gas and hydropower. Construction of projects needs to begin before 2025 and the tax credit is available for electricity output over 10 years.
- The bill expands a tax credit for carbon capture and sequestration projects built before 2033. Qualified technologies include direct air capture facilities that capture more than 1,000 metric tonnes of carbon dioxide emissions a year, while electric generators must capture more than 18,750 metric tonnes a year.
- Previous tax credits for capturing and storing carbon dioxide emissions were in the $12 to $50 a tonne range. Under the new act, carbon capture facilities receive $85 per metric tonne of carbon dioxide emissions captured and stored from an industrial source; $60 a metric tonne captured and stored for enhanced oil and gas recovery; and $180 a tonne for carbon dioxide emissions captured and stored from a direct air capture facility ($130 a metric tonne for direct air capture used in enhanced oil and gas recovery).
- It creates a new 30% tax credit over 10 years for clean hydrogen production facilities in service during or after 2023.
- New tax incentives of up to 55% and lasting 10 years are available for investments in US manufacturing facilities that make renewable energy equipment such as solar photovoltaic cells, wind energy parts and battery cells.
- Consumers and businesses can receive up to $7,500 for new electric vehicles, including delivery vans and medium-duty trucks.
- Nearly $300 million in grants are available for sustainable aviation fuel development.
- Close to $9bn in rebates are available for home energy efficiency, including up to $1,750 for heat pump water heaters, and up to $8,000 for heat pumps for space heating and cooling.
Corporate investors point to the landmark nature of the bill. “The passing of this legislation is an historic milestone,” says a spokesperson for Shell, the oil and gas major. “It will help diversify lower-carbon energy supply and secure domestic energy production for decades to come.”
Taha Syed Hussain, venture partner of Delek Innovation, the corporate venture fund of Delek US, a downstream energy company, says the act has “completely changed the mindset here.” He points to the tax incentives for hydrogen and carbon capture as particularly compelling for investors.
“It will make energy transition projects feasible for companies. They will be able to move faster into projects,” says Hussain. “Now we are in a good place in the US where there will be competition or a race to get these projects online and showing some good numbers.”
His comments are echoed by Youssef Mawad, managing director of JCI Ventures, the corporate venturing arm of Johnson Controls, a US maker of smart building products. In the past it was often difficult to prove the profitability of carbon capture solutions but the legislation makes it much easier to make the case for investments, says Mawad. “Exceeding carbon targets will directly impact the financial performance of companies and the value of decarbonisation measures becomes clear,” he says.
“We are thinking about things like energy management, heat pumps – things that didn’t used to be considered a priority, but which are now important. We were already looking at these deals before the act was passed but it is a relief to see it on paper.”
Youssef Mawad, JCI Ventures
The focus in the bill on improving energy efficiency of buildings has given JCI Ventures an incentive to target investments in this area. “We are thinking about things like energy management, heat pumps – things that didn’t used to be considered a priority, but which are now important. We were already looking at these deals before the act was passed but it is a relief to see it on paper.”
GCV knows of a number of companies that are pivoting to making more investments in decarbonisation projects as a result of the legislation. Friedman from Ceres expects the legislation will prompt companies across sectors – from tech, food and beverage, apparel, retail – to ramp up procurement of clean energy for their operations.
Says Friedman: “The investments in IRA is a signal that there is recognition of a global race to the clean energy transition, and that the US is in that race now.”