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How Will the Inflation Reduction Act Affect Renewable Energy Opportunities?

US Capital Building at sunsetOn August 16th, the United States Inflation Reduction Act was signed into law. This new law is the largest clean energy investment in American history and the potential implications for renewable energy are far-reaching. Estimates from American Clean Power predict that the new law could add 525-550 gigawatts of new utility-scale clean power to the U.S. electric grid and create more than 500,000 clean energy jobs. While it's still too early to determine the comprehensive impacts this will have on the renewables industry, there are some material impacts expected for corporations looking to procure renewable energy.

What is in the Inflation Reduction Act?

The Inflation Reduction Act invests a transformational $369 billion in spending to reduce the technology costs and barriers associated with developing and deploying renewable energy, bolstering energy resilience, and reducing economy wide emissions 40% in the United States by 2030. Some of the key provisions include:

  • Expansions and modifications of key clean energy tax credits, like the Section 45 Production Tax Credit (PTC) and Section 48 Investment Tax Credit (ITC)
  • Incentives to increase domestic manufacturing of clean and advanced energy projects
  • Billions in loans, grants, and rebates to spur electrification in the home and in buildings
  • Transmission related investments to increase access/supply of renewable energy

In addition to the above highlights, the solar industry tax credit (ITC) is restored to the full 30% value and now includes solar storage. However, it is important to note that because the 30% ITC acts as more of a ceiling, the base rate is 6% and the bonus credit rate is 30%. The bonus credit rate is activated if prevailing wage and apprenticeship requirements are met. If those requirements are met and domestic content requirements are met, there may be an additional 10% added to the tax credit. If a project is placed in an “energy community, such as those with past brownfield sites or a high population of coal or mining jobs”, another 10% may be added bumping the total possible ITC to 50%. Finally, the Production Tax Credit (PTC) is extended for qualified facilities and reinstated for solar energy, including a similar structure to the ITC with “base” and “increased” credit amounts.

From Jan 1, 2025, onwards, the traditional ITC and PTC will be replaced by new technology-neutral credits. This means that any qualified facility that is used for the generation of electricity that has anticipated GHG emissions rate of zero or less will be eligible for the credit, expanding the eligibility for tax credits beyond just wind and solar to additional clean energy technologies, such as energy storage and hydrogen.

While industry tax credits are common, the Act also includes a minimum tax provision for corporations of up to 75% that can be offset by using tax equity credits coming from renewable projects. This is a new mechanism to procure renewable energy that corporations should evaluate to determine if tax equity fits into their renewable power portfolio.

How will the Inflation Reduction Act impact renewable energy procurement?

In 2022, costs of renewable energy have increased dramatically due to a variety of factors. While the Inflation Reduction Act will likely have a positive impact on renewable energy prices over the long-term, the act does little to address the short-term lack of crystalline silicone photovoltaic (CSPV) cells needed to scale solar renewable energy. Roughly 3 gigawatts of modules cannot be imported to the U.S. due to the Uyghur Forced Labor Prevention Act. The price of renewable energy is reaching a point where some organizations with sustainability goals are struggling to justify new renewable energy expenses.

In the short-term, the act may offset the instability and price increases realized throughout the market, but it is unlikely that there will be a material decline in PPA pricing. Despite the renewable energy market being a sellers’ market, corporate demand for renewable energy projects is still at its highest level and is not projected to decrease. While the act over the long-term will likely increase domestic manufacturing of renewable energy, the increased cost of U.S.-based products compared to imports will likely result in a cost-neutral position for renewable energy. However, it will help increase the supply of wind and solar projects in an undersupplied market. Overall, the Inflation Reduction Act will result in increased electrification and electrification demand over the long-term but does not change pricing dynamics for corporations looking to immediately procure renewable energy.  

Despite these challenges, we are seeing more demand for renewables than ever before. However, due to increased prices, many organizations operating within the United States with sustainability goals are finding it difficult to justify new procurement. Navigating the complex renewable energy market requires expertise and a keen understanding of current market conditions. Let us help you manage the complexity – our team has over 150 years of combined experience in renewable energy procurement and can help you find the best deal possible for your organization. Contact us today to learn more.