Implications of the US Senate-passed Inflation Reduction Act on Electric Power

The power and renewables team at S&P Global Commodity Insights has analyzed the current version of the Inflation Reduction Act (IRA) on a preliminary basis, looking specifically at the implications of the bill for the US electric power sector, summarized below.

Clean energy tax credits in the IRA will provide a significant boost to clean electricity generation in the near and long term

• Wind and solar - already competitive in many markets across the country - will see development even further accelerated. The long-term extension of the tax credits will give stakeholders a consistent long-term economic signal, avoiding the boom-bust cycles of the 2010s resulting from numerous credit expirations and extensions.
• A new standalone storage tax credit will accelerate the cost competitiveness of battery storage and broaden the regional deployment. Without the requirement of being paired with solar, new standalone storage projects could be sited near urban load centers where the value of storage is high.
• A new zero-emission production tax credit would provide additional financial support for existing nuclear facilities in 2024 through 2032.
• Nascent clean energy technologies including new nuclear, carbon capture, and geothermal will also receive a substantial boost.

How long will the tax credits stay? Decades potentially.

• The IRA stipulates that the tax credits are scheduled to phase out the later of 2032 or power sector emissions fall to 25% of 2022 levels.
• We estimate that achieving this emissions target would require on the order of 1,200 GW of additional wind and solar capacity. In other words, the industry would need to add on average 120 GW per year of renewables for the next 10 years for the tax credits to start phasing out. (In comparison, the US added 21 GW of wind and solar in 2021.)
• Given several potential headwinds to such a scale-up, we expect these tax credits to be available for 20-30 years, absent further congressional action.

"To get to the power sector emissions target set forth in the IRA - 25% of current level - we estimate 1,200 GW of additional wind and solar capacity is required."
- Patrick Luckow, Director, North American Power and Renewables, S&P Global Commodity Insights

Coal retirements will continue to accelerate, even absent new EPA regulations, as tax credits enable clean alternatives

• Further deployment of wind, solar, and battery storage will reduce the revenue available to existing coal plants in wholesale energy markets.
• New renewables will be cost competitive with the going-forward costs of what is a rapidly aging coal fleet across the country.
• Of the remaining 201GW of coal fired capacity today in the United States, nearly 50 GW have already announced plans to retire by 2030. Successful implementation of the IRA is expected to accelerate retirements substantially.

"Coal's share in US installed capacity has already declined by 30% during the past decade. The IRA is expected to accelerate retirements substantially as renewables reduce the revenue available to thermal plants."
- Xizhou Zhou, Vice President, Global Power and Renewables, S&P Global Commodity Insights

State and corporate clean energy target expansions will be enabled by the new federal tax policy

• While the IRA includes no mandates for clean energy additions, the economic incentives it provides could embolden states that already have such mandates to pull them forward. We are likely to see an expansion of mandates approaching 100% over the next 15 years.
• Corporate renewable energy procurement targets have driven as much as half of announced renewable deals in recent years - these ambitions will only accelerate as corporations are further enabled to sign long-term renewable PPAs that are competitive with market rates.

Barriers to resource development remain -- siting and permitting an unprecedented amount of clean energy capacity will require substantial reforms

• Sluggish interconnection processes and unexpected network upgrade costs are already slowing the deployment of wind and solar in some regions, and pose a looming threat in others. Absent reforms, these challenges could restrain the growth of renewable energy despite attractive economics.
• The Federal Energy Regulatory Commission and various Independent System Operators have already begun to explore approaches to increase the speed of interconnection queue processes. The amount of new electric capacity in interconnection queues across the US exceeded 1,400 GW by the end of 2021—roughly equivalent to the total operating capacity today. Expediting the interconnection queue process will be essential to substantially accelerate the deployment of wind, solar and batteries.
• State permitting efforts have also proven to be challenging for many developers of both new generating capacity and transmission infrastructure. Early efforts to streamline permitting face pushback for overriding local control. Stakeholders are yet to find effective ways to manage the process.

"FERC, state regulators, and various Independent System Operators have already begun to explore approaches to increase the speed of interconnection queue processes, which will be essential to accelerate the deployment of clean energy sources."
- Doug Giuffre, Senior Director, North American Power & Renewables, S&P Global Commodity Insights

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Posted 10 August 2022 by Douglas Giuffre, Senior Director, North American Power Markets Analysis, S&P Global Commodity Insights and

Patrick Luckow, Associate Director, Gas, Power, and Energy Futures, S&P Global Commodity Insights and

Xizhou Zhou, Vice President and Managing Director, Global Power and Renewables, S&P Global Commodity Insights

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.