Maximising The Inflation Reduction Act: Four Things To Watch

The Inflation Reduction Act (IRA) has transformed the US from laggard to leader in energy transition policy – but greater clarity in some areas will be essential to prospective investors

Authored by David Brown, Director, Energy Transition Service at Wood Mackenzie

The Inflation Reduction Act (IRA) is an energy transition policy game-changer for the US. But now the initial furore has died down the next phase – leveraging the IRA to realise President Biden’s net zero vision – must ramp up.

It’s a mammoth undertaking. Our analysis of a net zero outcome for the US requires US$10 trillion in investment through 2050. And additional guidance from the Biden administration is needed to see the IRA truly jump-start that investment.

So, what are the key steps that could optimise the huge potential of this landmark policy change? Where is greater clarity needed to create optimal conditions for investors?

1. CCUS permitting: all eyes on EPA processes

Permitting is a key issue that will influence CCUS development in the US in 2023. While the IRA has improved incentives, CCUS FIDs are not in the bag. The uncertainty associated with permitting rests with whether or not the federal Environmental Protection Agency (EPA) process to license Class VI wells (for CO2 sequestration) will accelerate, or how fast the federal EPA will grant primacy over Class VI wells to individual states.

Primacy is extremely important to CCUS developers. In theory, it would grant states the ability to permit CCUS storage wells at a faster speed than the federal government. Texas and Louisiana are targeting one- to two-year approvals for Class VI storage wells, faster than the last Class VI well which was permitted over a six-year process.

And the time to act is now: Wood Mackenzie’s base case forecast expects that CCUS capacity in the US expands from current operational capacity of around 25 Mt to around 85 Mt by 2030. Over that timeline, we expect carbon capture capacity to target wider applications of dedicated sequestration sourced from a variety of industries including ethanol, LNG, and blue hydrogen.

2. Low carbon hydrogen exports: 45V eligibility clarity needed

The IRA reintroduces a production tax credit (PTC) for clean hydrogen, known as the 45V. Are low carbon hydrogen export projects eligible for the 45V incentive? The IRA does not say yes – or no. We believe that this issue must be clarified for low carbon hydrogen export projects to advance.

In principle, the US$3/kg 45V incentive could help make the US a leader in low carbon hydrogen exports. Low carbon hydrogen feedstock will be some of the lowest cost in the world due to:

• production and investment tax credits for wind and solar
• natural gas prices that peak at US$5.50/mmbtu in 2050
• expanded 45Q tax credits for CCUS.

3. Renewable Energy Credits (RECs) and time-matching rules to be defined

One of the largest areas of uncertainty within the IRA is how green hydrogen producers will certify that their power supply is zero emissions. The type of power used to produce hydrogen will have a large influence on lifecycle emissions – a key component of calculating the level of policy support.

But power output in the US is not 100% carbon-free. As of end 2022, around 60% is from fossil fuel generation. The IRS needs to clarify whether or not RECs can be used towards qualifying for the 45V and establish time-matching standards for power procurement.

4. Automakers seek looser eligibility requirements

The IRA is a strong tailwind for decarbonised transport. However, fulfilling some of the incentive requirements may be difficult. Automakers are currently seeking clarification from the IRS on a range of issues – and a key area of focus is battery raw material supply chains.

The IRA established a US$7,500 incentive for battery electric vehicle (BEV) sales, up to a vehicle value of US$55,000. 50% of this incentive requires a proportion of battery components to be manufactured or assembled in North America.

But China has more than an 80% market share for battery components, including cathodes, anodes, current collectors, solvents, additives and electrolyte salts. Battery manufacturing from China and other ‘foreign entities of concern’ (FEOC) are excluded from IRA’s incentive rules.

Clearer guidance on FOEC markets, battery sourcing and foreign ownership thresholds top the list of where automakers are seeking IRS clarity.