The Inflation Reduction Act (IRA) of 2022 has transformed the clean energy investment landscape both in the US and around the world.

It has arguably set a new benchmark for the level of financial support governments need to kickstart growth in hydrogen, CCUS and renewables, unleashing billions of dollars in the form of tax credits and other subsidies. The Biden administration has gone big on the development of regional hydrogen and carbon capture hubs.

The IRA has also drawn investment away from other regions, creating trade tensions with the EU and others. In the electrolyser industry, several European manufacturers have pivoted their investment strategies to the US, where they want to establish production at scale.

“We think IRA repeal risk is very low” Morgan Stanley

In CCUS, the IRA’s enhancements to an already attractive 45Q tax credit have injected fresh momentum into the sector.

The immediate question for investors and project developers is whether the IRA in its current form will continue under the next administration. The implications for hydrogen and CCUS project developers of material changes to the IRA framework would be significant.

One near-term risk for clean hydrogen project developers could be further delays to the finalisation of rules, such as those around the key 45V tax credit, uncertainty around which has already had a chilling effect on the sector.

However, the consensus seems to be that wholesale changes to the IRA are unlikely, even with a Republican win in November’s White House race.

“We think IRA repeal risk is very low, and I think the only scenario where IRA repeal is a relevant conversation is in a Republican sweep scenario,” said Andrew Percoco, North American clean tech analyst at US investment bank Morgan Stanley. “But even under this scenario, we would expect any repeal measures to be targeted in nature and not a wholesale repeal of the bill.”

A Republican victory is seen by some as potentially positive for the clean hydrogen and carbon management sectors as they are increasingly important to US oil and gas majors.

ExxonMobil is advancing its planned Baytown, Texas low-carbon hydrogen and ammonia facility, the largest project of its type in the world. The company recently stressed that the project is “contingent on supportive government policy and necessary regulatory permits”. ExxonMobil is also investing in carbon management projects, as are some of its peers, including Chevron.

A Republican election win could see the IRA streamlined to help kickstart projects under development by oil companies, said Viktor Katona, head of oil analysis at analytics firm Kpler. “I think the IRA will stay, but it could be modified,” he told a recent webinar hosted by the Financial Times.

Unspent funds

Helima Croft, managing director and head of commodity strategy at RBC Capital Markets, pointed to potential uncertainty around IRA funding that has yet to be allocated. “The unspent funding from the IRA will be potentially in play,” she told the webinar. However, she noted that largest beneficiaries of the IRA are in Republican strongholds, which would make it less likely for funds to be redirected by a Trump administration.

A Republican win could pose a threat to consumer-facing tax credits such as those aimed at EVs. Trump has also expressed a less than supportive view of offshore wind, said Percoco.

Tariffs

Other risks for the transition could be changes to tariffs on US imports, with a potential impact on the clean energy supply chain.

“The clean energy supply chain is global with a heavy concentration in China and Southeast Asia. So, if there are higher tariffs put in place against these regions, it could create some disruption in supply chains and impact the pace at which we deploy renewables in the US,” said Percoco.

That said, the IRA is designed to encourage the onshoring of manufacturing and tariffs on imports could actually accelerate that trend, he added.

Power surge

Post election tinkering aside, the underlying growth prospects for US renewables are very strong as demand for electricity surges.

“It is a very strong demand backdrop for the renewables space – and that's because in the electric industry, we are seeing an inflection in electricity usage across the US,” said David Arcaro, Morgan Stanley's US power and utilities analyst.

“It has been stagnant for years and years, but now with datacentre growth, with industrial production accelerating, and manufacturing and onshoring, we are seeing a big change in the growth outlook for electricity usage.”

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Author: Stuart Penson