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Utility Dive: What inflation – and the Inflation Reduction Act – mean for the clean energy sector

Posted by Kavya Balaraman on Aug 15, 2022

Utility Dive outlined how the Inflation Reduction Act is expected to impact the clean energy sector, citing AEE's Harry Godfrey on how support for clean energy projects can help curb current inflation rates. Read snippets below and the full article here.

High inflation in the U.S. could make things difficult for the clean energy sector, but the passage of the Inflation Reduction Act could more than make up for those impacts, experts say...

Clean energy projects that began to get underway as inflation ramped up face two countervailing forces, according to Harry Godfrey, managing director at Advanced Energy Economy: on the one hand, as natural gas gets more expensive, interest in solar and wind, for instance, is likely to increase. But at the same time, the primary way to combat inflation is to raise interest rates, in an attempt to “cool” the economy, which means that the cost of capital for clean energy projects will also rise. 

“So while there is, I think, a greater appetite to build these projects because they are deflationary, there is also [the fact that] the cost of the capital I need to raise to then build a multi-million dollar – let alone a multi-billion dollar – project has gone up. So those are the two forces at work there,” he said...

Clean energy projects tend to be inherently anti-inflationary – if not deflationary – in nature, Godfrey agreed. Conventional resources like coal, oil and natural gas are coupled to the global commodities market, and therefore subject to significant price volatility – but renewable projects, which don’t involve a fuel factor risk, can be viewed as a kind of “shock absorber” in the economy.

“The greater your share of that, the less you’re going to see your energy prices rise as those commodity prices rise,” he noted...

The two countervailing factors impacting clean energy development could affect projects at the margins, according to AEE’s Godfrey. That being said, wind and solar projects aren’t only built because they are the least cost resources – they are also driven by emissions reduction goals, as well as a need to diversify energy sources.

“So it’s important to note the cost of capital, and how that can impact these projects, but it’s not the sole determinant of project viability,” he said...

Take, for instance, the cost of capital. AEE’s first-cut analysis suggests that the provisions in the IRA are going to more than offset the increased, underlying cost of capital driven by inflation, according to Godfrey. The IRA would restore to full value and extend the Investment Tax Credit and Production Tax Credit for clean energy projects, as well as institute a credit for standalone storage. It also includes a variety of adders, like meeting domestic content requirements, and when stacked together, “for the ITC, you can get like a 50% tax break on it for a big project – that’s huge,” he said.

Another meaningful aspect of the legislation is that it will continue many of the tax credits into the 2030s, providing developers with more certainty and a clearer line of sight, said Godfrey.

“I think what’s in the IRA more than counterweights the inflation of this moment,” he added. 

Read the full article here.

Topics: Federal Policy, AEE In The News, Manufacturing and Infrastructure, Harrison Godfrey