- The Inflation Reduction Act may help utilities with a significant presence in the U.S. accelerate their emission-reduction plans.
- Companies with a high share of planned spending for new clean-energy projects may benefit the most from the bills’ new incentives providing long-term visibility for their investments.
- The bill’s minimum corporate tax rate of 15% was not expected to have a significant impact on utilities’ low-carbon-transition capital-investment plans.
The Inflation Reduction Act (IRA), signed into law on Aug. 16, includes an allocation of USD 369 billion in new energy- and climate-related spending over the next decade. Investors, particularly those with allocations to utilities and energy, may take note of the fact that the IRA could help many utilities and energy companies reduce their direct and indirect emissions by making their energy transition more financially appealing. It does so through tax-credit incentives to scale up the deployment of renewables and accelerate the development of frontier decarbonization technologies.
How the law’s tax credits may help
The IRA includes 10-year tax credits for developers of new renewable-power generation (solar, wind and geothermal), nuclear reactors and energy efficiency and storage (batteries, hydrogen and pumped hydro) facilities. This may provide a higher level of certainty for investors compared to previous schemes, which were up for renewal every few years.
For frontier technologies such as carbon capture and storage, direct air capture and renewable fuels, which are crucial to addressing hard-to-abate industries such as materials and aviation, the IRA offers tax credits per unit of production to help bring them to an operational scale. Other subsidies and rebates for electrification may support decarbonization for businesses involved in emissions-intensive activities like transport and heating.
These incentives may help increase the annual capacity additions of utility-scale solar by 5x and wind farms by around 2x by 2025 or 2026 compared to 2020 levels.1 This could affect U.S. utilities NextEra Energy Inc., Invenergy and Apex Clean Energy, as well as EU-listed Ørsted A/S, Iberdrola and EDF Group, all among companies with the largest wind and solar project pipelines in the U.S.2
Utilities with high planned renewable capital expenditure
Data as of Aug. 16, 2022. Power-generation constituents of the MSCI ACWI Index with a significant presence in the U.S. that have publicly disclosed investment plans for renewables. Data covers companies’ operations globally. Source: ESG Research MSCI LLC
The law also provides tax credits for operational nuclear reactors, which may help prevent the closure of 22% to 38% of the U.S. nuclear fleet by 2030.3 The tax credits are also expected to help cut the production cost of hydrogen produced from renewable power below USD 1 per kilogram by 2030, versus the USD 4 to 6 per kilogram at present.4 As the earnings of utilities’ regulated business are driven by the size of their asset base, utilities may benefit financially from power-generation projects supported by the IRA.
Estimated maximum revenues from clean-power generation
Data as of Aug. 16, 2022. Power-generation constituents of the MSCI ACWI Index with a significant presence in the U.S. that have publicly disclosed investment plans for renewables. Data covers companies’ operations globally. Source: MSCI ESG Research LLC
Tax credits may outweigh impact of a minimum tax
The IRA imposes a 15% minimum corporate tax on companies with annual profits greater than USD 1 billion, which could increase the average effective tax rate for U.S. utilities to 23.3% in 2023 — the highest among all industries — from 14.7% under prior law.5 Foreign-parented multinational companies also fall under the provisions if their U.S. subsidiary generates more than USD 100 million in income per year over a three-taxable-year period. Initial reactions to the bill from U.S. utilities, including Duke Energy Corp., DTE Energy and American Electric Power, however, suggested that any negative impact from the minimum tax may not outweigh the benefits from the new tax credits.6
Average effective tax rates vs. renewable deployment plans
Data as of Aug. 16, 2022. Power-generation constituents of the MSCI ACWI Index with a significant presence in the U.S. that have publicly disclosed plans for adding renewable capacity. Data covers companies’ operations globally. Source: MSCI ESG Research LLC, Refinitiv Eikon
Incentives, incentives, incentives
Some have estimated the IRA could lower U.S. net greenhouse-gas emissions by 40% to 42% below 2005 levels by 2030.7 While less than President Biden's net-zero-pathway-aligned 50% to 52% reduction target and the 46% reduction from his Build Back Better proposal, it’s significant compared to the 27% to 30% reduction trajectory prior to the IRA’s passage.
To get there, the IRA provides significant incentives for the energy transition in two main forms: the introduction of longer-term certainty into renewable-energy project development and per-unit-of-production tax incentives for frontier decarbonization technologies.
1Jenkins, Jesse D., Mayfield, Erin N., Farbes, Jamil, Jones, Ryan, Patankar, Neha, Xu, Qingyu, and Schivley, Greg. “Preliminary Report: The Climate and Energy Impacts of the Inflation Reduction Act of 2022.” Princeton University, August 2022.
2Good, Allison. “Inflation Reduction Act could help utilities sell competitive renewables assets.” S&P Capital IQ, Aug. 15, 2022.
3Natter, Ari. “Manchin Deal Tosses $30 Billion Lifeline to US Nuclear Reactors.” Bloomberg, Aug. 3, 2022.
4Holger, Dieter. “Renewable ‘Green’ Hydrogen Gets a Lift in Senate’s Climate Bill.” Wall Street Journal, Aug. 9, 2022.
5Kallen, Cody, and Watson, Garrett. “Who Gets Hit by the Inflation Reduction Act Book Minimum Tax?” Tax Foundation, Aug. 12, 2022.
6Pomerantz, David. “Utilities that support Inflation Reduction Act are members of trade groups attacking it.” Energy and Policy Institute, Aug. 4, 2022.