ARRA for the IRA

PFI 737 - 25 Jan - 07 Feb
5 min read
Americas, EMEA, Asia

At the Davos jamboree last week President Joe Biden's Inflation Reduction Act came under some fire, with allies in Europe saying: "Hey too much guys, where are we going to find US$369bn, under the sofa?" It was not just the Euro political classes that wanted to go on the attack, behind them Euro corporations were telling the Euro politicans to fight back and establish their own IRA. Establishing the nature of the subsidies appeared to be a secondary concern.

Remember the American Recovery & Reinvestment Act (ARRA) from 2009, President Obama's US$787bn stimulus package following the global financial meltdown just before he entered into office? Eventually the bill reached US$831bn. The sums seemed vast but the cash did seem to be spread around the vast American economy so much that it did not seem to make a huge economic impact. Indeed many felt the stimulus was too small. The package certainly sent a message, that the US was doing what it could be recover from disaster. But it did not stop Obama doing badly in the mid terms in 2010 and economists, as is their wont, debated its success albeit many said it did stimulate.

One interesting point. At the time the Act was past the mantra was getting the cash as fast as possible into "shovel-ready" infrastructure projects. But Obama, perhaps after chatting to a few project financiers, conceded defeat and admitted "there's no such thing as shovel-ready projects".

And so on to today with Obama's VP Joe Biden and his IRA. The package is smaller but more targeted. It is expected the IRA will see US$369bn invested in energy security and climate change over the next 10 years. It sets a goal of reducing carbon emissions in the country by 40% by 2030 and includes parts of the Build Back Better Act (BBB). It contains an array of grants, loans, and tax credits, with US$250bn in loan guarantees.

When the IRA past, one of the first things that happened was Canada said it was looking at it own IRA. Developers of hydrogen projects in Latin America started to worry about the economics of their less subsidised projects, particularly if they were due to export to the US. And of course corporate lobbying began across the world to ensure governments upped the ante to match the US, notwithstanding the debt burden many countries are now carrying. The issue caused a particular extra problem for the Europeans as the European single market principle is based on no state aid, ie no subsidies, although in practice the principle is often ignored.

French Finance Minister Bruno Le Maire said “the question is, where do we want to spend our European money? Do we want to buy foreign goods, foreign devices, foreign electric car batteries?” he asked. “We are fully convinced that there is a need to invest more in hydrogen, in semiconductors, in solar panels, in nuclear energy, in renewable energies, with the view of being more independent … while mixing growth and to fight against climate change. The key question is not China first, or United States first, or Europe first. The key question for all of us, and for all the nations in the world, is climate first.”

The fact is that the IRA is a game-changer – but in the US, which has until now invested little in relation to its size in climate change technologies at a federal level, although there has been plenty of activity in state-wide power markets, etc. And US$369bn over ten years is not going to stimulate in the same way as ARRA. Project developers in emerging technologies will not, by the nature of their projects, be able to put forward shovel-ready schemes. And by the time they are ready, the US political climate could have changed.

So perhaps we could be spared the corporate lobbying saying more subsidies please. It would be much better to have corporations putting forward their own economic cases and suggesting how over time they will reduce costs to reduce the need for subsidies. There is little wrong with viability gap funding (VGF) for a project, ie subsidising the gap between what is commercially fundable and what is needed on top to get the project over the line. But the onus should be on the project developers to present their specific case, not simply ask for a bigger pork pie.

It will be interesting to see how the Indian government structures its National Green Hydrogen Mission incentive programme. Could this set a precedent for hydrogen projects? Clearly, costs are an issue. How about using the Indian VGF funding model to get projects over the line but have that model linked to developments in the market – ie, reducing over time? Developers would still need to fund upfront capex but would have to compete against others now and against the market itself over time.