Inflation reduction acts

PFI 752 - 06 Sep - 19 Sep
5 min read

The US green industry sector is attracting huge amounts of interest and capital following the passing of the US$370bn Inflation Reduction Act last year. Unfortunately, the passing of the act coincided with the greatest spurt of inflation to hit the renewables market since the start of the century, with the consequences of that now starting to be fully felt. Inflation will slow down but is expected to remain embedded for the rest of the decade. It will be interesting to see if there is a tipping point between inflationary price increases and what consumers are prepared to pay.

The Inflation Reduction Act (IRA) has been designed, according to the New York State Energy Research & Development Authority (NYSERDA), to provide economic incentives for the US to create its own renewables supply chains but "it will likely take several years to stand-up the supply chain" at a time when, for instance, the Department of Commerce has adopted trade policies against part of the Chinese solar panel supply chain. NYSERDA has been opining on the request by offshore wind, onshore wind and solar project developers to increase strike prices by 60% and counting on projects already awarded but not built in New York State.

The NYSERDA report and accompanying ICe report on inflationary impacts do not hold out much inflationary relief for the rest of the decade, although the big increases between 2021 and 2023 are expected to subside. The solar sector in the US is suffering from the China panel dislocation while the offshore and onshore wind industry in the US has been hit by global problems with the original equipment manufacturers. This is coming at a time when the IRA is starting to pump a lot of funding into the the renewables sector.

The NYSERDA and ICe reports do not analyse the impact of the IRA on inflation in the sector but it could be a factor. Labour rates are one big constituent of inflation and a shortage of trained labour is bound to be an issue until the workforce is expanded. What is more, developers wanting federal support on their projects will need to take local labour – as set out in guidance released late last month.

NYSERDA stated that federal support from programmes such as the investment tax credit (ITC) can be substantial but the ability of projects to qualify may not be known right now. "For example, a project may not know at this stage whether it will be able to incorporate adequate domestic content into its project procurement to qualify for the domestic content bonus," it said.

Orsted is looking to secure at least an extra 10% on the ITC for its New York and New Jersey offshore wind schemes by having local content, but it is losing the race to achieve that. This ITC applies to offshore wind projects that begin construction before 2026. The company says, however, that those conversations are not progressing as they had expected and it has booked a US$700m impairment. Oops.

The IRA has been pushing renewables investment and interest in such investment into the US from outside the country, as intended. Global developers have been keen to join in the party although as Orsted, and many before it, has found, the US energy market can be tough and uncompromising. Not only has capital started to flow into the US but developers outside the US have demanded higher incentives from their local government on their local projects. An inflationary spiral, although in the scheme of things probably not as important a factor as the general panel and OEM problems.

The request by renewables developers to increase prices in New York made the headlines last week. Developers requested solar prices would go up from US$62.79/MWh to US$102.22/MWh and onshore wind prices up from US$67.63/MWh to US$115.66/MWh. In the offshore wind sector the strike price for Empire Wind 1 would rise to US$159.64/MWh from US$118.38/MWh, for Empire Wind 2 to US$177.84/MWh from US$107.50/MWh, and for Beacon Wind to US$190.82/MWh from US$118/MWh. Challenging numbers although perhaps not surprising.

What would be the impact on consumer bills if those prices hikes were accepted? The onshore impact would be 1.48% and offshore impact would be 2.5%. In the overall scheme of things fairly small increases. What is more NYSERDA points out if these strike price hikes were not accepted, developers would cancel existing projects and come back later if even higher prices. Indeed, The inflationary spiral. But at what point would the tipping point be reached with the rate payers? NYSERDA points to wider concerns. These are renewable projects with CO2 reduction benefits. Challenging times which call for efficient global supply chains across many markets. Two hundred years ago David Ricardo said nations gain when they focus on producing goods that produce the lowest opportunity costs as compared to other nations. Hence the US exports gas via a massive LNG boom and imports green via the IRA.