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US Energy Sector And Company Growth

On August 16, 2022, US President Joe Biden officially enacted the Inflation Reduction Act (IRA). The law calls for $437 billion in investments over the ten-year period from 2022 to 2031, $369 billion of which is allocated for investments in energy security and climate change. This article will explore the impact of this act and Pangea’s place as a part of it.

The Inflation Reduction Act aims to address inflation through policies that would reduce the cost of energy as well as the federal deficit. It is expected to raise an estimated $790 billion in revenue and savings from a new corporate minimum tax, improved tax enforcement, and prescription drug reform. In addition to spending on healthcare, $369 billion is earmarked for energy and climate change priorities.

– Maria Severnovsky, Head of Sustainability for North America at Schroders

Impact On Clean Energy

The package’s clean energy component, which affects practically all areas of the energy transition, seeks around $270 billion in contributions in the form of tax credits. The Internal Revenue Service (IRS) is yet to be more specific about what exactly those conditions are, but it seems that the tax incentives are set up as two-tiered incentives, offering a base rate and then a bonus rate if certain salary and apprenticeship requirements are fulfilled. While there are incentives for domestic manufacturing in other areas, there are additional incentives for certain sectors based on geography, such as a wind farm in a low-income neighbourhood or where a coal-fired plant has been shut down.

The following are some significant highlights for some of the key energy transition sectors:
Alternative Energy Tax subsidies for wind, solar, and storage make for almost half of the $270 billion in investments. This has two critical components:

  • Instead of being phased out over a set amount of time, these credits are now linked to total US emissions over a five-year period once the US sector produces 75% less carbon than it did in 2022. This gives these projects a tremendous amount of publicity and longevity.
  • A new system is gradually implemented, and all producers of zero-carbon energy will receive comparable compensation.
  • The US nuclear fleet is renowned for its minimal carbon footprint, which establishes a price floor for each MWh produced as well as a ceiling that takes into account the current climate of high-power prices.

    Green hydrogen, which varies from blue hydrogen in that it is created using renewable energy and so virtually eliminates emissions, is given a tax credit of $3/kg while blue hydrogen is given a credit of $1/kg. According to some estimations, grey hydrogen (made from fossil fuels and generated from natural gas) and blue hydrogen are on par, with green hydrogen being more affordable than grey hydrogen once the credits are taken into account.

    The removal of the manufacturer-level cap and the continuation of the $7,500 credit on a select group of new electric vehicles, including fuel-cell vehicles. However, domestic mineral content and domestic battery manufacturing account for 50% of the credit. Higher-income buyers and more expensive models are also prohibited by stricter regulations.

    Criticisms Of The Act

    Combining credits with criteria for local manufacturing and organized labour would likely imply that any “incremental” impact of the IRA is realized over time rather than immediately as the rules are increasingly understood. In fact, Morgan Stanley highlighted that while their 2035 renewable penetration estimate increased slightly to 57% from 55%, their 2030 renewable penetration estimate stayed at 42% compared to previous predictions.

    In its road map to net zero by 2050, the International Energy Agency (IEA) anticipated that worldwide clean energy investments will total more than $4 trillion annually. The size of the IRA, according to Bloomberg, is less significant than the EU Green Deal or yearly investments in China.

    The IRA did not address the US’s persistent refusal to enact a federal carbon policy, in contrast to the EU.

    There is also a reliance on future agreements that will address infrastructure obstacles (such as transmission capacity, smart grids, and permitting procedures), which are already a barrier to the adoption of renewable energy.

    With higher taxes serving as an offset, the costs of credits are an estimate that may very likely increase as specifics become clearer.

    How Will This Impact Investment?

    On the surface, the IRA appears to benefit the renewables sector, which will receive up to half of the tax credits allotted. It is questionable whether the trajectory of renewable additions received a sustainable elevation from the IRA alone, even though we continue to believe that this industry will continue to be the only one to benefit. For instance, it has been customary to pass a tax extenders package before the end of the year, and renewable energy sources are already the least expensive kind of electricity production.

    To put it another way, the benefits of making tax credits more visible are offset by the absence of any changes to the application process, the expansion of the infrastructure, or perhaps the requirements for domestic organized labor, which will require guidance from the IRS regarding implementation.

    Since hydrogen has a small end market outside of its usual usage and is not cost-competitive without subsidies, it is believed that this Act will primarily benefit hydrogen. In addition to hydrogen, the carbon capture sector might expand more quickly due to the increase of between 70% and 270% in 45Q credits.

    Inflation Reduction Act Conclusion

    According to estimates, the Inflation Reduction Act may reduce US yearly greenhouse gas emissions in 2030 to a level that is one billion tonnes lower than the amount set by present regulations. This would close two-thirds of the distance on the route to achieving net zero emissions by 2050. This reflects good development and follows the Intergovernmental Panel on Climate Change’s (IPCC) most recent assessment in April 2022. According to the analysis, it is highly unlikely that we will be able to keep global warming to 1.5 degrees Celsius. Therefore, even though more work needs to be done, the Inflation Reduction Act is a positive move.

    Where Does Pangea Come Into This?

    While there may be some areas of this act that require additional clarification, one thing is certain: we can expect to see a lot more energy and infrastructure projects that will be started as a result of this act. The energy transition is the industrial revolution of our time which makes it no small feat. Pangea is well equipped to handle all recruitment needs to handle such a task.

    In addition to having a team of skilled and experienced recruiters on hand, Pangea is continually growing to take on any projects that may come our way. Just the last two years provide a great example of this. For instance, in 2022, we noticed a 180% rise in the number of contract applicants we placed.

    Through a variety of learning and development programs, Pangea has also been growing and evolving to have not just more people available but also people who just as talented and driven. Each one of our team members follows our values, including inspiring expertise in not just each other, but the candidates that they bring to our clients for their projects.

    As previously stated, we have been taking care of a rapidly expanding range of clients while upholding our principles and providing excellent services. Just this year, through our strong growth mindset, we have added close to 25% more staff, demonstrating our enhanced capacity in anticipation of the significant changes the Inflation Reduction Act would bring about in the future.