Understanding the Inflation Reduction Act’s impact
What opportunities are available depending on various renewable or alternative energy asset classes?
First, understand that there are benefits across asset classes, from core renewables, to those emerging technologies in different stages of development. The IRA, which includes US$369 billion in spending and green-energy-related tax credits, will also be a major boon for the market’s solar sector. With a target to reach 50GW of domestic manufacturing capacity by 2030, the IRA’s tax credits, grants, low-cost loans and other support will play a key role in developing a full domestic solar supply chain. Last year, the US installed 23.6GW of solar capacity, a 19% increase from 2020.
Energy storage, too, will see benefits, with the IRA introducing a meaningful tax credit and incentive for stand-alone battery storage. Before this change, all batteries needed to be connected to a solar facility to receive the benefits of a credit. With the new change, this is no longer the case. It’s expected that taxpayers will be able to claim an investment tax credit for stand-alone energy storage assets and the move will open up and dramatically increase battery production.
In emerging technologies, the IRA is being viewed as a game changer for the US green hydrogen industry. Tax credits of up to US$3/kg for 10 years will make green hydrogen produced in the US the cheapest form of hydrogen in the world. Green hydrogen is currently being produced in the US Northwest at US$3.73/kg, so a US$3/kg tax credit would bring the cost of production for a developer to US$0.73/kg, cheaper than blue and gray hydrogen. Reaching this price would also make green steel cost competitive with steel made from fossil fuels, which would stimulate demand for green steel and could spark demand for green cement and green glass made with green hydrogen.
Substantial improvements to tax credits and incentives for carbon capture and sequestration are expected to make a wide range of projects more economically attractive and viable to companies, ultimately leading the US to be the world leader in the field. Similarly, an investment tax credit for qualified biogas, which includes renewable natural gas, is already leading to increased discussions for new renewable natural gas projects, and other tax credits have been increased for a number of diverse renewable energy initiatives. These include geothermal, microgrids and a wide variety of other sources, all of which together are predicted to increase investment in the energy transition space. Add to this incentives for green, bio or alternative fuels; charging stations; and electric vehicles (EVs), we can expect widespread activity and investment throughout the value chain.
Energy transition M&A will increase
IRA incentives will create a long-term transition to, and opportunities in, many energy technologies
Energy transition M&A has grown about 20% year over year in the last five years. It’s outpacing the market, and it’s not just solar farms: It’s also manufacturing, transportation, services and technology. In the future, we’ll see the sector become more resilient to downturns given strong demand trends and new policy underpinnings. There’s also been an outstanding volume of late-stage investments that are going to be maturing in the market, and that is important for M&A because we’ll always need targets.
In the United States, the increasing economic attractiveness of energy-transition-related assets, renewables and alternatives projects is already driving a dramatic increase in real-time investment analysis and decisions. The ecosystem of improved incentives, tax credits and market movement (coupled with additional and expansive financing sources and new market participants) is creating movement and large-scale opportunity — not just in the forward trajectory of the renewables industry but also across investment portfolios of every organization in, or looking to enter, the sector. Beyond simply increasing the M&A market, it is expected this activity will also broaden the asset ownership landscape.
For some time, competition has been strong for high-quality assets, and this is only going to intensify as more investors seek opportunity. It’s a good time for companies interested in this space to review portfolios with renewed rigor and anticipate an influx of new participants diverting capital from traditional investment spaces further away from their noncore and non-priority areas of business. All of this will spur additional transaction activity for those organizations already in energy-transition-related assets and renewables, as well as a likely months- or years-long period of investment and divestment requiring detailed collaborative partnership across the organization to plan and forecast the up and downside of potential scenarios.
The importance of aligning data and digital strategies
An accelerated energy transition means an increased need for data, digital and cybersecurity
As the energy transition accelerates, there will be an unprecedented need for reliable, verified and high-quality data. From emissions reporting, to documenting carbon reductions, data management and tracking will be a leading focus for all clients navigating changes in the energy landscape. Another pressing issue for the renewables industry is cybersecurity. Smart grid technologies, which help integrate, monitor, control and steer bidirectional flows of energy, significantly heighten the risk of cyber attacks.
Many companies don’t have the data practices to monitor their current business operations, but for those using the IRA to finance the exploration of new energy-transition-related projects, renewables initiatives or business models, they’ll need to put the data processes and protocols in place to efficiently monitor and report on their new initiatives. This could mean building out data frameworks, platforms and reporting systems and either upskilling current personnel or adding staff to help manage it all.
Separate and apart from the reporting and monitoring aspects, many of the IRA’s provisions are expected to elevate data from merely a reporting or compliance requirement to a direct participant in income-producing activities. For example, significant data rigor and platforms will be needed to both demonstrate compliance with certain IRA incentives (e.g., the IRA’s improved tax credit for carbon capture use and sequestration), as well as to substantiate and differentiate a company’s carbon reduction efforts for purposes of attracting capital through the developing voluntary carbon offset markets. The IRA’s developments are therefore turning high-quality data management from a “want to have” to a “have to have.”
Data management might also include the adoption of a smart compliance approach to determine, monitor and manage the many reporting variables and complicated compliance requirements of operating clean energy technologies. Likewise, some companies will need to build in a comprehensive operational technology (OT) review and the necessary steps to secure access to the grid, digital factories and every facet of the organization’s digital operations. And, of course, the adoption of new technologies and data practices will increase the prevalence, or at least possibility, of cybersecurity risk.
Companies should make plans now to review, assess and align their data, digital and cyber practices around likely needs. Key questions include:
- If regulations change, are we prepared with the data needed to properly report on environmental, social and governance (ESG) metrics?
- How are we measuring data quality, and do we operate with integrated, cross-enterprise, data-driven practices that will allow us to provide the needed data to all essential stakeholders? Can we use that data to make truly informed business decisions?
- Does our organization have the digital infrastructure needed to implement transformations in our business strategy, such as conducting intelligent asset management or tracking carbon efficiencies and renewables across the supply chain?
- How will the evolving strategy of our business change where potential cyber attacks may come from? Where are risks increasing? What vulnerabilities are being added to the system?
As companies evolve their energy strategies, their expanding data, digital and cyber needs must not be overlooked.
In the recent EY global Renewable Energy Country Attractiveness Index (RECAI), the US ranked first — again. Legislative support, particularly the enactment of the Inflation Reduction Act, served as the tailwind for renewable energy technologies and investments to gain momentum.