Inflation Reduction Act Sparks a Clean Energy Boom in the U.S.

Investors are responding to new incentives under the U.S. Inflation Reduction Act of 2022 with a flood of big, multi-megawatt commercial clean energy projects. That has grabbed the media spotlight, but the clean energy impact of the legislation can also be seen in provisions that support energy-efficiency improvements for small businesses, too.

It was always about the clean energy

The name Inflation Reduction Act is something of a misnomer. The key provisions of the IRA support projects that foster a low-carbon economy. The Joe Biden administration’s official guidebook on the IRA begins with this observation: “On August 16, 2022, President Biden signed the Inflation Reduction Act into law, marking the most significant action Congress has taken on clean energy and climate change in the nation’s history.”

Last year, the Congressional Budget Office assessed that the IRA would have little to no effect on inflation through 2023, though inflation did cool down this year due to other factors. 

 

In contrast, there is clear evidence that the tax credits and domestic manufacturing provisions of the IRA have sparked a clean energy boom that includes overseas investors as well as U.S. firms.

In August, for example, the sustainable business organization E2 counted 210 new clean energy projects announced since August 2022, spread among 38 U.S. states. About half of the projects are credited to overseas firms, indicating that the international business community is more motivated to create new manufacturing jobs in the U.S. rather than elsewhere. 

E2 also observed that the law benefited Republican districts by a wide margin, even though the IRA passed along party lines with no Republican votes. “Republican districts accounted for 72 percent of the jobs estimated to be created and 86 percent of the new investments,” E2 assessed. 

E2 updated its list in September to add 13 new projects, spread over 11 states. As with the earlier announcements, the new additions indicate that investors have been politically agnostic in their choice of location, with Republican and Democratic districts benefiting alike.

Together, the 13 new projects flagged by E2 are expected to drive a total of $2.7 billion in private investment. They range in size from an $8.4 million shipyard expansion planned by the U.S. firm Loyd Shipyard to serve the offshore wind industry in Virginia, to a $2 billion electric vehicle battery factory announced by the Chinese company Gotion in Illinois.

Beyond the private sector

In addition to spurring private-sector investment, the clean energy provisions in the IRA unlock the benefits of tax credits for tax-exempt entities, including the nation’s sprawling, and influential, network of rural electric cooperatives.

The National Association of Electric Cooperatives takes credit for helping to shape the Department of Agriculture’s New ERA (Empowering Rural America) program within the IRA. The program covers a wide range of proposals including carbon capture, renewable energy, energy storage, and nuclear energy as well as generation and transmission efficiency improvements.

“Electric cooperatives flooded the U.S. Department of Agriculture with interest in a new $9.7 billion clean energy program, submitting proposals for hundreds of projects that would require at least twice that amount and launch $93 billion in new investment across rural America,” NRECA announced on September 23.

New review reveals untapped potential around energy efficiency

While high-dollar investments and new manufacturing jobs are key parts of the IRA, the provisions that enable ordinary businesses to partake in the low-carbon economy are equally important.

On Friday, the U.S. Treasury Department released a review of tax provisions in the IRA that help ease the financial path for households and small businesses to invest in energy-efficiency upgrades.

For commercial properties, the IRA expands the existing Energy-Efficient Commercial Buildings Deduction to directly reward energy-efficiency improvements. Under the new rules, a property owner’s deductions will increase in coordination with the cost savings resulting from their energy-efficiency investments.

The critical importance of energy efficiency

It is difficult to overstate the importance of energy-efficiency improvements in buildings. Energy efficiency has been called the low-hanging fruit of climate action because the technology is accessible and relatively inexpensive, and the timeline for implementation is relatively short. 

“Energy efficiency is one of the easiest and most cost-effective ways to combat climate change, reduce energy costs for consumers, and improve the competitiveness of U.S. businesses,” the U.S. Department of Energy's website reads. 

According to the Energy Department, commercial buildings consume 35 percent of electricity generated in the U.S. and produce 16 percent of all U.S. carbon dioxide emissions.

“Reducing energy use in commercial buildings would have tremendous positive impact in our environment and energy security, and would save money that can be used to help grow U.S. businesses,” according to the department. “In addition, energy efficiency in commercial buildings creates good, skilled and needed jobs in construction and technology, such as engineers, commissioning agents, energy managers, and building operators.

The bottom-line benefits of energy-efficiency upgrades

The Energy Department notes that an average of 30 percent of the energy used in commercial buildings goes to waste. On the bright side, that means the average building stands to gain considerable bottom-line benefits by improving their energy profile. 

The new IRA provisions for commercial efficiency upgrades provide additional support for the Energy Department’s Better Buildings initiative. Launched during the Barack Obama administration in 2011, Better Buildings is a major public-private program that incentivizes building efficiency improvements across all sectors, including government, utilities, Tribal entities and other agencies.

Partnering in the program are almost a third of Fortune 100 companies and almost 40 percent of the top 50 U.S. employers. The program also encompasses about 14 percent of the nation’s manufacturing energy footprint and 13 percent of total commercial building space.

The Energy Department issued a progress report on the program on Monday. The 900 program participants have collectively saved more than $18.5 billion in energy costs since 2011. The upgrades they implemented reduced carbon emissions by almost 190 million metric tons, equivalent to the annual emissions of 24 million homes.

Who’s afraid of the ESG?

As a whole, the IRA provides strong support for the ESG (environment, social and governance) principles that have become mainstream guidelines for responsible businesses and investors. The law includes provisions for social equity and environmental justice along with bottom-line benefits.    

Public officials in Republican-dominated states continue to rail against ESG principles and something called “woke capitalism.” However, so far their efforts have met with mixed, if any, success. Surveys indicate that asset managers continue to tune out the anti-ESG rhetoric, though some may parse their words more carefully when discussing ESG.

After all, money talks, and the IRA has plenty to say.