One year on from the Inflation Reduction Act – who are the winners and losers?

The Inflation Reduction Act (IRA) marked the beginning of a new era in the US's decarbonisation efforts. The Act includes hundreds of billions of dollars in long-term incentives and tax credits. It represents the largest action taken so far to decrease greenhouse gas (GHG) emissions in the US and is expected to expedite progress towards mitigating climate change.

A year after it became law, we examine what, if any, the impact has been.

Where have we seen a positive impact?

Electric vehicles

US electric vehicle (EV) sales are gathering pace. Sales of EVs were up 54% in Q1 2023 compared to the same period in 2022 and now make up one in every 12 cars sold The sales are being driven by a combination of price cuts by automakers, IRA tax credits worth up to $7,500 for consumers and greater manufacturing capacities.

The initial cuts were prompted by IRA guidance that only vehicles under $55k would qualify for consumer credits. Tesla delivered a record 466,000 cars between April and June after cutting prices in the US in January by up to $13,000 across models.

Tesla, Hyundai, Kia, Ford, GM and BMW are just some of the high-profile automakers investing several billion dollars into their US EV manufacturing capacity in order to remain eligible for the consumer credits as the qualifying criteria becomes increasingly stringent over the next decade.

Batteries

Since the IRA was passed, the US battery production capacity pipeline has experienced growth rates higher than Europe and even China. The incentives from the IRA have been so strong that corporates have been reallocating capital spend from Europe to the US; both Volkswagen and Northvolt put their European plans on hold this year to pursue US alternatives.

Solar (pt. 1)

In solar, companies with US manufacturing facilities have seen a huge uptick in demand given the domestic content requirements in the IRA.

Most notable is First Solar, which is one of the solar module manufacturers in the US. Using a First Solar module in a utility-scale solar farm allows the developer instant access to the lucrative investment tax credits and production tax credits from the IRA. This has proven to be such a powerful driver of demand that First Solar is now fully sold out to 2026 and is even signing contracts for 2026-2030.

Which activities are yet to be impacted?

Solar (pt. 2)

While First Solar has benefited from the domestic content rules, renewable project developers without access to First Solar modules have found the guidance to be challenging. The calculations for the credit require full transparency from suppliers on what percentage of their product comes from the US.

What this means practically is that, if you were a solar module provider for example, you would have to provide the developer with where you got the materials to make your product from, what the individual costs were and therefore what mark-up you are charging the developer – clearly very sensitive information.

Furthermore, some component manufacturers see the domestic content guidance as unclear and remain unsure around whether a subcomponent must be manufactured in the US or can be sourced from abroad.

Finally, more than 50GW of module capacity has been announced in the US. This is an exciting development, spurred by the IRA, but, to meet the domestic content requirements, cells must also be US-made. Photovoltaic cells are the components that make up a solar panel or module. Cell manufacturing, currently dominated by China, would be a brand-new industry in the US and ramping up to full production will take anywhere between 24-36 months with prospective operating costs unknown.

Grey hydrogen is generated from natural gas, or methane, through a process called “steam reforming”. Blue hydrogen means the carbon generated from steam reforming is captured and stored through industrial carbon capture and storage. Green hydrogen is produced by using clean energy, such as solar or wind power, to split water into two hydrogen atoms and one oxygen atom through a process called electrolysis.

The IRA has introduced extremely generous subsidies for hydrogen, particularly for green hydrogen, which could result in a production cost of less than $1 per kilogramme by the middle of the decade. Despite these subsidies, progress on larger scale projects has been slow due to high energy prices, inflated labour costs and production issues, as well as the general scale and complexity of novel hydrogen production projects.

Stepping back, compared to wind, solar, and electric vehicles (EVs), the US hydrogen market is still in its early stages. Currently, the US hydrogen industry has less than 0.17GW of installed electrolyser capacity, a far cry from the Department of Energy and IEA’s 2030 target of approximately 45GW. Despite this slow start, we are optimistic that progress will pick up in the latter half of the decade as electrolyser technology is further developed and proven.

Carbon capture

Similar to hydrogen, first-of-a-kind tax credits for carbon capture and storage (CCS) were included in the IRA. In addition, the Environmental Protection Agency (EPA) unveiled new proposed rules that mandate emissions cuts based on the capabilities of technology such as CCS. This combination of incentive and regulation creates a "carrot and stick" approach to encourage CCS adoption.

However, the EPA must first demonstrate the feasibility of CCS as an option for their proposal to become law. This presents a challenge, as the EPA is also responsible for approving carbon wells (in which captured carbon is stored), but has only approved two wells in its entire history. The approval process for a new well takes several years due to pushback from environmental justice groups concerned about the impact of CCS projects on the surrounding environment.

How have other countries and regions responded?

No region has responded to the US with as large a package of incentives. Japan and South Korea have both refocussed national strategies to prioritise various aspects of the clean technology value chain. However, the corporates within these geographies had already responded to the US IRA with Panasonic, Toyota, Honda and LG Energy Solutions all rapidly announcing billion dollar US investment plans earlier in the year.

Europe has responded with a piecemeal “temporary crisis and transition framework”, TCTF, which forms part of its Green Deal Industrial Plan. This allows EU countries to provide faster state aid to companies making items like solar panels, wind turbines, heat pumps, the electrolysers needed to produce green hydrogen and carbon capture and storage technology.

While the TCTF has helped to stem the flow to the US at the margin, businesses still prefer the simplicity of the US legislation, which offers uncapped tax incentives targeted at manufacturers. By contrast, the EU's attempts to create a convincing green industrial policy have been hindered by a patchy regulatory framework and complex processes for accessing multiple funding sources.

What does this mean for climate investors?

The IRA does not solve all problems for investors looking to invest in clean technologies. Permitting issues, inflationary pressures, supply chain issues and the queue for a grid interconnection all remain persistent issues. Furthermore, while the subsidy approach is very effective, coupling it with regulation can often accelerate progress further. For example,  the EU carbon pricing mechanism helped to shift the energy mix towards renewables.

However, the IRA does represent an unprecedented, long term, stable policy and we expect renewable developers to have increased confidence in the US to support the build-out of solar and wind generation capacity. Furthermore, the credits within the Act provide financial support that will vastly improve the profitability of some of the more nascent clean technologies companies over the coming decade.

Any reference to sectors/countries/stocks/securities are for illustrative purposes only and not a recommendation to buy or sell any financial instrument/securities or adopt any investment strategy.