The Most-Cited Number About the Inflation Reduction Act Is Probably Wrong, and That Could Be a Good Thing

Reporting about the Inflation Reduction Act often includes the number $391 billion, which is based on the Congressional Budget Office’s estimate of the spending from the law’s programs related to climate and clean energy.

The number, which covers spending from 2022 to 2031, is a good shorthand for conveying that this is the largest climate clean energy law in the country’s history.

But it’s just an estimate, and a fuzzy one at that.

The main reason that we have only a vague idea of the actual spending is that the law’s major tax incentives have no caps. That means if developers, states, cities and tribal governments build enough projects that qualify, the credits could be much more than what the CBO expects.

But the estimates could also end up being overly optimistic about how much the credits get utilized. If that happens, then the spending could be less than $391 billion. (A previous CBO estimate had $369 billion, which also has been quoted a lot, including by me.)

My point is that the outcome depends on what happens in the near future with implementation, and dealing with obstacles to development that are unrelated to the law.

Credit Suisse published a report in November that noted the uncapped nature of the major tax credits. The bank said it expects the actual cost of the climate and clean energy provisions to be about $800 billion.

Goldman Sachs had an even larger number—$1.2 trillion—last month in a report about the climate and clean energy parts of the law.

That last one got a lot of attention, including coverage by Fox Business and the Wall Street Journal editorial page, some of it critical of the CBO and Congressional Democrats.

Some of the reactions made sense. Of course, we want Congress to be accurate in estimating the costs of legislation. But in this case I can understand the difficulty of forecasting a law with this many moving parts.

And some of the criticism is ridiculous.

“The Inflation Reduction Act may go down as one of the greatest confidence tricks on taxpayers in history,” said a Wall Street Journal editorial.

I was thinking about the size and scope of the IRA this week following a conversation with Alisa Petersen and Jake Glassman of the U.S. program at RMI, the clean energy think tank and advocacy group.

RMI has put together a spreadsheet that breaks down the many provisions of the Inflation Reduction Act.

I’ve seen other attempts to summarize the law, and this might just be the best one.

“The IRA is the biggest climate bill in American history,” Petersen said. “But much of it will hinge on the extent of people actually utilizing the tax incentives in that bill.”

To do that, people need to know what’s in the bill.

“The next step,” Petersen said, “is working with states and local governments to make sure not only do they know what’s eligible for them, but they know what’s eligible for their constituents, and they are able to tell their constituents about that, and also tell them how it stacks with their local incentives to go even further than just the federal incentives.”

RMI lists dollar values for about 100 programs in the law, ranging from a high of $27 billion for the Greenhouse Gas Reduction Fund, which is competitive grants for climate and clean energy projects, to a low of $3 million for placing air quality sensors in low-income and disadvantaged communities.

Glassman said he was struck by the wide variety of the programs in the bill.

“Its provisions run the gamut, from the big and well-known energy-related (programs) to funding for forest conservation, air and water quality, community resilience, and more.”

But the spreadsheet doesn’t list dollar values for the tax credits, most of which have no caps.

These include the extension of the investment tax credit, which provides 30 percent or more of the upfront cost to build a clean energy project, and the production tax credit, which is paid over 10 years based on the amount of electricity a clean energy project generates. Developers can choose whether to seek the investment tax credit or the production tax credit, but they can’t get both.

The CBO said the clean electricity tax credits would lead to cumulative spending of $161 billion. If the actual spending ends up being much more, then those credits are likely to play a big role.

When I imagine a scenario in which total spending is less than the CBO estimate, the main reasons are factors that slow down the pace of development. Here are some of them:

• Local opposition to projects. As I’ve covered extensively, there is a growing and formidable push in rural communities to resist the development of wind, solar and other clean energy. This has helped to inspire state and local rules that make development more difficult. The onus is on clean energy companies to get better at winning support at the local level, and on elected officials to design fair rules.

• Lack of transmission lines. A ramp-up in clean energy power plants is going to need new transmission lines to deliver the electricity. It often takes a decade to plan and build transmission lines, due to the complexity of the projects and the need for regulatory reviews. Unless officials can pick up the pace, the lack of transmission lines will force a slowdown in timetables for building the power plants waiting to connect to the lines.

• Backlogs at regional grid operators. Before a wind or solar project can be built, it needs to get approval to connect to the grid, and in much of the country that process gets handled by grid operators like PJM Interconnection and MISO. Grid operators are buried in these applications, leading to long delays. It’s especially bad in PJM’s territory, which stretches from Chicago to New Jersey, where officials approved a two-year pause in new applications. PJM and its peers know they need to catch up, and we’ll see if they are up to the task.

• High costs and shortages of key materials. The country is ramping up development of clean energy resources at the same time that it’s trying to become less dependent on China for materials, including rare earth metals. The result could be that the demand for some components outstrips the supply, which would lead to a spike in prices. The Biden administration knows the importance of keeping costs low for wind, solar and battery storage, and we’ll see how effectively the administration is able to pull its policy levers to manage those costs.

Some of these factors are interrelated, and they can build on each other to counteract the stimulus provided by the IRA.

That’s the down side. But let’s close by thinking about the upside:

If the cost of the law ends up being double or triple $391 billion, that would be incredible for the energy transition because it means there was substantial development.

Other stories about the energy transition to take note of this week:

How Electrification Became a Major Tool for Fighting Climate Change: The New York Times used data from Evolved Energy Research to help visualize what the country’s energy use might look like by mid-century if the United States is able to meet the Biden administration’s climate change goals. The result is an energy system that uses much more electricity across the economy, which would be more efficient than using fossil fuels but also bring major challenges, as Nadja Popovich and Brad Plumer report. The graphics in this story help to explain one of the most complicated and important parts of the transition to clean energy.

Berkeley’s Landmark Gas Ban Overturned in Court, But Ripple Effects May Be Limited: A federal appeals court has thrown out Berkeley, California’s ban on natural gas in new construction, agreeing with plaintiffs who said the city law was in violation of federal law. But experts say the ruling is not likely to have a major effect on other cities with policies limiting gas in buildings, according to experts interviewed by Maria Gallucci of Canary Media. The main reason for the limited scope is that Berkeley’s regulations are based on the city’s authority to issue rules about health and safety, while other cities are doing rules through building codes and other parts of the law that may be more defensible if challenged in court. The court challenge shows how the electrification of the economy is going to have many speed bumps.

These 14 EVs Are the Only Ones Left that Get the Tax Credit: The Treasury Department published a list of the EVs that qualify for the new federal tax credit, as Tanya Snyder reports for Politico. It’s a disappointingly small list for many observers because of requirements in the Inflation Reduction Act about where the cars and their batteries are made. The Chevrolet Bolt, F-150 Lightning and Tesla Model 3 are among the 14 models that get the full $7,500 credit. This list will be updated and it is sure to grow over time as automakers make changes to their processes to allow more vehicles to qualify. But for now, there are many brands that are completely shut out, including Kia, Honda, Hyundai, Nissan and Volkswagen, which those companies are understandably upset about.

G7 Vows to Step Up Moves to Renewable Energy But Shies Away from Action on Coal: Officials from the Group of Seven wealthy nations agreed Sunday to accelerate the shift to renewable energy but set no timetable for phasing out coal-fired power plants, following two days of talks in Japan, as Elaine Kurtenbach reports for the Associated Press. This dynamic of talking about progress while shying away from the difficult decisions that would lead to progress, is all-too-familiar when this group gets together.

Renewable Energy Contract Prices Continue to Rise Despite Inflation Reduction Act Relief: The average cost of North American power purchase agreements, or PPAs, for wind and solar power rose 6.6 percent in the first quarter compared to the prior quarter, according to a report from LevelTen Energy. Prices are rising largely because of high demand for the contracts, as Emma Penrod reports for Utility Dive. Prices are higher even with the Inflation Reduction Act’s expansion and extension of tax credits, a sign of just how strong demand for wind and solar has become for the companies and local governments that are signing these contracts.

A Huge New Clean Energy Transmission Line Gets the Green Light: The 732-mile TransWest Express transmission line has received final approval from the Bureau of Land Management, one of the most important steps toward building a project that has been in the works for 18 years, as Gabriela Aoun Angueira reports for Grist. The $3 billion project will deliver wind energy from Wyoming to consumers Arizona, Nevada and California. It would be easy to lament that this project took so long to approve, but it was unusually large and federal officials had a lot to review. Now, we just need to build a few dozen projects like this one, and do it much more quickly.

Washington’s Biggest Clean Energy Lobbying Group Pushes Natural Gas-Friendly Policy: On some major policy debates, the American Clean Power Association has aligned itself with companies that want to preserve the market for natural gas, as my colleague Marianne Lavelle reports. The story is a good primer on some of the friction in the clean energy business community about how best to build support for a transition to clean energy.

Inside Clean Energy is ICN’s weekly bulletin of news and analysis about the energy transition. Send news tips and questions to [email protected].