Last week President Biden signed the Inflation Reduction Act into law. A significant part of the legislation was focused on decarbonizing energy and transportation. We will discuss a few focused areas of the legislation that should benefit our Carbon Neutral 2050 Strategy.
Hydrogen has always been a major focus of our firm’s investment in the energy transition, as it can both provide a solution for energy storage and help decarbonize heavy industry. These same reasons are why clean hydrogen incentives were a major part of this bill. The bill created a new production tax credit for clean hydrogen, worth $3 a kg if all the conditions are met. Firms can also elect to get a direct payment of $3 a kg instead of the tax credit during the next five years. This is a huge change in the production of clean hydrogen. For example, the cheapest current green hydrogen project can produce clean hydrogen for about $3.75 a kg. If this project qualifies for the tax credit that would reduce the cost of hydrogen to $0.75 a kg. Researchers at the DOE and other organizations postulate that the price point of $1 kg is the key to help decarbonize heavy industry and heavy trucking. The reason for that is that a kg of hydrogen is equal in energy to a gallon of diesel. For comparison, diesel before distribution and taxes is currently around $3.60 per gallon, so at $0.75 a kg of hydrogen is a much cheaper alternative to diesel. Hydrogen below $1 a kg was not forecasted to be achieved until after 2040 according to most estimates; so this production tax incentive is a game changer for hydrogen development.
The Inflation Reduction Act is also a major boon for energy storage. Previously, the path many energy storage projects needed to take to obtain tax credits was an arduous one. Previously written laws only allowed tax credits for energy storage projects from renewable sources. Therefore, most if not all energy storage projects needed to be combined with renewable energy projects to get the tax credit. This created a major limitation for energy storage investment. The Inflation Reduction Act addressed that issue. Now, stand-alone energy storage projects can receive the 30% tax credit, which will allow for battery storage systems to take advantage of power fluctuations from all forms of renewables that are located on the same grid. With the cost of energy storage already having dropped substantially over the past decade, this extra incentive will likely substantially increase demand for energy storage projects. For lithium battery-based energy storage, the new tax credit will likely bring the capital cost of storage below $100 a kwh, which is seen as a key price point for grid sized investments. These tax credits will now make storing intermittent wind and solar power more economic.
The Inflation Reduction Act’s impact on renewables comes mainly from policy clarity. Wind and solar have seen a challenging tax environment for the past few years, mostly because the major tax credits for those investments were supposed to be stepped down. This, combined with the fact that Congress had continually passed single year extensions of previous level tax credits, created unnecessary uncertainty around renewable investments. The Inflation Reduction Act sets a clear 30% tax credit level and sets it at that level for the next few years. The bill also expanded and clarified other types of renewable energy sources that would qualify besides wind and solar power, including: biomass, geothermal, landfill gas and marine. This amount of clarity will help with longer term planning for major developers of renewable energy.
Carbon capture, an often forgotten and unloved part of decarbonization, is benefitting from the newly enacted law. Carbon capture already had existing tax credits of up to $50 per ton of CO2 captured through the 45Q tax credit. Yet, at that level, only the purest stream of CO2 would be economic to capture and sequester, limiting carbon capture projects to very specific activities. Ethanol plants, located in areas of prime geological formation for sequestration, often have very pure CO2 streams in flue gas and were therefore the main utilizers of carbon capture projects. The Inflation Reduction Act increased the maximum credit to $85 per ton of CO2 captured. This now makes CO2 from many sources economic to capture. We will likely start to see many more ethanol plants, natural gas plants, refineries, chemical plants and other large emitting industrial facilities start to add carbon capture equipment now that the credit is $85 a ton. Areas with geologic formations useful for sequestration will also be the first to benefit; we will likely see these facilities built in Texas and the eastern area of the Midwest, as they have beneficial geology for carbon capture.
A Rapidly Changing Energy Landscape
The Inflation Reduction Act has now set the US on an attainable path to carbon neutrality by 2050. The incentives discussed above, combined with similar incentives for technologies around the world, will likely allow the world to enter a clear stage of decarbonization within the next few years. These incentives represent game changers in terms of the economics of projects involving decarbonization. The question is no longer how quickly this technology scales but how quickly can the manufacturing capacity and supply chains keep up with the demand. We are now entering the age of decarbonization.