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US climate bill is a ‘generational opportunity’, energy execs say

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One thing to start:

Welcome back to Energy Source.

After a tortuous few months, the US Congress is finally about to pass a massive budget bill with unprecedented spending on climate and clean energy.

Hot takes on whether it does enough to curb emissions are two-a-penny. (Yes and also no, depending on who you speak to).

Today’s newsletter homes in on what it means for renewables developers in the US, who are giddy with excitement over a haul of long-term tax credits the bill will send their way — providing a long-term horizon that is expected to “supercharge” investment. We spoke to some executives.

And as soaring energy costs drive a cost of living crisis across the world, in Data Drill, Amanda charts the effect on British households.

Thanks for reading.

Myles

New tax credits will transform America’s clean energy landscape

The US Congress will this week (assuming no shock upsets) pass the most significant climate bill in the country’s history. A boom in clean energy projects should follow. 

That is a big deal. And the superlatives used to describe the legislation’s impact on developers of wind, solar and battery projects have not been lacking. 

“A generational opportunity for clean energy after years of uncertainty and delay,” said Heather Zichal, chief executive of the American Clean Power Association, a trade group.

“The most sweeping legislation to pass the Senate to address climate change, both in terms of emission reductions and improving the nation’s energy infrastructure and resilience,” said Business Council for Sustainable Energy president Lisa Jacobson.

The Inflation Reduction Act, which passed the Senate over the weekend, is indeed set to be historic. It is likely to clear the House of Representatives by the end of the week and then head to the Oval Office for President Joe Biden to sign off.

The legislation will unlock about $370bn for climate and clean energy investment, and analysts believe it should help slash emissions to about 40 per cent of 2005 levels by the end of the decade — bringing Biden’s target of a 50 per cent reduction back within reach. 

There is something for everyone in the bill — including oil and gas interests — but today we zoom in on why it is a big deal for the clean energy sector. The answer, in short, is sweeping tax credits, that Zichal says will “supercharge” investment.

In essence, America plans to tackle the existential climate crisis by tweaking its tax code. While sticks may have failed to gain traction as a US climate policy tool — a carbon tax never got off the ground — carrots for clean energy developers — in the form of tax credits — are the centrepiece of this bill.

Yet tax credits for wind and solar developments are not new. A stuttering patchwork of investment and production tax credits has helped propel the US renewable industry to where it is today. 

However, they have been short term. Congress has repeatedly extended solar and wind credits over the past two decades — often at the eleventh hour or even after they had already expired. That has made it exceedingly difficult to plan ahead and in many cases attract financing, developers said. 

“Renewable projects are highly levered and need to be financed,” Andrés Gluski, chief executive of AES, a power generation and utility company, told ES. “When you go to the banks, they say: ‘Well, let’s look at your cash flow.’ And you don’t know if the tax credit runs out in two years.”

The production tax credit that existed for wind has expired and the investment tax credit for solar is in the process of being phased out.

The new bill reinstates and expands production and investment tax credits for wind, solar and energy storage — with a 10-year time horizon, that allows for long-term planning and should avoid some of the boom and bust cycles that have dogged the industry for years. 

A lack of certainty over policy, among other factors, was blamed for a slump in deployment in recent months: there was a 55 per cent slide in project installations in the second quarter of this year, compared with the same period last year.

“It’s an extremely attractive proposition for us because it gives us — and more importantly our financiers — a long-term horizon to look at for the first time,” Jereme Kent, chief executive of wind developer One Energy, told ES.

The bill also makes the credits transferable, so that developers can monetise and transfer them more simply.

“We now know we have 10 years of work to do and — most importantly — all of a sudden the complexity of tax equity . . . is gone. We can just sell tax credits,” said Kent.

There are other elements of the bill that will ruffle feathers among developers: to get the full benefits of the tax credits companies will have to comply with certain conditions on wages, apprenticeships and buying American.

But for the first time, industry bosses say they will have both stability and predictability as they make long-term development plans. That will allow for a take-off in developments.

“Business doesn’t like uncertainty,” said Gluski at AES. “This can be a game changer.”

(Myles McCormick)

Data Drill

UK households are facing a cost of living crisis as food and energy prices soar upwards at a record pace. 

Roughly 90 per cent of the country’s households saw their cost of living increase in the past month, according to survey data released on Friday by the Office for National Statistics. Rising gas, electricity and fuel costs were among the most common reasons for cost of living increases.

According to the UK’s June consumer price index, prices for electricity and gas were up 53 per cent and 95 per cent, respectively, year-over-year. Petrol prices were up 42 per cent. 

More than half of survey respondents cited gas and electricity prices as their top concern when it comes to inflation. Prices for gas and electricity began rising last year due to unexpected demand and supply shortages and skyrocketed after Russia’s invasion of Ukraine.

A majority of households reported spending less on non-essentials and using less gas or electricity at home to meet rising living costs. Savings and credit are taking a hit too, with one in four households reporting using their savings to meet rising costs and 16 per cent of households reporting using more credit.

Last week, UK energy regulator Ofgem confirmed plans to pass on rising gas and electricity prices at a faster rate to consumers, with analysts predicting household bills averaging £4,210 a year by January. 

Don’t Pay UK, an activist group, is calling on households to refuse to pay their energy bills if Ofgem continues with a rate rise on October 1. According to their website, the group has received more than 90,000 signatures. (Amanda Chu)

Bar chart of Respondents who saw living cost increases were asked what changes they've made to their spending showing UK households are spending less on non-essentials and turning to savings and credit to meet living cost increases

Power Points

  • Kyrsten Sinema received over half a million dollars in campaign donations from private equity executives, an FT analysis found. The Democratic senator refused to support past iterations of Build Back Better bill, now renamed the Inflation Reduction Act.

  • A severe drought is sweeping across Europe creating water shortages and conditions for wildfires. 

  • Carmakers face a fierce battle to secure enough lithium by 2030 to power the electric vehicle revolution. 

  • Temperatures surpassed 120 degrees Fahrenheit in Iraq, forcing the government to impose power outages across the country to relieve the grid. (Washington Post)

Energy Source is a twice-weekly energy newsletter from the Financial Times. It is written and edited by Derek Brower, Myles McCormick, Justin Jacobs, Amanda Chu and Emily Goldberg.

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