Inflation Reduction Act Two Years Later: Building Clean Electricity Faster than Ever

This is the fourth article in a series analyzing the effects of the Inflation Reduction Act after two years. First summarizes its total impact, second details historic industry investment, third track a pure production boom.

In August 2022, when the Inflation Reduction Act went into effect, it became the most important climate investment the United States has ever made, making long-term transformational investments in clean energy deployment, manufacturing, electric vehicles and buildings, and targeted investments to support communities that are disproportionately impacted by our energy system.

The U.S. electricity sector is a cornerstone of the IRA, accounting for 30% to 44% of the economy-wide emissions reductions expected under the Act. Now, two years after the IRA passed, there are signs of progress.

Before the IRA passed, clean electricity incentives became caught up in a cycle of short-term extensions and expirations, creating enormous uncertainty in the clean energy industry. The IRA has invested in the long-term economic health of the clean energy industry, providing utilities, developers and investors with a decade of certainty, cementing that clean energy is a better solution for electricity consumers, shareholders and the planet.

The IRA owes its name to the era of rising prices in which it entered. Global fossil fuel price volatility and supply chain constraints have driven inflation and interest rates. Because clean energy costs represent largely upfront capital expenditures, the industry was in a period of moderate growth when the bill was passed.

Key policies included expanding and expanding clean electricity tax credits, providing up to 60% off clean energy costs for ten years, creating production tax credits that will bring clean energy production to the U.S., and billions of dollars in grant and loan programs to provide upfront financing for projects that will save money in the long term.

A new era of energy

The effects of the IRA are only just beginning to be seen in clean energy implementation. While solar, wind and energy storage installations remained relatively sluggish in the first half of 2023, 2023 ended with a new record of over 35 gigawatts of new solar and wind installed capacity, with a 91% increase in the first half of 2024 . over installations in the first half of 2023 at the level of 19 GW. Not only were installations higher than in 2023, but they were 10 GW above the average of the previous five years. The U.S. Energy Information Administration expects a total of 59 GW of wind, solar and energy storage facilities to be connected to the grid in 2024. The development of renewable energy installations is only expected to increase, and planned projects submitted to the EIA will overwhelmingly involve wind, solar, and battery power in the coming years.

Going into 2021, utility plans are also becoming more optimistic about adding new clean energy. An RMI analysis of 121 utilities representing 48% of U.S. electricity demand found that utilities now plan to add 34% more wind and solar power than in August 2022. Unfortunately, plans to add gas have also increased as utilities utilities are responding to growing electricity demand while working to modernize planning assumptions. However, utilities don’t have to rush to purchase gas because good planning and procurement practices can help utilities meet growing demand using cleaner, cheaper resources.

The IRA has expanded support for clean electricity across the sector, but some of the most significant changes have been among publicly owned and not-for-profit electricity providers. First, tax credits that were previously unavailable due to the lack of tax liability were converted into direct remuneration, so that non-profit entities could benefit directly from them.

Rural energy cooperatives in particular will receive significant direct funding. Rural energy cooperatives provide electricity to 42 million people across 56% of the country. They serve a disproportionate share of the low-income population, but lag behind the rest of the country in transitioning away from coal-fired power – 30% of their electricity will come from coal in 2022, compared with 19% nationwide. But the IRA has breathed new life into these nonprofits by committing $9.7 billion to help cooperatives cut emissions and install clean energy projects.

The program’s first round of funding was announced in September, awarding $7.3 billion to 16 utilities in 23 states, bringing in an additional $29 billion in private investment. These funds are expected to support 10 GW of new clean energy projects and reduce rural energy cooperatives’ greenhouse gas emissions by 43.6 million tons per year, or about 30% of the cooperative’s current annual emissions. According to several winners, the projects are also expected to significantly reduce electricity rates compared to continuing to rely on fossil energy.

Clean electricity for everyone

The IRA didn’t stop at supporting new clean energy investments – it sought to create a positive feedback loop between the clean energy transition and the health of American manufacturing through a new set of tax credits that can be obtained by producing components that go into clean energy projects.

Since the bill’s passage, announcements have emerged for manufacturing plants with more than $112 billion in investments in batteries, electric vehicles, solar and wind power. Batteries constitute by far the largest share in the investment – 68%, divided between batteries for the power grid and for electric vehicles, which use a slightly different chemical composition. However, solar power production boasts quite a share, with announcements worth $14 billion, which will continue to reduce supply chain delays that have persisted since the pandemic.

The strength of an IRA does not lie solely in its direct investments. The bill’s clean energy provisions also enabled states to take action, with four states implementing 100% clean energy goals for the first time in 2023. Minnesota and Michigan have passed legislation requiring 100% of electricity sales by 2040. clean sources, and New Jersey’s governor signed an executive order requiring 100% clean electricity by 2035. Delaware also passed clean energy legislation requiring 100% clean electricity by 2050.

While interest from states, utilities and investors in clean energy has increased, many bottlenecks remain, namely interconnection queues or projects waiting to connect to the grid. Research by Lawrence Berkeley National Lab found that at the end of 2022, there were over 2,000 GW of clean projects waiting to be connected, and by the end of 2023, this number had skyrocketed to over 2,500 GW. The total energy capacity of the United States is approximately 1,400 GW, which means that many more projects are waiting to be connected to the grid than are currently connected.

Federal Energy Regulatory Commission reforms aim to shorten wait times and reduce costs, but the regional approach has shown that much more can be done by trying to connect clean energy projects as quickly as possible. Texas, for example, uses an interconnection approach that avoids lengthy studies and costly transmission grid upgrades every time a project wants to connect.

This shortened Texas’ project combination timeline by 2.5 or more years compared to other regions and shows why the state is projected to add 35% of all solar projects and 44% of all battery projects this year, even though it will only produce 13% of the country’s electricity.

Further improvements in transmission planning, bolstered by recent FERC actions, are expected to prepare the grid to handle more clean energy at a faster pace, but short-term actions such as upgrading existing infrastructure to transmit more electricity through already existing transmission paths could help meeting our current needs.

The future of clean energy

The IRA investment approach will not be enough to reduce the electricity sector’s emissions to zero – it was never expected. However, this created a tailwind, pushing the industry forward and creating momentum well into the future. Now it’s time to focus on the next piece of the puzzle and make sure that momentum translates into pure power.