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How the Inflation Reduction Act (IRA) Will Revolutionize Green Energy Technology

On August 16th, 2022, the Inflation Reduction Act (IRA) was signed by President Joe Biden to celebrate the most significant climate change act in U.S. history. $369 billion will be spent on the climate/energy sector to reverse climate change and reduce greenhouse gas (GHG) emissions.

By 2030, the Energy Innovation Policy and Technology LLC modelling determined that this Inflation Reduction Act is expected to cut U.S. greenhouse gas emissions by 43% below their prehistoric 2005 levels. This will strengthen the United States economy by creating 1.3 million new jobs while reducing air pollution and saving around 4,500 lives annually from cleaner air by 2030.

Graph retrieved from Energy Innovations. Emissions reductions under provisions in the Inflation Reduction Act. Users are free to copy, distribute, transform, and build upon the material under the CC BY License as long as they credit Energy Innovation for the original.

Here are the Three Biggest Subsectors Being Affected:

1) Electric Vehicles

The transportation sector is the leading source of Green House Gas emissions, and the fastest way to reverse this trend is using electric vehicles (EVs). Now with the IRA, significant tax incentives exist for manufacturing electric vehicles. The tax incentives are $7,500 per vehicle at the point of purchase for customers to make them more affordable and apply if the manufacturer meets two requirements for the electric vehicle's battery. The first requirement is that minerals used in the battery are extr\

acted, processed, or recycled in North America or countries with free trade agreements with the United States. The second part of being eligible is that a certain percentage of the EV battery's components must be assembled or manufactured in North America. The percentage of these criteria's will increase gradually throughout the upcoming years.

To meet these goals, the IRA also provides $2 billion in grants for companies to revamp their existing manufacturing facilities to meet the listed goals above. These provisions will boost the long-term electric vehicle market and provide cost savings to EV users as they are cheaper to own than their gas counterparts. These tax incentives could make electric vehicles more affordable for lower and middle-income households. In addition, a new 30% tax benefit will also apply to commercial electric vehicles and fleets to help reduce the GHG emissions for the 8 million commercial vehicles and trucks used for fleets in the United States.

2) Hydrogen

Currently, 98% of hydrogen is being produced by fossil fuels. This act will incentivize companies to synthesize cleaner hydrogen and allow businesses to substitute fossil fuels with clean hydrogen in the transportation, aviation, and shipping sectors. Hydrogen is the most efficient fuel as it has the highest energy per mass compared to any other fuel. It releases zero carbon emissions when burned or turned into electricity through a fuel cell. Many advocates believe hydrogen will be crucial to decarbonization.

Hydrogen is essential to reaching the Paris Climate Agreement goals of achieving net zero emissions and limiting global warming to a 1.5 degrees Celsius increase. The Hydrogen Council at McKinsey & Company reports that hydrogen can abate 80 gigatons (GT) of carbon dioxide by 2050, which is 20% of the total abatement needed to reach net zero emissions. To put this into perspective, 80 gigatons is equivalent to powering over 17 billion gasoline vehicles driven for one year or equivalent to the energy used by over 10 billion homes for one year. By 2050, they also estimate renewables will power 60-80% of hydrogen production.

The IRA provides tax credits depending on hydrogen production sustainability. If the hydrogen is produced without releasing any carbon emissions, the tax credit is maxed at $3 per kilogram of hydrogen and scales down from there depending on total production emissions. Under this scheme, businesses will receive a tax credit if production is cleaner than current production techniques. Hydrogen being made with electrolysis through wind and solar power currently costs between $3-$7 per kilogram, so this tax credit is a massive incentive for businesses to produce clean hydrogen. After the bill is passed, hydrogen produced using renewable energy will become much more competitive with traditional fossil-fuel-produced hydrogen.

In addition, the U.S. Department of Energy has one of its goals, named the Energy Earthshots Initiatives, to reduce clean hydrogen costs to $1 per kilogram in the next decade. This will be a significant opportunity as hydrogen will become one of the cheapest energy sources while still being the highest energy per mass.

3) Electricity and Solar

With a focus on helping low-income consumers, the IRA is providing $9 billion towards home energy rebate programs. This will help people electrify their home appliances and make them more energy efficient. To increase energy efficiency in homes, the IRA is also providing 10 years of consumer tax credits for rooftop solar, heat pumps, electric HVAC and water heaters to become more affordable.

There is also additional funding for production tax credits (PTC) to help U.S. manufacturers produce solar panels, batteries, wind turbines and process key minerals. In addition, energy storage technologies can qualify for investment tax credits (ITC) of 30%. The tax credits will accelerate production to realign with their goal of meeting the Paris Climate change act of reducing emissions by 45% by 2030.

U.S. utility-scale wind and solar deployment and cost trends. Users are free to copy, distribute, transform, and build upon the material under the CC BY License as long as they credit Energy Innovation for the original creation and indicate if changes were made. Energy Innovation, using data from Lawrence Berkley National Laboratory

Overall, the IRA’s tax credit framework will incentivize businesses and consumers to use clean, renewable energy and will open massive opportunities to improve the world. The change to clean hydrogen energy will provide a new, efficient and affordable renewable energy source. At the same time, the tax incentives for electric vehicles and solar technologies will allow low to medium-income families to afford these renewable energy sources.

Graphic by Megan McGrew/PBS NewsHour

How Can RE Royalties Help? RE Royalties is committed to providing unique financing solutions to companies looking to develop renewable energy systems. As a result, we allow our clients the opportunity to grow their business while reducing greenhouse gas emissions, without worrying about financial restrictions. We believe it is vital to invest in sustainable infrastructure to take action on climate change, create a net-zero emissions future, and create energy security for citizens. Likewise, we support operators who are looking for solutions to fight climate change and meet future energy reliability needs in a more sustainable way. If your organization is ready to take a step forward in the fight against climate change, RE Royalties is ready to help you meet your financing needs. Contact us here.

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