The U.S. recently came up with the Inflation Reduction Act, which is expected to boost domestic energy security by opening the door to more federal onshore and offshore lease sales while also promoting low-carbon and renewable energy developments. However, Norway’s energy intelligence group Rystad Energy believes that there is no respite on the horizon for energy industry costs with this bill, although, Chinese policies could save the day.
As reported by Rystad last Friday, the U.S. Inflation Reduction Act, contrary to its title, will usher in more energy service inflation in the next 18 months as the incentives offered to manufacturers struggle to keep up with the increased demand triggered by the bill. Therefore, the Norwegian firm’s research shows that there will be a positive impact on domestic energy security, and the U.S. position in the global low-carbon supply chain if the bill gets signed into law, but significant growing pains are likely in the coming years.
Furthermore, the bill will provide over $100 billion to accelerate construction start dates for low-carbon developments, including solar, wind and battery storage. Bearing this mind, Rystad believes that these measures will undoubtedly increase renewable energy installations and short-term demand for U.S. manufacturing, given the focus on domestic production and procurement. On the other hand, the energy intelligence group forecasts that the $60 billion provided for expanding manufacturing capabilities will struggle to alleviate existing inflation or even keep pace with expected growth.
Rystad Energy research shows that deflationary clouds have recently circled above the U.S. energy industry, with the cost of goods and services falling across several disciplines. In line with this, prices fell across civil, mechanical and electrical goods and services month-over-month in June 2022, with steel leading the way. The Norwegian firm claims that the extent to which this deflation will pick up speed or stall depends mainly on the economic moves by China, the U.S.’ biggest global economic adversary.
Moreover, producer inflation in China is at an almost 18-month low as manufacturing capacity increases and coincides with a global demand decrease, outlined Rystad, adding that the country’s short-term stimulus policies will significantly impact the global inflation outlook. In lieu of this, if China employs low expansionary policies, new project module construction prices will start to fall before the end of this year while high expansionary policies – which are now a viable option for policymakers due to recent domestic slowdowns caused by weakening global demand – would increase prices by an additional 10 per cent this year and only start to fall in 2023, explained the energy intelligence provider.
Matthew Fitzsimmons, senior vice president with Rystad Energy, remarked: “Cost inflation in the US energy industry has hit operators, manufacturers and suppliers hard – and the Inflation Reduction Act shows no signs of addressing that in the near term. The fate of the industry’s future inflation or deflation lies firmly in the hands of the Chinese, fittingly, as US policymakers attempt to build and strengthen a domestic supply chain and attempt to avoid such reliance in the future.”
When it comes to the U.S. onshore industry, Rystad underlined that China’s actions are unlikely to impact inflation, but they may still be exposed to additional price increases, as supply and demand balances in U.S. shale reign supreme and will continue to push project costs higher over the next year despite falling raw material prices. As an example, the Norwegian company points out that increased activity has driven spot land rig prices to double their 2016 values and planned E&P activity through next year will push average high spec rates above $33,000 per day.
Rystad highlighted that the bill incentivizes manufacturers with incentives on components necessary for clean energy projects in an attempt to stoke domestic clean energy manufacturing. According to the Norwegian energy intelligence player, these incentives will help to increase the domestic supply of critical components in both wind and solar infrastructure, encouraging developers to ramp up production and boost clean energy capacity. In addition, the bill’s wind and solar industry incentives reward manufacturers based on a facility’s overall power generation rather than the components’ quantity or size. As a result, these incentives bode well for reversing rampant price inflation of offshore wind components by incentivizing manufacturers in the US to ramp up production.
Energy bill to boost U.S. labour market
Rystad Energy’s research shows that elements of the Inflation Reduction Act are designed to boost the domestic energy labour market with wage requirements for developers to take advantage of tax credits. The company underscores that the number of U.S. oil and gas extraction employees has grown by 25 per cent in the past 18 months, returning to pre-Covid-19 pandemic levels. This has had a knock-on effect on the number of unemployed American workers actively looking for oil and gas jobs, as this number is at its lowest since 2005.
The Norwegian firm elaborated that previous wage premiums have saved the day and enticed workers to help grow domestic oil and gas production while the bill will pose new competitive challenges for oil and gas recruitment.
Moreover, to receive tax credits for clean energy projects, developers must comply with wage requirements set by the Secretary of Labor and wage rates will be determined by averages based on region and job title to ensure that workers also benefit from the legislation. In lieu of this, developers found to be underpaying workers will have to pay fines to compensate for violations or risk losing their tax benefits.
Rystad further added that these projects require apprenticeship thresholds to be met for developers to receive full tax benefits and for projects which started in 2022, 10 per cent of all labour hours spent on construction, alteration, or repairs must be performed by qualified apprentices. This percentage increases to 12.5 per cent in 2023 and 15 per cent in 2024, although, some roles, including supervisors, superintendents and administrative staff, are excluded from these rules.
Thus, in practice, the rules only apply to employees directly involved in installing or maintaining facilities. Additionally, the increase in apprentices will likely cause productivity declines for clean energy projects, says Rystad, predicting that more inexperienced workers will likely lead to more inefficiencies on job sites.
The energy intelligence group concludes that investing in a healthy labour force through these requirements will increase productivity in the long run and stabilise hourly wages for developers as workers graduate from apprenticeship programs. It will also develop the skills necessary to complete and maintain clean energy projects.