(OEM) While energy and climate crises take their toll on countries worldwide, occasionally pulling them in different directions, the energy transition takes root, steadily gaining ground in pursuit of the low-carbon and green shift. As it is estimated that investments amounting to a whopping $10 trillion are needed for the U.S. to reach its net-zero by 2050 goal, Wood Mackenzie, an energy intelligence group, looks into four technology pillars that would enable the U.S. to reap the benefits of the provisions within the Inflation Reduction Act (IRA).
Wood Mackenzie outlined within its recent report that the Inflation Reduction Act – seen as an energy transition policy game-changer – had transformed the U.S. from “laggard to leader” in energy transition policy, however, “greater clarity” in some areas would be “essential to prospective investors.” As the initial furore has died down the next phase, entailing the leveraging of the IRA to realise President Biden’s net-zero vision “must ramp up,” says the report while highlighting that this is “a mammoth undertaking.”
The company’s analysis of a net-zero outcome for the U.S. requires $10 trillion in investment through 2050 along with additional guidance from the Biden administration to see the IRA truly kick-start that investment, thus, Wood Mackenzie’s David Brown – Director, Energy Transition Service – explores the key steps that could optimize the huge potential of this landmark policy change, pointing out where greater clarity is needed to create optimal conditions for investors.
In a bid to maximise the benefits of the Inflation Reduction Act, Brown points out four things to watch, including carbon capture, utilisation and storage (CCUS) permitting processes, low-carbon hydrogen exports’ eligibility for 45v tax credits, the role of renewable energy credits (RECs) and time-matching for green hydrogen, and battery raw materials.
Why is CCUS permitting important?
Wood Mackenzie sees permitting as a key issue that will influence CCUS development in the U.S. in 2023, since CCUS FIDs have not been secured even though the IRA has improved incentives. This uncertainty associated with permitting rests with whether or not the federal Environmental Protection Agency (EPA) process to license Class VI wells (for CO2 sequestration) will accelerate, outlines the energy intelligence group. Thus, this is influenced by how fast the federal EPA will grant primacy over Class VI wells to individual states.
Based on the report, primacy is “extremely important” to CCUS developers, as it would grant states the ability to permit CCUS storage wells at a faster speed than the federal government. Wood Mackenzie illustrates this by explaining that Texas and Louisiana are targeting one- to two-year approvals for Class VI storage wells, faster than the last Class VI well, which was permitted over a six-year process.
“The time to act is now: our base case forecast expects that CCUS capacity in the U.S. expands from current operational capacity of around 25 Mt to around 85 Mt by 2030. Over that timeline, we expect carbon capture capacity to target wider applications of dedicated sequestration sourced from a variety of industries including ethanol, LNG, and blue hydrogen,” added Brown.
What’s up with low-carbon hydrogen exports?
Wood Mackenzie’s report further specifies that the IRA reintroduces a production tax credit (PTC) for clean hydrogen, known as the 45V. The company ponders whether low-carbon hydrogen export projects are eligible for the 45V incentive, emphasising that the IRA does not say yes or no in this case. Bearing this in mind, the energy intelligence provider believes that this issue should be clarified for low-carbon hydrogen export projects to advance.
Furthermore, Brown underscores that the $3/kg 45V incentive could help make the U.S. a leader in low-carbon hydrogen exports. In line with this, low-carbon hydrogen feedstock would have some of the lowest cost in the world due to production and investment tax credits for wind and solar, natural gas prices that peak at $5.50/mmbtu in 2050, and expanded 45Q tax credits for CCUS.
How relevant are Renewable Energy Credits (RECs) and time-matching rules?
Wood Mackenzie underlines that one of the largest areas of uncertainty within the IRA is how green hydrogen producers will certify that their power supply is zero emissions. Brown claims that the type of power used to produce hydrogen will have “a large influence on lifecycle emissions,” which is “a key component” of calculating the level of policy support.
As the power output in the U.S. is not 100 per cent carbon-free, around 60 per cent is from fossil fuel generation since the end of 2022. With this at the forefront, Wood Mackenzie highlights that the IRS needs to clarify whether or not RECs can be used towards qualifying for the 45V and establish time-matching standards for power procurement.
Do automakers seek looser eligibility requirements?
Moreover, Wood Mackenzie is adamant that the IRA is “a strong tailwind for decarbonised transport,” but fulfilling some of the incentive requirements may be difficult. In light of this, automakers are currently seeking clarification from the IRS on a range of issues while a key area of focus is battery raw material supply chains.
The report shows that the IRA established a $7,500 incentive for battery electric vehicle (BEV) sales, up to a vehicle value of $55,000, however, 50 per cent of this incentive requires a proportion of battery components to be manufactured or assembled in North America.
On the other hand, Wood Mackenzie elaborates that China has more than an 80 per cent market share for battery components, including cathodes, anodes, current collectors, solvents, additives and electrolyte salts. Despite this, battery manufacturing from China and other foreign entities of concern (FEOC) are excluded from IRA’s incentive rules.