The US is poised for an energy revolution

The U.S. Inflation Reduction Act (IRA) will spur about $3 trillion investment in renewable energy technology that could double the amount of energy produced by the shale revolution 15 years ago, according to Goldman Sachs Research.

The shale boom has allowed the U.S. to produce low-cost energy comparable in scale and efficiency to the Middle East, Michele Della Vigna, head of Natural Resources Research, writes in the team’s Carbonomics report. But even as those reserves of natural gas and oil decline, renewable energy can help the U.S. retain its role as a global cost leader.

“Shale remains a valuable asset, but in our view, the U.S. can no longer rely on it to carry this key cost competitive advantage into the next decade: it needs another energy revolution to maintain its energy cost leadership,” writes Della Vigna, who started the Carbonomics research series in 2019. The early years of the new revolution will focus on electrification, while spending for clean hydrogen and carbon capture will eventually accelerate.

Recently passed legislation may help fulfil that potential. Critical funding for this next energy revolution is expected to come from the IRA, which will provide an estimated $1.2 trillion of incentives by 2032 — creating the most supportive regulatory environment in clean tech history, according to Goldman Sachs Research.

The IRA includes incentives that make most clean tech — solar, wind, electric vehicles (EVs), and storage, as well as bio-energy, clean hydrogen, and carbon capture — profitable at large scale. Goldman Sachs Research estimates that the IRA’s impact could encourage $11 trillion of total infrastructure investments by 2050. By 2032, our analysts estimate there will be $2.9 trillion of cumulative investment opportunity across sectors for the re-invention of U.S. energy system, or on average $290 billion annually.   

“To put this figure in context, over the coming decade this would represent more than two times the total investment in the U.S. shale revolution,” Della Vigna writes.

The IRA’s biggest impact will likely be in the transportation sector.  Modified tax credits for new EVs and commercial clean vehicles will decrease costs for cleaner transport options, as will the extension of credits for biofuels and, eventually, the creation of sustainable aviation fuel, according to the report.  

However, some key uncertainties remain. One is the share of EVs eligible for tax incentives. Another is the level of onshoring that will take place for battery and solar components. Many companies are still in the early stages of evaluating new U.S. capacity following the IRA’s passage, according to our analysts. Companies are weighing the tax credits against the likelihood of higher U.S. manufacturing costs relative to where the components are manufactured today. Depending on the level of onshoring of manufacturing facilities, government spending under the IRA may vary significantly.

Clean power investments will also prove critical to this renewable revolution, given that power generation was responsible for about 30% of U.S. carbon emissions in 2021. Power infrastructure plays a significant role in electrification trends in transport, industry, buildings and green hydrogen production.

GS Research estimates that total U.S. power demand will increase 2.5 times by 2050 compared with 2021, which will require $6.6 trillion in renewable power investment.

This includes the build-up of solar and wind (~$1.4 trillion each) and other renewable energy generation facilities (~$700 billion), the expansion, upgrade, and digitalization of power networks (~$2.3 trillion) and utility-scale energy storage facilities (~$800 billion). Renewable energy sources (excluding nuclear and hydro) are expected to grow by about 9% annually through 2050, representing 44% of total generation capacity by 2030 and 80% by 2050, according to GS Research.

Our analysts anticipate that the early years of the new revolution will be driven mainly by electrification through the expansion of renewable power facilities, transmission, storage, and networks and building upgrades. Later, spending for clean hydrogen spending and carbon capture will accelerate. The report estimates that the average annual investment in decarbonization between this year and 2050 will be about $400 billion, representing about 1.3% of GDP, with the peak estimated at about $520 billion, or 1.7% of GDP, in the mid-2030s.

Meanwhile, U.S. hydrocarbon energy will gradually decline, depending on the pace of energy transformation and each fuel’s respective carbon contents. Natural gas will likely diminish after 2030, but consumption is expected to be more resilient than oil and gas, according to GS Research.

Among residential and commercial users, electricity will gradually almost completely replace natural gas, the team predicts. Meanwhile U.S. net gas exports, primarily driven by increased liquefied natural gas capacity, will almost double from 11 billion cubic feet a day to 20 billion by 2030, cushioning the overall decline of domestic gas consumption, the report finds.

As EVs make up a larger share of the vehicle market, demand for oil — 70% of which is used for transportation — will decline significantly after 2030. EV market share will rise to 75% by 2040 and 100% by 2050, GS Research estimates. Our analysts estimate that one EV replacing one internal-combustion engine car in the total fleet reduces, on average, oil consumption by 11 barrels per annum.

The drive for electrification and clean energy will also spur demand for natural resources such as aluminum, copper, lithium, and nickel, which are used for power network and charging infrastructure, EVs and battery manufacturing, according to analysts at Goldman Sachs. Incremental copper demand, for example, will increase ~35% by 2050 as compared with last year, the report found.

“For battery metals such as lithium, nickel and cobalt, we expect demand growth by several folds,” Della Vigna writes. “The demand profiles for nickel, cobalt and lithium will to a major extent depend on the mix of EV battery types adopted.”

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