Where the Inflation Reduction Act tailwinds are blowing

19 JAN 2023

Passage late last year of the Inflation Reduction Act (IRA) will impact several sectors, including clean technology, hydrogen, and electric vehicles (EVs). But the effects of the U.S. legislation will extend well beyond those industries, driving investment in other areas including energy services, agribusiness, and financials, according to a new Goldman Sachs Research report. Here’s a quick look at how GS Research sees the IRA playing out across a range of sectors:

Clean technology. The IRA clears the way for a decade of stable solar installation growth across the residential, commercial, and industrial markets, benefiting solar power, solar components, and energy storage companies.

Tax incentives were key in spurring previous growth of solar and solar-plus-storage installations, lowering development costs in the sector. Now, the IRA extends tax credits to storage-only facilities for the first time. Goldman Sachs Research forecasts a robust 18% compound annual growth rate in U.S. solar installations through 2026. Manufacturing tax credits provide a significant benefit to suppliers with U.S. domestic production capacity.

Hydrogen and chemicals. Hydrogen becomes eligible for investment tax credits for energy storage for the first time whilst the introduction of the 45V production tax credit (PTC) for clean hydrogen is transformational in supporting the economics of hydrogen production plants for the next 10 years. The IRA also extends and expands tax credits that promote carbon capture, utilization, and sequestration.

“We view these incentives together as a major game changer for the sequestration of carbon and production of hydrogen,” the report’s authors write. They see significant benefits for companies with current or planned hydrogen projects.

EVs and batteries. Substantial new tax incentives for EVs and batteries are prominent in the IRA. Manufacturers’ plans to transition to EVs are being reinforced, and companies that have domestic battery production and North American assembly stand to benefit in particular.

A $7,500 tax credit for consumer EV purchases has been renewed, expanded, and refined. There are requirements for batteries in EVs to contain a certain percentage of materials produced in the U.S. (or in countries that have a free trade agreement with the U.S.). A certain percentage of battery components must be from North America.

This is a significant policy boost to the electrification of the U.S. vehicle fleet. GS Research expects EVs to be 55% of all new vehicle sales a decade from now. And, counting the vehicle and battery credits in aggregate, “we estimate cumulative IRA spending in support of light vehicle EVs could be at least tens if not hundreds of billions of dollars over the life of the program,” the report says.

Industrials and agribusiness. Industrial companies stand to gain from the broad policy support in the IRA for infrastructure modernization. Among other features are investment tax credits for wind projects, and these, as with the EV provisions, incentivize domestic production of wind turbine components. Agribusiness will benefit from tax credits for biofuels and alternative fuels.

Environmental services. Delving into some of the narrower and less-discussed features of the IRA reveals incentives that boost returns for landfill gas projects. There are investment tax credits of up to 30% for biogas projects, and a production tax credit that extends to electricity production using landfill gas. 

Energy services. There may be underappreciated upside for energy services companies in the IRA, which presents them with growth opportunities in hydrogen, renewables, and electricity transmission. Specifically, the strong incentives to drive large-scale renewables projects may boost energy services companies that are moving beyond their traditional oil and gas businesses in a bid to play a role in construction, maintenance, and upgrading of electric and renewable energy infrastructure.

The report points out that there could be countervailing forces that blunt the benefits from these tailwinds. Risks to the outlook include a policy response in the form of protectionist measures in other regions, such as Europe and China, potential changes to the legislation over time, and company-specific factors that might outweigh the positive impact of the new law .

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