The Inflation Reduction Act (IRA), which seeks to set the U.S. on an accelerated path towards net zero is “shifting the world view on the art of the possible,” according to Rebecca Kruger, a managing director in the Natural Resources Group within Goldman Sachs Investment Banking.
The sweeping climate, healthcare and tax bill is estimated to provide more than $390 billion of energy and climate spending over a 10-year period, according to the US Congressional Budget Office, with about $270 billion of that coming in the form of incremental tax incentives for businesses and individuals to pursue and invest in cleaner and more efficient energy sources.
Globally, we need $1.8 trillion higher annual spending this decade to be on track to reach net zero by 2050, says Brian Singer, the global head of GS SUSTAIN within Goldman Sachs Research. The $270 billion over 10 years of government-estimated incremental tax incentives from the IRA, Singer says, won’t be enough for the planet to reach that target. But that isn’t to say it won’t be far-reaching in its impact.
“The Inflation Reduction Act impacts virtually, if not, every vertical in the green capex mosaic,” Singer says. “We can’t get to net zero with just solar or just wind, we also need electrification, we need energy efficiency, we need hydrogen, carbon capture and much more… the IRA doesn’t get us all the way there, but it does in our view accelerate the incremental investment.”
Notably, there is potential for the ultimate impact to exceed current government estimates, and recent company commentary suggests a pickup in capital deployment in the second half of 2023. Singer believes the IRA will “push forward the deployment of clean energy solutions.”
Kruger says the IRA is “significant” for certain companies she advises. “With the passage of the IRA, those companies are now saying, ‘I see the path to our net zero goals,’” she says.
The bill is also changing the perspective of some energy companies that haven’t historically been involved in clean energy, according to Kruger. “The incremental certainty that the IRA provides around some of these renewable investments helps bridge that gap a little bit in terms of making these investments more attractive,” she says.
The IRA is encouraging tangible action as well. In August, First Solar, an American solar technology company, announced $1 billion of additional U.S. investment to expand production capacity, she says. Kruger expects to see more of these types of investments following the passage of the IRA. In another example, Kruger says there’s more investment from the foreign auto industry. For many of these companies to qualify for EV-related tax credits, they need to be producing components in the U.S. and not overseas, she explains.
Stocks in several clean energy sectors — particularly solar — have outperformed broad stock indexes, according to Brian Singer. “The solar side is where we have seen the greatest outperformance after the first announcement was made in late July,” Singer says. “This is partly because those stocks had been volatile previously and also because there is a greater runway and visibility of the incentive of the IRA.” Singer highlights opportunities for stocks across the supply chain, in particular those levered to battery storage, hydrogen, carbon capture and energy efficiency.
Akif Irfan, a portfolio manager on the energy infrastructure and renewables team within Goldman Sachs Asset Management, says it’s not only the actual tax credits that stand out about the IRA, but the clarity the bill provides around those credits. Tax incentives in the U.S. have sometimes had some uncertainty because it isn’t always clear how long they will last, Irfan says. “When you don't have a clear period of time when something will be in place, it becomes difficult to create long-term investment plans,” Irfan says. “The IRA has provided some clarity on the duration of these extensions, and in some cases some tax credits have been extended for a decade or longer.”
The additional certainty could help support emerging sectors such as hydrogen and sustainable aviation fuel, according to Irfan. Providing longer-term tax credits to nascent industries can encourage technological innovation and bring greater benefits to what these industries can eventually offer, he says. Additionally, Kruger in Goldman Sachs Investment Banking says many historic tax incentives have only been aimed at specific technologies. The tax credits for projects that generate electricity with zero greenhouse gas emissions will be “technology neutral” after 2024, she says, which means “it could really allow for exponential growth beyond the traditional sources of zero-emission electricity.”
While the IRA does a lot to attract and accelerate investment into decarbonizing the economy, it will not be enough to drive energy transition, Kruger says. “Permitting infrastructure projects in the U.S. remains challenging, and reform will be needed to drive implementation of many of these projects,” she says.
“The IRA won't get us to a 100% on U.S. net-zero goals and it's hard to picture any piece of legislation sitting here in 2022 that would have gotten us to a fully decarbonized economy,” she adds. “But this does move us significantly in that direction.” Irfan agrees. “The IRA is historic in its scale. And it's helpful in the longevity that it provides, but it's probably also fair to say that you know it’s one part of the longer journey,” he said.