We are in a period of unprecedented tailwinds for renewable energy. Federal incentives created under the new Inflation Reduction Act (IRA) provide material opportunities not just for an accelerated energy transition, but a more equitable one as well. Items such as tax credits and funds that target underserved communities will no doubt significantly contribute to supercharging the energy transition. But will they be enough?
While participating on a panel at the recent Confluence Climate Solutions Summit, I had the opportunity to discuss with Kerry O’Neill, CEO of Inclusive Prosperity Capital, and Greg Rosen, Founder & Principal of High Noon Advisors the good, the bad, and the future of the energy transition, and what steps can be taken today to ensure that the current momentum is not lost but supercharged going forward.
The Good
Without question, all panelists agreed that the passage of the IRA provided a once-in-a-generation opportunity to direct almost $1 trillion towards initiatives providing cleaner energy for everyone, while also providing material economic benefits in the form of savings and job creation for communities often overlooked and undervalued. We also highlighted the potential tax credit adders that will require significant LMI customer savings to qualify, as well as the advent of the Greenhouse Gas Reduction Fund (GHGRF) that will provide $27 billion in funding to the energy transition, particularly in overlooked communities. The IRA also allows tax-exempt entities to more fully participate in the energy transition through the advent of the “direct pay” mechanism.
The Bad
While the good part of the discussion was unquestionably the IRA, the bad part of the discussion was unquestionably the IRA as well. More specifically, the bureaucracy associated with allocating funds and the time that will be required for the allocation to begin. The panel agreed ITC adder allocation is unlikely to happen before 2024 and allocation of GHGRF funds is unlikely to occur before mid-2025. The effect of these delays has been a standstill in the marketplace. Many projects have stalled because the allocation process is longer than expected. These delays, combined with the broader market uncertainty due to rising interest rates and regional bank failures, has led to a significant chilling of institutional investment in the renewable project market. Instead of supercharging the transition, the IRA is playing a significant part in slowing it down.
Now and the Future
So, what can be done and what does this mean for the future of the transition? First, the market needs capital to help bridge through this transition period. If traditional institutions are unable to answer the call, then the duty falls upon values-aligned investors to step in and help continue the momentum until government funds begin to flow. In the project space, it is usually not project economics, but cash-flow timing that kill deals and companies. There many small community-based companies answering the call of the IRA and working towards supercharging an equitable energy transition, but without current capital available for continued construction, they are likely to go out of business before their projects reach completion. This loss would not just be of capital investment, but jobs and economic benefits for other community stakeholders as well.
In the end, the panel agreed that the future of the transition is bright and the effects of the IRA will be great. However, the key is for values-aligned investors to do their part today to continue the momentum building over the last several years. There are not many chances for private capital to be as catalytic as it can be in this moment. Investors must seize the opportunity while they have the chance.
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Omar Blayton, Chief Financial Officer, Sunwealth Power
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