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The Inflation Reduction Act (IRA) Transforms US into Leader in Energy Transition Policy

US Takes Bold Step Towards Sustainable Future with Inflation Reduction Act (IRA)

President Joe Biden's Inflation Reduction Act (IRA) has emerged as a key piece of legislation in the energy transition space. It has set the United States on its way to becoming a leader in energy transition policy.

David Brown, Director of Energy Transition Service at Wood Mackenzie, has examined the effects of the IRA and believes that a mammoth undertaking is needed to see the IRA thrive and reach Biden's goal for net zero emissions by 2050. Brown's analysis surmises that investing $10 trillion by 2050 is required to reach net zero.

CCUS Permitting: All Eyes on EPA Processes

As part of the IRA, permitting is a major issue that will influence Carbon Capture Utilization and Storage (CCUS) development in the US in 2023. Though the Act has improved incentives, CCUS Final Investment Decisions (FIDs) are not yet guaranteed.

Potential investors are looking to the federal Environmental Protection Agency (EPA) process for licensing Class VI wells for carbon dioxide sequestration for greater clarity. The EPA is responsible for granting primacy over Class VI wells to individual states. Primacy is a key factor for CCUS developers as some states are aiming for one- to two-year approvals for Class VI storage wells, much faster than the six-year process seen in the past.

Wood Mackenzie's base case forecast expects that CCUS capacity in the US will expand from current operational capacity of 25 million tons to around 85 million tons by 2030. It is expected to be sourced from a variety of industries including ethanol, liquefied natural gas (LNG), and blue hydrogen.

Low Carbon Hydrogen Exports: 45V Eligibility Clarity Needed

The IRA reintroduces a production tax credit (PTC) for clean hydrogen, known as the 45V. Currently, there is no clear answer whether low carbon hydrogen export projects are eligible for this incentive.

Uncertainty in this area is crucial as the $3 per kg 45V incentive could make the US a major player in low carbon hydrogen exports. Low carbon hydrogen feedstock costs in the US are predicted to be some of the lowest in the world due to its abundance of renewable energy sources.

Renewable Energy Credits (RECs) and Time Matching Rules to be Defined

Green hydrogen producers must prove that their power supply is zero emissions for the 45V incentive to apply. While the majority of power output in the US comes from fossil fuel generation, the IRS must clarify the role of RECs in qualifying for the 45V and establish time-matching standards for power procurement.

Automakers Seek Looser Eligibility Requirements

The IRA has bolstered decarbonized transport by offering a $7,500 incentive for battery electric vehicle (BEV) sales up to a vehicle value of $55,000. A portion of that incentive requires that 50% of battery components be manufactured or assembled in North America.

The problem lies in that China has more than an 80% market share for battery components. To qualify for the incentive, battery manufacturing and components from China and other foreign entities of concern (FEOC) must be excluded. Automakers are currently pushing the IRS for guidance on FEOC markets, battery sourcing, and foreign ownership thresholds.

Wood Mackenzie is a global leader in natural resources analysis and advice, helping customers make better strategic decisions. The firm's analysis of the Inflation Reduction Act has highlighted key areas where clarification is needed for optimal investment conditions for investors. The Biden administration is expected to release additional guidance on the IRA in the coming months to realize President Biden's goal of net zero emission.


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