‘Friction in the system’: the problem with Biden’s $369bn clean energy push

The landmark US climate, tax and spending law signed by president Joe Biden on Tuesday holds potential to spark an explosion of new renewable power projects across the country. Clean-energy executives, climate advocates and scholars have praised it, saying it is the first serious legislative attempt to tackle emissions that fuel global warming.

But a host of obstacles may stand in the way. They range from tariffs and import controls that are driving up the cost of solar panels to state land-use laws over which the federal government has no control.

The new law was “absolutely game changing”, said Jos Shaver, chief investment officer at Electron Capital Partners, a renewables-focused asset manager with $2.8bn under management. “[But] it’s an energy transition, not an energy switch. It’s not going to happen overnight and there’s going to be a lot of bumps in the road.”

The Inflation Reduction Act will pump a record $369bn into clean energy. The Biden administration predicted that the law would allow the country to slash greenhouse gas emissions by 40 per cent from 2005 levels by the end of the decade, putting it within striking distance of its commitment to cut emissions by 50-52 per cent by 2030 under the Paris climate accord.

Modelling by think-tanks broadly lines up with the administration’s estimates of emissions impact. For the most part these do not account for external forces that could delay projects, however.

“The models generally assume that if something is economic, it will get built,” said Robbie Orvis at Energy Innovation, a climate policy think-tank. “And we know that in the real world there can be some friction in the system.”

At the heart of the bill are tax credits to spur investment in and production of renewable power. While some of credits are not new they are long-dated with a 10-year horizon, while previous versions of credits repeatedly expired, requiring extensions at the eleventh hour.

Now, the 10-year credits will give developers an unprecedented ability to make long-term plans for new projects, while a “transferability” mechanism that allows the credits to be bought and sold will expand options for financing projects.

“It really opens the floodgates for us to expand the rollout massively of the pipeline of projects with a planning horizon that gives us certainty,” said Tom Buttgenbach, chief executive at 8Minute Solar, one of the biggest utility-scale developers.

Some developers fret that other efforts to catalyse a domestic green energy manufacturing industry may slow the torrent.

A Department of Commerce investigation into tariff circumvention by parts makers in south-east Asia — the source of most panels — is due this month. While the president has said any tariffs would not be enacted for at least two years, a lack of clarity makes it hard to plan ahead.

The potential for retroactive tariffs along with supply chain snags drove down solar installations in the last quarter to their lowest level since the start of the coronavirus pandemic, according to Wood Mackenzie, a consultancy.

“I need to know what my supply chain looks like in four to five years,” said Buttgenbach. “And the current environment is tariffs this week and investigation next week. It’s just a nightmare when you’re working on these billion dollar infrastructure deals.”

Another new US law that bars imports linked to forced labour in China — a leading source for solar panels and components — has also caused confusion as customs agents have impounded some parts.

Executives in the US’s nascent offshore wind power sector are anxiously eyeing a separate piece of legislation that would require them to use only American vessels and crews when installing turbines.

That is a “real issue right now”, said Pedro Azagra, chief executive of Avangrid, which owns utilities and one of the biggest US wind developers. “It’s something that is not realistic. You do not have them and it will take some time to build them, some time to train the crews.”

But most developers support the approach taken in the new climate law, which creates incentives for buying locally rather than forcing the issue. That will allow the development of a local industry over time. “When you have critical mass and you need things, it comes naturally,” Azagra said.

The development of solar and wind farms at a scale that decarbonises the economy will require construction on vast swaths of land. A Princeton analysis found that meeting Biden’s goal of net zero emissions by 2050 would entail wind farms with a “visual footprint” on a land area equivalent to Illinois and Indiana combined, at a minimum. For solar farms, land at least the size of Connecticut would be needed.

Already, states such as New York that have aggressive renewable electricity targets have encountered resistance from some residents living near energy projects. In less renewables-friendly Ohio, lawmakers last year passed a law empowering counties to block solar and wind farms, with one saying that wind turbines “ruin the character” of a place.

A recent study in the journal Energy Policy found that 53 utility-scale wind, solar and geothermal projects had been delayed or blocked between 2008 and 2021.

Building new long-distance transmission lines will be needed to deliver electricity from remote wind and solar farms to urban areas. However, states also have power to block interstate transmission projects. A $1bn project to deliver Canadian hydroelectricity to Massachusetts recently hit the ropes, despite being federally permitted, after opposition in the state of Maine.

Lengthy federal permitting procedures and lawsuits can also slow down transmission and other energy projects. As part of his crucial support for the climate bill, West Virginia senator Joe Manchin won commitments to pursue reforms to what he called a “broken” permitting process.

With billions in incentives about to flood the market, some investors see states moving to ease onerous permitting rules.

“Certain states will, I believe, as a result of this bill, seek to improve their processes because capital is mobile,” said Pete Labbat, managing partner at Energy Capital Partners, a private equity firm. “Our capital will seek to invest or to be invested in those areas where the permitting can be done in a streamlined manner or the environmental approvals can be obtained in a relatively straightforward way.”

Climate Capital

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