7investing CEO Simon Erickson recently attended the Massachusetts Institute of Technology’s ClimateTech conference, which highlighted innovation taking place in the energy industry.

The following is an edited excerpt from Simon’s “Complete Notes” advisor update — which he provided to 7investing subscribers on October 6, 2023.

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414 Days of the IRA

The Inflation Reduction Act of 2022 was signed into law on August 16, 2022, infusing billions into energy infrastructure. We reflect on its introduction, execution, and potential to reorient the way the U.S. and global economies produce and consume energy.

Leah Stokes 

Associate Professor, UC Santa Barbara

Author “Short Circuiting Policy”

@leahstokes

The Inflation Reduction Act has actually done very little to reduce inflation. The IRA actually started with different goals initially; primarily to create American Jobs that were in the green energy industry.

Policy in the USA is aimed at cleaning up our electric system and electrifying everything we possibly can. Advocate movements have really helped to push through the policy. The Sunrise Movement became the only opportunity to get a climate bill passed – as the Democrats held control of the Senate and Biden was currently sitting as the President. There were several sacrifices that were required to get it there and it almost didn’t pass.

The bill itself for the IRA was over 100 pages long. Not all provisions of it are actually that good or even useful. For example, the Hydrogen Provisions are considered by some to be one of the most lucrative parts of the bill and yet are vocally opposed by others.

As one example, WV Democratic Senator Joe Manchin was a vocal critic of some parts of the bill. He publicly stated “Going forward I will push back on those who seek to undermine this significant legislation for their respective political agenda and that begins with my unrelenting fight against the Biden administration’s efforts to implement the IRA as a radical climate agenda instead of implementing the IRA that was passed into law.”

This is known among political types as the “fog of enactment”, where groups will take advantage of the ambiguity of certain parts of a law to push their own agenda.

The hydrogen provisions have established a 5 cents/kW-hr subsidy for the production of hydrogen. It might sound small, but that is actually a really big subsidy! Be on the lookout for industries where hydrogen could be used in large quantities, such as steel production (where hydrogen reacts with iron ore to produce steel, without CO2 emissions).

The learning curve is a necessary part of innovation. It involves high costs at first, which can be reduced over time as organizations monitor their operations and learn how to take out unnecessary costs. Solar PV was a perfect example, as it was competing against other technologies, imports from China, etc. But subsidies accelerated the learning curve and America is now bringing PV production on-shore.

The same thing is happening with electrolyzers, as a way to store solar and wind as base energy.

The 45x manufacturing tax credit is intended to reduce the cost of building necessary equipment for the energy transformation, including battery plants, heat pumps, etc. CleanInvestmentmonitor.org is a map that shows how and where this is happening. [See my thoughts on how the 45X tax credit will impact solar manufacturing here]

Critics of the IRA describe it as “all carrots and no sticks.” There are a lot of incentives and rewards written in, yet it’s rather light on penalties or regulations.

The methane fee is one stick though, as is the Clean Electricity Performance clause that would require utilities to continually improve their renewable energy supply each year. Leah believes many utilities though – including Duke Energy aren’t actually making any significant changes. “The utility industry will do the right thing…after they’ve exhausted every other possible option. They aren’t making credible commitments and there’s too much greenwashing. Utilities are not telling the truth when they’re setting these [renewable energy] goals.”

International coordination can have significant outcomes. An international “conference of the parties” coordinated activists which led to the Paris Agreement of limiting global warming to 1.5 degrees. President Biden committed to this and the IRA was passed. Now scientists and companies are making progress.

Simon’s overall thoughts: Significant funding made possible by the IRA tax credits and the DOE’s $400 billion loan program will open the door for ambitious entrepreneurs to create new renewable energy businesses. We are already seeing this in solar PV manufacturing and in utility-scale battery storage systems.

Yet the capital requirements of this industry are significant. So after they’ve exhausted funds from government grants, be on the lookout for many of these early-stage companies to raise funding through initial public offerings. And keep an eye on their learning curve — where costs per unit of output are falling over time — to be a sign of the best-in-class companies you want to be invested in.

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