Challenges to Scaling U.S. Low-Carbon Technology
This commentary is part of the annual Energy Futures Forum, a project from the CSIS Energy Security and Climate Change Program exploring changes to the energy and climate landscape over the next 10 years.
The 2022 Inflation Reduction Act (IRA) provides at least $369 billion in direct support for U.S. climate change initiatives, in particular for renewable power generation, electric vehicles, hydrogen, and carbon capture use and storage. Most of the IRA’s provisions utilize tax credits to incentivize climate-related investment, and many of the provisions are uncapped.
The IRA is an unprecedented government investment effort, and one with significant promise for shaping the country’s energy, emissions, and manufacturing path for the next decade or beyond. It passed into law by the narrowest of margins, which was a significant legislative feat in its own right. The IRA’s next challenge, and the challenge of the current and subsequent presidential administrations, is to implement the law to its fullest.
This commentary posits five areas that investors, policymakers, and strategists should consider as the IRA moves from policy to implementation.
- Accelerating and De-costing Planning and Permission for Renewable Power
The IRA will enable the development of hundreds of gigawatts of new renewable power generation across the country. The private sector is quite enthusiastic to plan, develop, finance, and build renewable power assets. However, there are challenges to doing so.
It must be noted that there is no shortage of existing planned new renewable capacity in the United States. Lawrence Berkeley National Laboratory found last year that there is more than 1,400 gigawatts of power generation or storage projects seeking interconnection to the nation’s grids.
However, planning processes in the United States are increasingly slow and expensive. As Berkeley Lab also notes, the cost of interconnection has doubled in constant dollar terms in the past two decades. The time for successful permission has also increased (which is a factor in costs). The costs for active projects have increased almost tenfold at the same time.
- Preparing for Manufacturing at Scale
The IRA will likely lead to a flourishing of new manufacturing capacity in the United States. Some of that capacity will match capabilities which already exist, such as for wind turbine towers and blades. Other capacity will scale U.S. capabilities well beyond what exist today, in particular for value chains such as solar or electric vehicles.
Atlas Public Policy estimates that in 2022 alone, electric vehicle manufacturers announced more than $73 billion worth of manufacturing expansion in the United States. The United States has not engaged in a manufacturing scale-up of this dimension in decades, and doing so will strain existing human capital while also requiring financial capital and intelligent and proactive planning and permission to ensure that capacity can be developed quickly and at the lowest possible cost.
- Creating Domestic Processing Capacity
In order to meet the full promise of the IRA, the United States needs to not only manufacture existing clean technology at a much greater scale, it also needs to pursue an insourcing of the further-upstream aspects of each clean technology value chain. In some cases, such as steel production, U.S. production will likely be able to meet new domestic demand—and if it cannot do so immediately, the expertise and human capital necessary for doing so exists in the United States already.
In other cases, such as the critical minerals needed for renewable power and electric vehicle value chains, the United States should pursue primary production as well as processing. In many cases, processing capacity, not primary production, is the highly concentrated step in the value chain. That concentration should be mitigated where possible, either by bringing capacity closer to the United States, or by trade agreements with other trusted trading partners.
The International Energy Agency notes that China in particular has a particularly strong position in the processing of seven minerals or materials critical for energy transition products (polysilicon, graphite, cobalt, aluminum, lithium, copper, and nickel). Nearly four-fifths of global polysilicon processing, required for the vast majority of today’s photovoltaic solar modules, is located in China.
- Managing Megaproject Economics
A subtler challenge to the IRA’s ambitions could emerge as some of its larger initiatives move into the construction phase. As Bent Flyvbjerg, chair of major program management at Oxford's Saïd Business School, notes in his latest book, certain types of large energy and infrastructure projects are prone to cost overruns. Flyvbjerg terms these “megaprojects” due to their size, complexity, and often-unique nature, and they include nuclear power and hydroelectric power in particular.
Mining projects are not immune to cost overruns either, according to Flyvbjerg’s research. Today’s highly distributed renewable energy technologies, in particular solar and wind power, have very low-cost overruns. This is due to their modular nature, relatively short construction schedules, and competition between developers for market-based assets.
It is possible that some IRA-related developments, such as new nuclear power, carbon capture, or even clustered hydrogen infrastructure, will be prone to megaproject economics. It behooves policymakers, planners, and builders to work as quickly and smartly as possible to modularize elements of their own processes in order to mitigate this potential outcome.
- Encouraging Human Capital Development
This final concern may seem esoteric, but it is also critical to implementing the full promise of the Inflation Reduction Act. Human capital, at every level from the shop floor to the executive boardroom, will need to be expanded in scope and scale in order for IRA provisions to be realized to the fullest.
Tensie Whelan, clinical professor of business and society and director of the Center for Sustainable Business at the NYU Stern School of Business said in her research that the Fortune 100 boardroom has little knowledge of energy or environmental issues.
Of the 1,188 individual board members of the Fortune 100 in Whelan’s study, 29 percent had some environmental, social, and governance (ESG) qualification. However, those qualifications skew heavily towards social and governance. Only 1.2 percent of the Fortune 100 board has any expertise in energy; just 0.2 percent have any expertise in climate.
A lack of understanding of the challenges—and opportunities—to be had from engaging climate challenges through ingenuity and technology deployment could be detrimental to the goals that the IRA outlines.
Human capital development is neither instant nor guaranteed. A preference for experience and expertise in corporate core competencies, which skews towards pure financial or corporate governance domains, may hamper the development of board-level capability in energy, climate, and manufacturing scale-up.
Opportunities, Challenges, and Promise
The Inflation Reduction Act of 2022 is the most ambitious energy and industrial legislation in four decades. It is also the most ambitious climate legislation in U.S. history, and it has the chance to transform the nation’s energy and industrial landscape.
Achieving its full potential will require dedicated action at the policy, regulatory, business, financial, and executive levels. Principals in each of those domains are already well aware of the IRA’s promise. This commentary suggests that they should be aware of its challenges as well. Addressing these challenges openly and constructively enhances the chance that the IRA succeeds to its fullest, and that its principals do as well.
Nat Bullard is a senior contributor to BloombergNEF and a participant in the CSIS Energy Security and Climate Change Program’s 2023 Energy Futures Forum.
The 2023 Energy Futures Forum was made possible by support from Chevron and general support to the CSIS Energy Security and Climate Change Program.