This transcript is from a CSIS podcast published on December 11, 2023. Listen to the podcast here.
Trevor Houser: So, we've seen this really exponential increase in investment and clean energy manufacturing in the U.S. Over the past year there's been 39 billion in invested in new plant equipment in clean energy and transportation. That's up 135% year on year and up several thousand percent from five years ago.
Lisa Hyland: Hello and welcome to Energy 360, the podcast from the Energy Security and Climate Change Program at CSIS. I'm your host, Lisa Hyland. This week I am pleased to welcome to the podcast friend of the program Trevor Houser.
Trevor is a partner at the Rhodium Group -an independent research provider combining economic data and policy insight to analyze global trends. Today he joined my colleague Allegra Dawes to discuss findings from the Clean Investment Monitor, Rhodium’s database that has been tracking clean energy and transportation investments since 2018.
Trevor and Allegra look at how clean investment in the United States has increased significantly following the passage of the Inflation Reduction Act, the Bipartisan Infrastructure Bill, and the Chips and Science Act.
Here’s Allegra to lead the discussion.
Allegra Dawes: Trevor, thank you so much for joining us today. Maybe a good place to start would just be to kind of give us a little background on your work and what you've been seeing in the energy space here.
Trevor Houser: So, my name's Trevor Houser. I'm a partner at the Rhodium Group, and Rhodium is an independent research provider and I'm with the company's energy and climate practice. And about half a year ago now, we set out in partnership with MIT to pull together a database of all clean energy and transportation investments in the U.S. going back to 2018 to provide some empirical grounding in assessing what's happening to overall clean investment trends in the U.S. and particularly how those trends are changing following the passage of three really large pieces of legislation over the past couple of years, the Inflation Reduction Act, the bipartisan infrastructure bill, and the Chips and Science Act.
Allegra Dawes: Yeah. So maybe we'll start with the Clean Investment Monitor. You mentioned you've been tracking since 2018, and then obviously the past year and a half we've had this massive injection of public funding and subsidies for this space. Maybe just at the high level, what's kind of stood out to you, surprised you, just your high-level takeaways when you're looking at that space over the past year and a half in particular?
Trevor Houser: Yeah. Well, so first all the figures that I'm going to provide are estimates of actual investment. So, there've been a lot of announcements of projects and what we try to do with the Clean Investment Monitor is in addition to tracking those announcements to quantify actual investment that's happening in the economy. So, we track projects through their lifecycle from when they're first announced to when they break ground, to when construction completes. And so, if you look at actual investment occurring over the past year, so the 12 months following the passage of the Inflation Reduction Act, there was 213 billion in clean investment in the U.S. economy, and that was up 37% year on year and up 165% relative to five years ago. And that accounted for about 4.1% of all investment that happened in the U.S. economy during that period of time compared to five years ago where clean energy was only 1.7% of total investment in the economy.
We'd like to think about, and maybe we could use this as a way to structure this conversation, there's places where the investment trends that we're seeing were clearly catalyzed by recent legislation. So, the trends that are occurring now would not be happening without that legislation. And then there's a category of technologies where it appears that the legislation is accelerating investment trends that were already happening, and then there's a third category where the incentives in those three pieces of legislation appear to be insufficient to overcome other headwinds facing that investment. And so happy to chat through those, what we're seeing in each of those three categories.
Allegra Dawes: Yeah, I think that would be a great starting point. Maybe if we start, where is the IRA, the Inflation Reduction Act having the most impact in terms of catalyzing investment that wouldn't happen in the absence of these bills and this kind of money on the table?
Trevor Houser: So, two areas. The first is manufacturing. So, we've seen this really exponential increase in investment and clean energy manufacturing in the U.S. Over the past year there's been $39 billion in invested in new plant equipment in clean energy and transportation. That's up 135% year on year and up several thousand percent from five years ago. Five years ago, there was almost no clean energy investment, like 2 billion a year in clean energy manufacturing in the U.S. And so that's really where we've seen the most exponential growth. Most of that's happening in the EV supply chain. So that's everything from rare earth metals to electric materials that go into batteries to battery module assembly to EV vehicle assembly. And so about 93% of all the investment in clean energy manufacturing we've seen in the U.S. is in the EV supply chain, but also solar investment in solar. And it's not just modules, but also cells and some ingots and wafers technologies that I think a lot of folks had given up hope would ever be manufactured in the U.S. That investment's up 131% year on year to $2 billion. And we have a lot more announcements in pipeline. Both the EV investment and the solar investment at that scale really would not be happening without some of the tax incentives and other provisions of that legislation.
Allegra Dawes: And maybe they kind of both fit into the box of a more industrial policy kind of orientation, though I think the Biden administration has really pursued including domestic content requirements that have been associated with some of the IRA funding. And I think it also fits into that geopolitical positioning of waking up and seeing China's dominant position there. I wonder if we look at the EV battery supply chain in your mind, how you're seeing investments split between the upstream of the manufacturing, the critical minerals, the materials that go into some of these components versus the big flashy battery announcements that I think have been more prevalent in the U.S. to date, and maybe how some of these investment decisions differ at different stages of the value chain for EVs in particular.
Trevor Houser: So, by dollars, most of the investment has been in battery cell and module manufacturing and then final vehicle assembly. There is a large amount of investment happening in EAM and in rare earth minerals, so that more upstream parts of that value chain. But a lot of those projects are slower to come online, big, complicated mining and refining projects. And so that's still a place where there's more import dependency in the EV supply chain. Then farther downstream in the actual battery sell and module assembly and in the final vehicle assembly where we've seen the most investment activity by dollars occurring.
Allegra Dawes: And then I wonder just in terms of the political goal, that's the focus of shifted to diversifying supply chains, and I think there's a growing awareness that while the IRA has a lot of funding for domestic production, there needs to be more capacity for building supply chains that are resilient and include more partners. Have you noticed any trends of U.S. companies that are looking very actively at some of this domestic supply but also pairing it with this friend shoring, near shoring shift as well?
Trevor Houser: Yeah, so we're not comprehensively tracking right now investment in these supply chains in other countries. Anecdotally, there's a lot of interest by companies in the EV supply chain that are looking to ultimately sell into the U.S. or European markets and ensuring that they have diversified upstream suppliers so that they're not as concentrated in their supply chain in China as they've been in the past. But that's mostly just anecdotal at this point. We don't have any comprehensive data on it.
Allegra Dawes: So, we have that first bucket of kind of where is investment going? Where it wouldn't necessarily have been kind of directed prior to the IRA.
Trevor Houser: One other big thing in that bucket just before we move on, so the other large category is emerging climate technologies, so carbon management, clean hydrogen, sustainable aviation fuel. So the past two years in those three categories, there's been 80 billion in announced investment, and that's an increase from just 7.5 billion during the preceding two year period. So almost a third of all of the announced investment over the past couple of years in large scale energy infrastructure has been in these emerging climate technologies now only 3.5 billion of that 80 billion of announcements has actually occurred. These are big complex projects take a while to break ground, but that's another area where without the incentives in the IRA and the IJA, we would not be seeing nearly that much activity in carbon management and clean hydrogen and sustainable aviation fuels.
Allegra Dawes: Awesome. And maybe we'll turn back to some of the emerging technologies as well, but in terms of accelerating trends that have already been in the market, where have you seen the pickup in investment? What are some of the trends and patterns that you've noticed there?
Trevor Houser: Yeah, so the two biggest are in solar and storage, which often are co-invested together. Storage is a compliment to the variable nature of solar generation. So solar and storage were already taking off in the U.S. due to the decline in the price of solar PV and lithium-ion batteries. And the incentives in the IRA and IIJA have accelerated that trend. So, investment last year was up 39% year on year to 44 billion in solar and storage combined. And if you look at the projects that new announcements last year, it was a hundred billion of new projects that were announced and that was double the announcements from the year before. So, the pace is really accelerating in solar and storage. And then the other would-be electric vehicles where that takeoff was already occurring. And the incentives in the IRA in particular are accelerating growth in EVs. So year to date electric vehicle sales are up 46% year on year, and it's trending higher than most expectations were before the IRA and IHA were adopted.
Allegra Dawes: And then one thing I was kind of taking a look at the Clean Investment Monitor and you kind of break it into the retail investment as well. How significant do you think some of the incentives for consumers and businesses to adopt some of these technologies have been? And I often think it's a little bit underplayed in some of the discussion, but how do you see that playing in especially EVs as the accelerating there?
Trevor Houser: Yeah, the EV incentives for adoption, the $7,500, the expansion of the $7,500 tax credit is pretty meaningful in terms of its effect on EV sales and EV and overall EV demand. And then the investment tax credit for rooftops solar and storage systems also plays a pretty significant role now for rooftops solar and storage. The tax credits in some states are secondary to local net metering policy in terms of what shapes overall level deployment, but they're still a pretty large driver.
Allegra Dawes: Awesome. And then we have our final bucket where maybe the story is slightly less rosy. Where are we still seeing hurdles and maybe it's cost challenges, maybe it's technology development rates, but where is the IRA and some of these other funding bills falling short of the goal of accelerating deployment or development?
Trevor Houser: So, two I'd highlight the first and probably most concerning is wind, where wind investment in the U.S. is down 36% year on year and down 53% over the past two years despite the expansion of tax credits in the IRA. And that's primarily because of high interest rates which hurt. So high interest rates hurt coin energy economics generally, but they're particularly tough for wind projects because of the longer timeline to completion of a wind project versus a utility scale solar project. So that whole period of time that you're under construction, you're carrying construction finance to cover the cost of the equipment, you're not generating any revenue because you're not producing yet. And so three to 4% increase in your interest rates can really challenge the economics of the project. And we've seen that particularly in the offshore wind market with some of the recent project cancellations or attempts to renegotiate power purchase agreements.
Wind is also more vulnerable to challenges in interconnection and citing and permitting transmission in the U.S. than solar is. So it's facing both of those headwinds and the incentives in the IRA and the IAJA have not yet been sufficient to overcome those broader headwinds. Another is, and this kind of a half good half bad story is heat pumps. So heat pumps shipments are down 10% year to date despite having a $2,000 tax credit in the IRA for the purchase and installation of heat pumps. So that's the bad news that is driven also primarily by interest rates. So overall residential construction is down about 15% year on year so far this year. And so as fewer people are renovating their homes, fewer people are building new homes, there's less opportunity for heat pump shipments. Now the good news is that heat pumps continue to grow in their market share. So if you look at just standalone AC units, they're down 15% year on year and gas and oil furnace shipments are down 25% year on year. So heat pumps are holding up better in an overall down market than furnaces and standalone acs are. But high interest rates and slow residential construction is definitely impeding the pace of turnover of that capital stock and replacement with high efficiency electrified options.
Allegra Dawes: If we look at wind, obviously some of the macroeconomic conditions make it much harder to build these big expensive projects, but I think offshore wind often the developers have often pointed to a really undeveloped supply chain in the U.S. and bottlenecks on manufacturing capacity and the ability to deliver there. We've heard the positive story on the manufacturing side of actually seeing shifts in investment in where it could go. I wonder, do you see any differences when thinking about building out some of the offshore wind and supply chain there and why the manufacturing capacity story has been harder to pick up on that side?
Trevor Houser: So, it's a little bit of a chicken and egg with the manufacturing and the installation. So, a lot of the projects in New York, for example, the offshore wind RFPs, as part of those bids, the project developers are pledging to build assembly and manufacturing capacity in New York, but it's conditional on winning those bids. And then you have a concentration in wind manufacturing. I mean there's basically three large companies that service the U.S. and European markets, Siemens, Vestus and GE, and they have backlogged orders and challenges in expanding their supply to meet that. So, for the onshore wind market, the manufacturers are having challenges keeping up with demand, and then projects are getting delayed. And then the offshore wind, so much of the manufacturing really ends up being customized to the particular offshore wind project like the tower and foundation assembly. It has to be done pretty close to where the offshore wind project is going to be and the overall uncertainty about the financing of those projects also chills the investment in the manufacturing to supply them directly as opposed to solar investment or battery investment where there's much more confidence that the market is growing.
And so, you have more willingness by investors to make speculative investments on production capacity, assuming that there will be continued growth in the market for it to occur.
Allegra Dawes: Yeah, I guess it's also part of that story where solar has seen that really substantial cost decline and it's a technology that we know how to do and how to do it pretty well, and I guess that's one of the big fears when we're looking at this industrial policy effort and the build American and develop a manufacturing base to support deployment. I wonder your view on some of these cost increases that could come through and the ability to manage both ambitious goals on deployment that are in the IRA with pretty ambitious goals on domestic supply and construction of these projects.
Trevor Houser: So, in general globally, the pace of deployment that we need to get to our climate goals is really dramatic and we need as much production capacity of this technology as we can possibly get and as many different countries as we can get it around the world, the pie is growing so fast. I think there's a lot of concern often with industrial policy and incentives for manufacturing that what you're doing is you're setting up a battle, a subsidy war between countries and between producers for a fixed pie of product. And so, you get a race to the bottom of who can out subsidize each other the quickest. And I think what's slightly different about the clean energy transition is that the scale of the market is growing so fast and the amount of new manufacturing capacity that we're going to need globally is so large that the pie really is expanding as quickly as that domestic production is.
And what we really want to be careful of, like you were talking about with wind, is that the lack of production capacity in general, not just domestic production capacity, but global production capacity is not a constraint on deployment because I think that's a very real, real risk. And so, in addition to the supply chain diversification benefits and resilience benefits of having solar investment in the U.S. battery investment in the U.S., it's also just helping overcome global supply chain barriers and capacity barriers that we need to get the pace of global deployment that's required to meet our climate goals.
Allegra Dawes: I think especially Europe had a lot of those fears expressed over losing out on some of the business opportunities in terms of not being able to match the subsidies, but it does seem to have kind of shifted over to a more net positive gain for I think global climate ambition.
Trevor Houser: When you think about often people will point out they forget, he'll point out, well, China accounts for 80% of global battery and EV manufacturing. That's true. China is also 70, 80% of all EV sales. The vast majority of the Chinese solar and EV industry is serving a domestic market. That market is growing very quickly. And so it really isn't right now a battle over a fixed pie. It is a race for countries to be able to bring on enough capacity and at a low enough cost to keep the clean energy transition moving a pace.
Allegra Dawes: And especially for those technologies that you kind of mentioned, the IRA accelerated trends that were already there, but if we're thinking of some of those emerging technologies that you mentioned, clean hydrogen and direct air capture, carbon storage, the story is kind of different because we're trying to move the technology along the development and cost curve enough that it actually becomes competitive in a few years time when we need to start deploying it quickly. How do you see the U.S.' approach to those segments maybe in comparison to in Europe or other kind of areas that they're also approaching these technologies and what do you think the strengths are the U.S. approach or where it could need some additional support policy or investment?
Trevor Houser: Yeah, so I'd say on carbon management, the U.S. really is currently in a leadership position globally. So, whether that's carbon capture from a flu stack, point source carbon capture, or direct air capture, most of the r and d is happening in the U.S. Most of the deployment is happening in the U.S. and we have a lot of expertise in the types of geological skillsets. You need to be good at geologic sequestration because of the relatively robust oil and gas industry in the us. And so, I think that that is a place, carbon management is a place where the U.S. will likely continue to push the technology frontier globally in clean hydrogen. I think the U.S. is likely to be the center of investment on the blue hydrogen side or turquoise hydrogen because of relatively low-cost natural gas. On the green hydrogen side, I think the question is mostly around the supply and availability of low-cost renewable energy.
That's going to be the main constraint. Is there enough low cost renewable capacity that at the same time as we're trying to electrify transportation and decarbonize existing power generation, is there enough low cost renewable electricity to really scale a green hydrogen industry that doesn't cannibalize clean energy from those other sources where we clean electricity from those other sources that we need it now compared to Europe, the U.S. is in a relatively good place in terms of the resource that we have both shoulder and wind, but we also have a permitting system that is really slowing down the pace at which we build out that and get that low cost renewable electricity to market for sustainable aviation fuels. There's a lot of really interesting activity happening in the U.S. right now. There's quite a bit of demand among the airlines right now for procurement of sustainable aviation fuels, even at a meaningful premium over the cost of traditional jet fuel. And you have a number of different companies in the U.S. investing in different types of technology pathways, and that'll be a really interesting space to watch and to see if new innovation coming out of those plants ends up putting the U.S. in a leadership position on sustainable aviation fuels as well.
Allegra Dawes: And then I guess when we're thinking of the IRA, the IIJA, we're kind of I think approaching a dicey kind of political environment in the U.S. where we might see a shift in how much support there are for some of these big spending policies. I wonder when you're thinking of the resilience of some of these carrots that are incentivizing the investment announcements and the actual investments, what's your takeaway in terms of resilience to political change and maybe how companies are also approaching that landscape with the potential shifts in the way that the federal government approaches energy policy and manufacturing and policy as well?
Trevor Houser: Yeah, so one thing that's interesting when we look through these data is that the investment is pretty broadly spread geographically, and there's quite a bit of clean energy investment incentivized by this legislation in Republican districts and Republican states, not just in democratic districts and democratic states. Indeed, the majority of the investment in clean energy manufacturing and in wholesale clean energy generation that we've seen over the past couple of years, the majority of it is going into states that are currently Republican controlled, and that's turning into real steel in the ground and jobs being created. And in theory, that should translate into, if not explicit, bipartisan support, hesitancy among elected officials that have IRA incentivized investments creating thousands of jobs in their districts or states to remove those incentives. But a key question will be how local are the companies and employees of those facilities in the political process and how much is that home state or home district economic interest able to prevail relative to national partisan eyes politics? And that'll be the real test over the next couple of years because the investment's actually occurring, it's occurring pretty quickly, it's creating a lot of jobs, and so now we just have to see whether that actually translates into political support for those policies.
Allegra Dawes: Yeah, for sure. Trevor, we've kind of touched on a lot of what we've been seeing and a lot of what the Clean Investment Monitor’s kind of tracking as well. We've seen the IRA and action for about a year and a half now. When you're thinking of the midterm, the next two years, the next five years, what are of the key metrics or changes that you're kind of keeping an eye on to see if this policy is working? Is this going to achieve the energy transition goals that we have and address it at a scale at the speed that is required?
Trevor Houser: Yeah, great question. So, a couple of things that I'm keeping my eyes on. One is this current set of headwinds for wind power, are they going to abate? We need a lot of, we can't decarbonize the U.S. grid exclusively on solar and storage. We need a lot of wind power, particularly in New England and the Pacific Northwest where the solar resource isn't as good, but where there's really high quality offshore wind, a lot of that will depend on what happens with interest rates, which is not something that legislators can control, but it also will hinge and John permitting policy and just overall public acceptance and support for the pace at which those projects need to get billed. So that's something that we're paying pretty close attention to. Another is EVs are at a really tenuous moment in the S curve of deployment in the U.S.
We burned through most of the early adopters that we're going to buy an EV no matter what, and now the auto companies really are having to transition into selling into the bulk of the market. The technology progress has been really impressive. The costs are coming down a lot. There remains reasonably high degrees of consumer anxiety about range and charging. And so, whether both the combination of charging infrastructure and work by the auto companies to develop the range of makes and models that people want is able to overcome that over the next couple of years will be pretty decisive in terms of shaping what happens with the EV transition over the next decade. That's another one that we're watching closely on the emerging climate technology front, there's a huge amount of announced activity. These are really big projects. They have the potential to pretty fundamentally transform that technology landscape and put the U.S. in a leadership position, but it's still very much early days. And so do those projects break ground? Do they proceed on schedule, and are they able to prove out and reduce the cost of those earlier technologies in a way that allows for much broader deployment? So those are three trends that we're paying close attention to. That in combination will be pretty pivotal in determining whether the U.S. is able to hit its submission reduction goals in 2030 and beyond.
Allegra Dawes: Well, I think we've covered quite a bit. Is there any kind of other topic that we've missed on or anything that you kind of think would be important to include here?
Trevor Houser: I think we pretty much covered it. Thanks. Awesome.
Allegra Dawes: Sounds good.
Lisa Hyland: Thanks to Trevor for joining us this week. There is a link in our show notes to the Clean Investment Monitor – it’s a great resource for detailed data, including breakdowns of all investment trends discussed today.
You can find more episodes of Energy 360 wherever you listen to podcasts, find us at CSIS.org and follow us on social media for the latest updates from our team. Thanks for listening.
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