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August 2022Download Report
The Inflation Reduction Act of 2022 (IRA) addresses three key areas: climate issues, corporate taxes, and healthcare.
- We see renewables owners and developers as the largest beneficiaries of the Inflation Reduction Act. The legislation will accelerate the U.S. energy transition.
- The 15% minimum tax is likely a modest negative for the largest U.S. midstream corporations, while separate legislation aimed at infrastructure project permitting will reduce a significant headwind to new project development.
- We continue to expect significant volatility in global energy markets through at least next winter, which may drive policy responses in both in the United States and from foreign regulators.
We view the bill as a net positive for listed infrastructure. We believe favorable tax credits are a tailwind for utilities and renewable energy, although the 15% minimum tax is likely a modest negative for the largest U.S. midstream corporations.
At $730 billion, the scope of the bill is substantially less than that of the failed Build Back Better Act, but we think the legislation is one of the most significant pieces of climate policy ever passed in the United States. The IRA strives to make a ‘down payment’ on deficit reduction to fight inflation while providing incentives for investment in clean energy production and domestic manufacturing. These policies are intended to help reduce carbon emissions by an expected 40% by 2030. The bill will invest approximately $300 billion in deficit reduction and $369 billion in energy security and climate change programs over the next ten years.
As infrastructure investors, we see renewables owners and developers as the largest beneficiaries. The legislation will accelerate the U.S. energy transition. Tax credits and other subsidies will improve the economics of clean energy projects and promote capital deployment. Three climate provisions in the legislation are particularly notable:
- Clean energy tax credits: Planned large investments in a wide range of tax credits, including wind, solar, storage, hydrogen, nuclear, energy efficiency and electric vehicles. These tax credits will materially reduce the cost of renewables to customers and will accelerate investment by utilities and other renewables developers.
- Industry and manufacturing: Tax credits for carbon capture and domestic solar manufacturing. These tax credits will streamline supply chains and reduce emissions.
- Environmental justice: Grants dedicated to reducing pollution and combating corresponding public health risks. Some funds are also allocated to tackle the negative impacts of transportation infrastructure, and other public projects, on communities. These provisions will accelerate the shift to electrification.
The IRA creates more winners than losers in the listed infrastructure universe. All things being equal, the most negatively impacted are five large U.S. midstream companies that have historically earned more than $1 billion of pre-tax profit per year; this income will be subject to the new corporate minimum tax of 15% beginning in 2023. These companies would otherwise not have paid cash taxes until at least 2027. We calculate this change in corporate tax policy to be cash neutral but net-present-value negative in the long term. However, a partial offset is available through expanded renewable credits and tax transferability, which will allow utilities and other renewables developers to benefit from lower capital costs for energy transition investments.
Another positive offset, particularly for midstream and utilities, is separate legislation for the ‘streamlining’ of infrastructure project permitting (proposed by Senator Joe Manchin of West Virginia). Delayed and costly permitting has been a significant headwind to new project development in recent years; it has been a driver of higher natural gas prices, has increased customer rates and has negatively impacted project returns.
This legislation is highly encouraging, though we await U.S. Treasury and IRS guidelines around nuances of the tax provisions. As we approach the mid-term elections, we remain vigilant in assessing how policy outcomes may impact the listed infrastructure universe. We continue to expect significant volatility in global energy markets through at least next winter, which may drive policy responses both in the United States and from foreign regulators.
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