The Inflation Reduction Act and its impact so far

The landmark bill promised to unlock unprecedented levels of cleantech investment while reigniting US manufacturing. But has its lofty expectations lived up to the hype? We explore how the IRA has created seismic changes in PPA markets, propelling US solar growth, and more.

3 minute read

Amaiya Khardenavis

Analyst, EV Charging Infrastructure

Amaiya focuses on electric vehicle charging infrastructure for the Grid Edge practice

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In August 2022, President Biden signed the Inflation Reduction Act (IRA), a watershed moment in the history of US climate legislation. The bill offered hundreds of billions for clean energy and decarbonization measures through grants, loans, tax credits, and other incentives. Specifically, many aim to rejuvenate US manufacturing and build new supply chains across North America. 

After the initial fanfare, the focus quickly shifted to how all the legislation’s specific details would be implemented. In support, the US Treasury released guidance on domestic content requirements, tax credits, and identifying regions where wind, solar, and storage assets qualify for additional incentives. 

But is the IRA delivering on its potential? Fill out the form on the right to download a summary of the impacts of the IRA to date across power and renewables markets; from solar, Grid Edge and energy storage to US wind markets, electrification and supply chains. Or, read on for some highlights. 

The IRA prompts a race for land in the North American power sector 

The IRA’s subsidies for solar PV, wind, and energy storage assets have ensured they remain financially competitive with other generation technologies – at least in the right locations. The result has been a national land grab as developers race to secure sites with the most lucrative resources, permitting conditions, and tax bonus eligibility. 

This momentum is yielding seismic changes in the PPA markets. Many developers are increasing contract pricing on expectations that the IRA’s tax credits will remain for decades – a point we’ve reinforced for some time – and lead to reduced wholesale power market revenues in the post-contract period. After years of decreasing PPA prices, the tax credits haven’t been able to curb upward trends driven by higher costs, inflation, supply constraints, and the demand for new projects dwarfing supply. 

For new assets, interconnection and transmission remain primary obstacles. While the IRA does not meaningfully address these issues, there are reforms at various levels of the FERC and the ISOs and RTOs. We are more confident in reforms to interconnection than transmission, as they are more technical and administrative in nature and avoid thorny political issues posed by transmission reforms. 

For solar and storage developers, interconnection remains the biggest hurdle overall. Reducing the mounting national backlog requires a concerted effort to reform processes and enable grid operators to streamline applications. The IRA’s incentives are only exacerbating this situation, as many developers are now exploring opportunities that previously seemed unviable. 

The IRA unlocks a bright future for US domestic manufacturing 

When the IRA first passed, we projected that the law would be a powerful catalyst for US solar growth. Today, there are still many unanswered questions the industry must resolve before its benefits can be fully realised. 

One area where the IRA is succeeding is reigniting interest in domestic manufacturing. There have been roughly three dozen announcements for new US solar manufacturing facilities in the last year.  While not all of these announcements will come online as promised, the IRA has still caused a surge in domestic solar manufacturing. 

In terms of solar project development, developers and financiers are still combing through the details of IRS guidance, or waiting for further clarity. We still expect the IRA to be a long-term driver of solar capacity growth – our latest outlooks put average annual growth for the next five years at 15%. But in the near-term, the industry is still grappling with the uncertainty surrounding qualification processes for various IRA provisions.  

The IRA’s domestic content requirements mean the US needs to develop a local battery supply chain – and then quickly ramp up production to meet its exploding demand. Even though US-made battery modules won't be available until at least late 2024 or early 2025, most are fully committed as soon as they become available.  

We expect these evolving market conditions to yield various manufacturer pricing strategies. Many buyers are willing to pay a premium for US-made equipment - as long as manufacturers provide cost transparency and IRS-compliant documentation. 

Final thoughts 

The IRA has generated encouraging progress and lucrative investment opportunities, although uncertainty remains around many specifics of the legislation. While it’s unclear when (or if) all these questions will be resolved, it seems clear that the IRA will ensure renewables, electrification, and decarbonisation remain critical pillars of the US’s economic future. 

Learn more 

For deeper insights into the impacts of the IRA across the power and renewables sector, download our complimentary summary by entering your details into the form at the top of the page.