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And the U.S. Inflation Reduction Act is surprisingly well-designed to deal with the fallout.
It’s an open secret in U.S. climate policy circles that the Inflation Reduction Act got its name for purely political reasons. It’s a climate bill, after all. Calling it “Inflation Reduction Act” was just the marketing term to help sell it to a skeptical public more worried about rising prices than temperatures in August 2022.
Temperatures have only risen since, while inflation is down, and the Inflation Reduction Act had nothing to do with either. But to see why the name was more than appropriate only takes going back a further six months.
On February 24, 2022, Russian president Vladimir Putin launched a full-scale invasion of Ukraine. In many ways, the step shouldn’t have come as a surprise. The invasion followed months of saber-rattling. It wasn’t even Putin’s first invasion of Ukraine — that happened ten years earlier, with Russia’s forceful annexation of Crimea. But Russia’s bombs raining down on Ukraine still came as a shock. February 24 was a Thursday. By Sunday morning, Germany had changed 75 years of pacifist defense strategy. Another result of the invasion: fossil energy price spikes.
Now, two years later, it has become clear that the shock of the war has changed the trajectory of global energy and climate in ways that we are only beginning to appreciate. It is also precisely where the U.S. Inflation Reduction Act enters the picture, and why history will judge the law — and its name — kindly. Let me explain.
Gas prices in Europe had already been high all winter before Russia’s invasion, in part in response to Putin’s posturing. After the invasion, they spiked. The peak happened in August 2022, in anticipation of the Russian war lasting through the coming winter and worries about the war dragging on. Drag on, of course, it did. Two years in, there’s no end to the fighting in sight. Gas prices, meanwhile, are down again to levels not seen since well before the invasion.
One key reason: demand is down. Europe’s gas demand was down almost 18% in the first year after the invasion, compared to the year before. Not all of that is good news, for the climate or otherwise. One reason for decreased gas demand had been temporarily increased coal use. Another is a sputtering European economy.
The U.S. had been relatively insulated from these extreme fluctuations. But it, too, saw gas prices spike in August 2022. The spike, to be clear, was much lower than in Europe. Gas, unlike oil, is a regional market. But the economic upshot was similar everywhere: massive inflation driven by volatility in fossil fuel prices, or “fossilflation” for short.
All of us, the global economy, and the fortunes of political leaders everywhere are at the mercy of geopolitical vagaries. Putin blows a fuse and invades Ukraine, and your gas bills spike – both types of “gas” bills, by the way: gasoline to get to work, and methane gas to heat your home. Electricity bills typically are not far behind, with gas-powered plants that can be called upon at a moment’s notice providing a necessary margin of safety during moments of peak demand. That means that they — or, by extension, Putin, in this case — set the price.
Don’t take my word for it. The U.S. Bureau of Labor Statistics unpacks the underlying drivers of inflation into three main categories: food, fuel, and everything else. Throughout the most recent U.S. spike in inflation in 2022, the energy category alone was responsible for around half of total inflation. And that’s just counting the direct effects. Indirectly, a good portion of the food price increases ever since are also due to higher energy costs. If the farmer pays more to harvest the crop, soon those commodity prices increase as well. Of course, it isn’t all fossil fuels. Putin’s invasion, for example, also impacted corn production in the Ukraine directly, by destroying crop land, preventing a timely harvest, and cutting off export routes.
There are two other climate-related factors that drive inflation — call them “climateflation” and “greenflation,” to use German economist Isabel Schnabel’s terms. Schnabel — a member of the Executive Board of the European Central Bank, the body that sets interest rates for the 340 million people in the Eurozone — introduced all three -flationary terms in a March 2022 speech warning of “a new age of energy inflation.”
Climateflation is just what it sounds like: inflation because of unmitigated climate change. When an extreme weather event wipes out a country’s harvest of a particular crop, prices spike. One year it’s avocados, the next sugar, and more significant food staples like corn, rice, and wheat are never far behind. The long-term prescription, much like with fossilflation: get off fossil fuels.
None of that will happen overnight. That, in a sense, makes the IRA a horrible political strategy with an eye toward the next election cycle. Want to cut inflation quickly? Make gas and gasoline cheaper with direct handouts. Hello, gas tax holidays!
The problem with that policy quick fix is that it’s just that: decidedly short-term thinking. Fossil energy use will go up as a result. In fact, several U.S. states and European countries have done just that in response to Putin’s invasion. As a result, the average price paid per ton of CO 2 has gone down in 2022, after a decade of steadily rising carbon prices the world over.
The IRA famously does not establish a carbon price either, and that’s A-OK. It does establish a $900-per-ton price for methane paid by oil and gas companies, but the law is decidedly more carrots than sticks. That contrasts U.S. climate policy with what has been the primary focus of the EU, with its emissions trading system and national carbon taxes. It also addresses a more subtle type of climate-related inflation: greenflation, upward pressure on prices because of the rush to get off fossil fuels.
The good news on that front: It seems to be true that there’s plenty of the kinds of precious metals and rare earth minerals we need to power the low-carbon transition to go around. Polysilicon prices spiked for a bit, before new supply came online, and solar panel prices never budged from their decades-long, precipitous decline. Lithium, nickel, and other minerals used in batteries and other low-carbon technologies similarly rose for a bit before they, too, declined precipitously.
The post-fossil fuel transition will still take plenty of active management and proactive policy. That is where the U.S. IRA shines, and where the EU, despite its head start and overall ambitious climate policy, is playing catchup.
In May 2022, the European Union passed REPowerEU, a broad set of measures to cut off Russian gas within five years. By September of that year, the EU had cut Russian gas as a percentage of total gas piped in from abroad to under 10%, down from over 40% a year prior. Germany built three LNG import terminals in record time, and lots of other measures showed almost immediate effect.
Overall, the EU is now racing to catch up with the U.S. in the global climate race with its own set of ambitious supply-side measures in form of a broad Green Deal Industrial Plan. We should all applaud that transatlantic climate policy competition and embrace the newly rekindled green growth mindset. Done right, the planet will emerge as a winner, and so will our economies.
The IRA has not and will not cut inflation overnight. But that fight is indeed a big part of the bill’s legacy: Play the long game of tackling all three types of climate-related inflation — fossilflation, climateflation, and greenflation — at their very core, and indeed justify the law’s name.
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Amarillo-area residents successfully beat back a $600 million project from Xcel Energy that would have provided useful tax revenue.
Power giant Xcel Energy just suffered a major public relations flap in the Texas Panhandle, scrubbing plans for a solar project amidst harsh backlash from local residents.
On Friday, Xcel Energy withdrew plans to build a $600 million solar project right outside of Rolling Hills, a small, relatively isolated residential neighborhood just north of the city of Amarillo, Texas. The project was part of several solar farms it had proposed to the Texas Public Utilities Commission to meet the load growth created by the state’s AI data center boom. As we’ve covered in The Fight, Texas should’ve been an easier place to do this, and there were few if any legal obstacles standing in the way of the project, dubbed Oneida 2. It was sited on private lands, and Texas counties lack the sort of authority to veto projects you’re used to seeing in, say, Ohio or California.
But a full-on revolt from homeowners and realtors apparently created a public relations crisis.
Mere weeks ago, shortly after word of the project made its way through the small community that is Rolling Hills, more than 60 complaints were filed to the Texas Public Utilities Commission in protest. When Xcel organized a public forum to try and educate the public about the project’s potential benefits, at least 150 residents turned out, overwhelmingly to oppose its construction. This led the Minnesota-based power company to say it would scrap the project entirely.
Xcel has tried to put a happy face on the situation. “We are grateful that so many people from the Rolling Hills neighborhood shared their concerns about this project because it gives us an opportunity to better serve our communities,” the company said in a statement to me. “Moving forward, we will ask for regulatory approval to build more generation sources to meet the needs of our growing economy, but we are taking the lessons from this project seriously.”
But what lessons, exactly, could Xcel have learned? What seems to have happened is that it simply tried to put a solar project in the wrong place, prizing convenience and proximity to an existing electrical grid over the risk of backlash in an area with a conservative, older population that is resistant to change.
Just ask John Coffee, one of the commissioners for Potter County, which includes Amarillo, Rolling Hills, and a lot of characteristically barren Texas landscape. As he told me over the phone this week, this solar farm would’ve been the first utility-scale project in the county. For years, he said, renewable energy developers have explored potentially building a project in the area. He’s entertained those conversations for two big reasons – the potential tax revenue benefits he’s seen elsewhere in Texas; and because ordinarily, a project like Oneida 2 would’ve been welcomed in any of the pockets of brush and plain where people don’t actually live.
“We’re struggling with tax rates and increases and stuff. In the proper location, it would be well-received,” he told me. “The issue is, it’s right next to a residential area.”
Indeed, Oneida 2 would’ve been smack dab up against Rolling Hills, occupying what project maps show would be the land surrounding the neighborhood’s southeast perimeter – truly the sort of encompassing adjacency that anti-solar advocates like to describe as a bogeyman.
Cotton also told me he wasn’t notified about the project’s existence until a few weeks ago, at the same time resident complaints began to reach a fever pitch. He recalled hearing from homeowners who were worried that they’d no longer be able to sell their properties. When I asked him if there was any data backing up the solar farm’s potential damage to home prices, he said he didn’t have hard numbers, but that the concerns he heard directly from the head of Amarillo’s Realtors Association should be evidence enough.
Many of the complaints against Oneida 2 were the sort of stuff we’re used to at The Fight, including fears of fires and stormwater runoff. But Cotton said it really boiled down to property values – and the likelihood that the solar farm would change the cultural fabric in Rolling Hills.
“This is a rural area. There are about 300 homes out there. Everybody sitting out there has half an acre, an acre, two acres, and they like to enjoy the quiet, look out their windows and doors, and see some distance,” he said.
Ironically, Cotton opposed the project on the urging of his constituents, but is now publicly asking Xcel to continue to develop solar in the county. “Hopefully they’ll look at other areas in Potter County,” he told me, adding that at least one resident has already come to him with potential properties the company could acquire. “We could really use the tax money from it. But you just can’t harm a community for tax dollars. That’s not what I’m about.”
I asked Xcel how all this happened and what their plans are next. A spokesperson repeatedly denied my requests to discuss Oneida 2 in any capacity. In a statement, the company told me it “will provide updates if the project is moved to another site,” and that “the company will continue to evaluate whether there is another location within Potter County, or elsewhere, to locate the solar project.”
Meanwhile, Amarillo may be about to welcome data center development because of course, and there’s speculation the first AI Stargate facility may be sited near Amarillo, as well.
City officials will decide in the coming weeks on whether to finalize a key water agreement with a 5,600-acre private “hypergrid” project from Fermi America, a new company cofounded by former Texas governor Rick Perry, says will provide upwards of 11 gigawatts to help fuel artificial intelligence services. Fermi claims that at least 1 gigawatt of power will be available by the end of next year – a lot of power.
The company promises that its “hypergrid” AI campus will use on-site gas and nuclear generation, as well as contracted gas and solar capacity. One thing’s for sure – it definitely won’t be benefiting from a large solar farm nearby anytime soon.
And more of the most important news about renewable projects fighting it out this week.
1. Racine County, Wisconsin – Microsoft is scrapping plans for a data center after fierce opposition from a host community in Wisconsin.
2. Rockingham County, Virginia – Another day, another chokepoint in Dominion Energy’s effort to build more solar energy to power surging load growth in the state, this time in the quaint town of Timberville.
3. Clark County, Ohio – This county is one step closer to its first utility-scale solar project, despite the local government restricting development of new projects.
4. Coles County, Illinois – Speaking of good news, this county reaffirmed the special use permit for Earthrise Energy’s Glacier Moraine solar project, rebuffing loud criticisms from surrounding households.
5. Lee County, Mississippi – It’s full steam ahead for the Jugfork solar project in Mississippi, a Competitive Power Ventures proposal that is expected to feed electricity to the Tennessee Valley Authority.
A conversation with Enchanted Rock’s Joel Yu.
This week’s chat was with Joel Yu, senior vice president for policy and external affairs at the data center micro-grid services company Enchanted Rock. Now, Enchanted Rock does work I usually don’t elevate in The Fight – gas-power tracking – but I wanted to talk to him about how conflicts over renewable energy are affecting his business, too. You see, when you talk to solar or wind developers about the potential downsides in this difficult economic environment, they’re willing to be candid … but only to a certain extent. As I expected, someone like Yu who is separated enough from the heartburn that is the Trump administration’s anti-renewables agenda was able to give me a sober truth: Land use and conflicts over siting are going to advantage fossil fuels in at least some cases.
The following conversation was lightly edited for clarity.
Help me understand where, from your perspective, the generation for new data centers is going to come from. I know there are gas turbine shortages, but also that solar and wind are dealing with headwinds in the United States given cuts to the Inflation Reduction Act.
There are a lot of stories out there about certain technologies coming out to the forefront to solve the problem, whether it’s gas generation or something else. But the scale and the scope of this stuff … I don’t think there is a silver bullet where it’s all going to come from one place.
The Energy Department put out a request for information looking for ways to get to 3 gigawatts quickly, but I don’t think there is any way to do that quickly in the United States. It’s going to take work from generation developers, batteries, thermal generation, emerging storage technologies, and transmission. Reality is, whether it is supply chain issues or technology readiness or the grid’s readiness to accept that load generation profile, none of it is ready. We need investment and innovation on all fronts.
How do conflicts over siting play into solving the data center power problem? Like, how much of the generation that we need for data center development is being held back by those fights?
I do have an intuitive sense that the local siting and permitting concerns around data centers are expanding in scope from the normal noise and water considerations to include impacts to energy affordability and reliability, as well as the selection of certain generation technologies. We’ve seen diesel generation, for example, come into the spotlight. It’s had to do with data center permitting in certain jurisdictions, in places like Maryland and Minnesota. Folks are realizing that a data center comes with a big power plant – their diesel generation. When other power sources fall short, they’ll rely on their diesel more frequently, so folks are raising red flags there. Then, with respect to gas turbines or large cycle units, there’s concerns about viewsheds, noise and cooling requirements, on top of water usage.
How many data center projects are getting their generation on-site versus through the grid today?
Very few are using on-site generation today. There’s a lot of talk about it and interest, but in order to serve our traditional cloud services data center or AI-type loads, they’re looking for really high availability rates. That’s really costly and really difficult to do if you’re off the grid and being serviced by on-site generation.
In the context of policy discussions, co-location has primarily meant baseload resources on sites that are serving the data centers 24/7 – the big stories behind Three Mile Island and the Susquehanna nuclear plant. But to be fair, most data centers operational today have on-site generation. That’s their diesel backup, what backstops the grid reliability.
I think where you’re seeing innovation is modular gas storage technologies and battery storage technologies that try to come in and take the space of the diesel generation that is the standard today, increasing the capability of data centers in terms of on-site power relative to status quo. Renewable power for data centers at scale – talking about hundreds of megawatts at a time – I think land is constraining.
If a data center is looking to scale up and play a balancing act of competing capacity versus land for energy production, the competing capacity is extremely valuable. They’re going to prioritize that first and pack as much as they can into whatever land they have to develop. Data centers trying to procure zero-carbon energy are primarily focused on getting that energy over wires. Grid connection, transmission service for large-scale renewables that can match the scale of natural gas, there’s still very strong demand to stay connected to the grid for reliability and sustainability.
Have you seen the state of conflict around renewable energy development impact data center development?
Not necessarily. There is an opportunity for data center development to coincide with renewable project development from a siting perspective, if they’re going to be co-located or near to each other in remote areas. For some of these multi-gigawatt data centers, the reason they’re out in the middle of nowhere is a combination of favorable permitting and siting conditions for thousands of acres of data center building, substations and transmission –
Sorry, but even for projects not siting generation, if megawatts – if not gigawatts – are held up from coming to the grid over local conflicts, do you think that’s going to impact data center development at all? The affordability conversions? The environmental ones?
Oh yeah, I think so. In the big picture, the concern is if you can integrate large loads reliably and affordably. Governors, state lawmakers are thinking about this, and it’s bubbling up to the federal level. You need a broad set of resources on the grid to provide that adequacy. To the extent you hold up any grid resources, renewable or otherwise, you’re going to be staring down some serious challenges in serving the load. Virginia’s a good example, where local groups have held up large-scale renewable projects in the state, and Dominion’s trying to build a gas peaker plant that’s being debated, too. But in the meantime, it is Data Center Alley, and there are gigawatts of data centers that continue to want to get in and get online as quickly as possible. But the resources to serve that load are not coming online in time.
The push toward co-location probably does favor thermal generation and battery storage technologies over straight renewable energy resources. But a battery can’t cover 24/7 use cases for a data center, and neither will our unit. We’re positioned to be a bridge resource for 24/7 use for a few years until they can get more power to the market, and then we can be a flexible backup resource – not a replacement for the large-scale and transmission-connected baseload power resources, like solar and wind. Texas has benefited from huge deployments of solar and wind. That has trickled down to lower electricity costs. Those resources can’t do it alone, and there’s thermal to balance the system, but you need it all to meet the load growth.