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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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Tariffs and the loss of Inflation Reduction Act incentives could realign new power pricing, according to Morgan Stanley.
If you’re putting new power onto the grid right now, the cheapest option is likely solar. Thanks to years of declining equipment costs, generous federal subsidies, and voluntary renewables buyers like big technology companies, much of America’s planned future electricity generation is solar (along with battery storage). Of the 63 gigawatts planned to be added to the grid this year, the Energy Information Administration has estimated that solar will make up about half of it, while solar and storage collectively will make up over 80%.
While there’s no one single price for a megawatt-hour of any given power generation source, a good place to start are estimates from the financial advisory firm Lazard of the levelized cost of energy, which is supposed to allow comparisons between different generation sources. When Lazard put out its updated figures last summer, the average cost of utility solar was $61 per megawatt-hour. For a combined cycle natural gas plant, the most common type of gas generation, the average cost was $76.
But that math may be endangered, according to a new analysis by Morgan Stanley — to the point where solar could lose its competitive cost advantage with new natural gas.
“The cost of power generation is moving higher. The impact of tariffs and potential changes to subsidy support (i.e., IRA) will likely have an inflationary impact on the cost of power,” the analysts wrote to clients.
The team of analysts looked at the impact of both tariffs and the possible reduction or cessation of Inflation Reduction Act tax credits on utility-scale solar costs. According to Morgan Stanley’s figures, about half of the capital expenditure for a utility-scale solar project comes from the hardware, which is mostly the cost of the panels.
While some panels are produced in the United States, there are still significant imports from Southeast Asia, which currently face preliminary tariffs as high as several hundred percent. Those should become permanent later this month when the Department of Commerce completes its investigation into “dumping” by Chinese solar companies that have set up shop in the region.
The imports of these solar panels — some $10 billion in 2024, according to Tim Brightbill, a lawyer for a coalition of domestic solar manufacturers who are pursuing the anti-dumping case — “undercut and really drove down prices in the U.S. solar market,” Brightbill told a group of reporters Thursday. “It forced U.S. producers to significantly reduce their prices,” he said. “The industry was sort of pushed into a cost price squeeze.”
Those days are likely over. Instead, a variety of economic and political factors look to force prices up instead of down for new renewable power.
In a world where capital expenditure for solar projects goes up 5% to 10% — a range the analysts called “reasonably plausible” based on how much solar panels make up of the cost of a project — the Morgan Stanley analysts estimate that to maintain an industry standard investor return in the low-teens, power purchase agreements prices would have to rise to $52 to $57 per megawatt-hour, up from $49 to $54. “In a scenario where tariffs hold and IRA tax credits are eliminated,” the analysts write, those prices might go up as high as $73.
Those PPA prices could seriously degrade the advantage solar has over new natural gas generation, the Morgan Stanley analysts found, despite natural gas seeing its own cost pressures.
For one, there’s the shortage of gas turbines that’s causing higher equipment prices, bringing capital expenditures for a new gas plant up by around 75% in the last few years, the analysts said. Natural gas will also face its own hurdles from tariffs.
After penciling all that out, the Morgan Stanley analysts project that industry standard returns would require PPA prices of about $75 to $80 for natural gas.
You may notice how close that is to the pessimistic forecast on solar pricing.
“While current power market prices are not at levels that would support a new-build of natural gas turbines impacted by a tariff, we believe the co-location opportunity is still viable as a mid-to-high $70/MWh PPA price is still well within the willingness-to-pay for data center customers,” the Morgan Stanley analysts wrote. In other words, data centers that need a lot of power and don’t particularly care about carbon emissions or supporting renewables could end up procuring new gas.
That seems to track what we’re seeing out in the world. In January, Chevron and the investment firm Engine No. 1 announced a joint venture to deploy GE Vernova turbines on site to power data centers.
Natural gas pipeline giant Kinder Morgan’s executive chairman Richard Kinder told analysts Wednesday during the company’s quarterly earnings call that the company had seen a “nice uptick” in demand, “driven in part by the surge in AI and data centers.” The company’s natural gas pipelines president Sital Mody told analysts that Kinder Morgan is “actively pursuing opportunities to provide supply to ultimately feed these upcoming data centers,” and its chief executive Kimberley Dang called out Arizona as a potential market for gas-powered data centers.
So far this year, despite the threat of IRA repeal and protectionist tariffs hanging over the industry (not to mention “Liberation Day” tariffs on inputs like steel), prices paid for solar power have held steady, according to data from LevelTen, a power purchase agreement marketplace.
“Despite policy uncertainty, clean energy deals are moving forward at high volume,” Zach Starsia, LevelTen’s energy marketplace senior director, told me in an email. “There’s more certainty for projects expected to reach [commercial operation] in the next 12 to 16 months. It’s the longer-term, early-stage projects that are two to three years out where cost predictability becomes more difficult. Buyers are acting now to secure favorable pricing and access before tariffs and policy shifts begin to tighten market conditions,” Starsia said.
The company attributed the steady prices to the sector “finding itself on firmer footing following a long period of pandemic-era supply chain woes and an array of policy headwinds,” according to a LevelTen market analysis. While new and scheduled tariffs “are certainly a cause for concern,” the analysis said, the market is “well-attuned” to them due to the long history of solar tariffs since 2012.
“We expect upward pressure on PPA prices through 2025, particularly in technologies and regions exposed to tariffs and supply chain risk,” Starsia said. But he also wrote, perhaps optimistically, “The window is still open for prepared buyers to secure strong deals before price shifts fully take hold.”
Plus, what a Texas energy veteran thinks is behind the surprising turn against solar and wind.
I couldn’t have a single conversation with a developer this week without talking about Texas.
In case you’re unaware, the Texas Senate two days ago passed legislation — SB 819 — that would require all solar and wind projects over 10 megawatts to receive a certification from the state Public Utilities Commission — a process fossil fuel generation doesn’t have to go through. The bill, which one renewables group CEO testified would “kill” the industry in Texas, was approved by the legislature’s GOP majority despite a large number of landowners and ranchers testifying against the bill, an ongoing solar and wind boom in the state, and a need to quickly provide energy to Texas’ growing number of data centers and battery manufacturing facilities.
But that’s not all: On the same day, the Texas Senate Business and Commerce Committee approved a bill — SB 715 — that would target solar and wind by requiring generation facilities to be able to produce power whenever called upon by grid operators or otherwise pay a fine. Critics of the bill, which as written does not differentiate between new and existing facilities, say it could constrain the growth of Texas’ energy grid, not to mention impose penalties on solar and wind facilities that lack sufficient energy storage on site.
Renewable energy trades are in freak-out mode, mobilizing to try and scuttlebutt bills that could stifle what otherwise would be a perfect state for the sector. As we’ve previously explained, a big reason why Texas is so good for development is because, despite its ruby red nature, there is scant regulation letting towns or counties get in the way of energy development generally.
Seeking to best understand why anti-renewables bills are sailing through the Lone Star State, I phoned Doug Lewin, a Texas energy sector veteran, on the morning of the votes in the Texas Senate. Lewin said he believes that unlike other circumstances we’ve written about, like Oklahoma and Arizona, there really isn’t a groundswell of Texans against renewable energy development. This aligns with our data in Heatmap Pro, which shows 76% of counties being more welcoming than average to a utility-scale wind or solar farm. This is seen even in the author of the 24/7 power bill – state Senator Kevin Sparks – who represents the city of Midland, which is in a county that Heatmap Pro modeling indicates has a low risk of opposition. The Midland area is home to several wind and solar projects; German renewables giant RWE last month announced it would expand into the county to power oil and gas extraction with renewables.
But Lewin told me there’s another factor: He believes the legislation is largely motivated by legislators’ conservative voters suffering from a “misinformation” and “algorithm” problem. It’s their information diets, he believes, which are producing fears about the environmental impacts of developing renewable energy.
“He’s actively working against the interests of his district,” Lewin said of Sparks. “It’s algorithms. I don’t know what folks think is going on. People are just getting a lot of bad information.”
One prominent example came from a hailstorm during Hurricane Uri last year. Ice rocks described like golfballs rained down upon south-east Texas, striking, among other things, a utility-scale solar farm called Fighting Jays overseen by Copenhagen Infrastructure Partners. The incident went viral on Facebook and was seized upon by large conservative advocacy organizations including the Competitive Enterprise Institute.
What’s next? Honestly, the only thing standing between these bills and becoming law is a sliver of hope in the renewables world that the millions of dollars flowing into Texas House members’ districts via project investments and tax benefits outweigh the conservative cultural animus against their product. But if the past is prologue, things aren’t looking great.
And more of the week’s most important conflicts around renewable energy.
1. Westchester County, N.Y. – Residents in Yonkers are pressuring city officials to renew a moratorium on battery storage before it expires in July.
2. Atlantic County, New Jersey – Sorry Atlantic Shores, but you’re not getting your EPA permit back.
3. St Clair County, Michigan – We may soon have what appears to be the first-ever county health regulations targeting renewable energy.
4. Freeborn County, Minnesota – Officials in this county have rejected a Midwater Energy Storage battery storage project citing concerns about fires.
5. Little River County, Arkansas – A petition circulating in this county would put the tax abatement for a NextEra solar project up for a vote county-wide.
6. Van Zandt County, Texas – Officials in this county have reportedly succeeded in getting a court to impose a restraining order against Taaleri Energy to halt the Amador battery storage project.
7. Gillespie County, Texas – Peregrine Energy’s battery storage proposal in the rural town of Harper is also facing a mounting local outcry.
8. Churchill County, Nevada – Battery storage might be good for Nevada mining, but we have what appears to be our first sign of revolt against the technology in the state.