IRA Subsidies Are Driving Investment Decisions In A Dangerous Direction

As we pass the one-year anniversary of the enactment of the Inflation Reduction Act, the energy media is currently filled with stories attempting to gauge the level of impact the $369 billion in new green energy subsidies and tax breaks contained in it have had on the direction of U.S. energy investment.

When the law was enacted, I predicted those provisions would become the major driver of such investments for a decade. Across the ensuing 12 months, I have now interviewed at least 18 CEOs and other senior executives at companies who are investing in renewable energy projects or some form of technology designed to support renewables and other low-carbon solutions. When asked, each of them has told me that the IRA subsidies are integral to their projects’ ability to move forward.

There are no exceptions.

Even oil majors like ExxonMobil, BP and Shell are happy to point to the ability to take advantage of certain subsidies and the expanded investment tax credit as motivating factors boosting their own investments into renewables and other low carbon solutions like carbon capture projects. The same is true of big oil and gas contractors and service companies, as well as for a wide array of startups and international companies mounting new entries into the U.S. market.

This is a clear example of public policy steering the ship, a situation in which politicians – among the very least knowledgeable class in our society when it comes to energy and climate – are picking winners and losers. This isn’t happening just in the United States: It’s taking place throughout the western world, as governing entities like the EU rush to implement similar arrays of subsidies designed to compete for these major new capital investments.

One result of having perhaps the worst possible class of people – politicians – making all these multi-billion-dollar decisions for the rest of us comes clear in the perverse incentives and unintended consequences the policies are now creating.

One of the best illustrations of this is the IRA/EPA policy effort to force 2/3rds of the U.S. transportation fleet to convert to EVs by 2032. The IRA contained the carrot of heavy incentives and subsidies for EV makers and consumers, and the EPA is implementing the stick of new tailpipe emissions and mileage standards designed to crowd most current internal combustion models out of the market.

This carrot-and-stick policy approach comes at the same time the U.S. power generation sector faces an already-severe and growing shortage of the transformers that are integral to any power generation or transmission project. It is now taking up to 4 years to source high voltage transformers, most of which are made overseas and moved via supply chains largely controlled by China.

The obvious problem here is that recharging millions of additional EVs will place an enormous new load on the nation’s power grids, a fact that Tesla CEO Elon Musk says will require at least a doubling of generation capacity in the coming years, and that even the Biden administration admits will require the build-out of 47,000 miles of new high-capacity transmission lines.

But get this: Neither the IRA nor the 2021 infrastructure law included subsidies or incentives targeting transmission or transformers.

Oh.

That is just one of many perverse incentives being forced into the marketplace by this ill-structured set of subsidies. And again, this is not isolated to the U.S. – it is happening throughout the western world.

Meanwhile, the Xi government in China systematically secures its energy future by locking up international supplies of energy minerals, rare earth elements and supply chains for pretty much every other product or component that is integral to the maintenance of national energy security, all while commissioning more and more coal-fired power plants needed to maintain a stable power grid.

It has always been impossible to de-link energy investments from politics and public policy – those have always been factors that must be considered. But in the wake of the IRA, it has become clear that subsidies and incentives are now the major driver of a steadily rising array of such investments. The question becomes whether that direction is healthy for the maintenance of national energy security. The answer thus far is not encouraging.

David Blackmon is an energy writer and consultant based in Texas. He spent 40 years in the oil and gas business, where he specialized in public policy and communications.

The views and opinions expressed in this commentary are those of the author and do not reflect the official position of the Daily Caller News Foundation.

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