The Inflation Reduction Act: ‘Step One, Not Step Last’ for the Planet
Danny Kennedy is a former Greenpeace and climate activist who became a groundbreaking leader in the international clean energy industry. Currently CEO of New Energy Nexus, a global platform that connects and capitalizes entrepreneurs working to build a clean energy economy, Danny Kennedy has a unique perspective on the clean energy sector and the way that activism and social movements intersect with the technical reality of a clean energy transition. When the Inflation Reduction Act was signed, and it became clear that there was real potential for a transformation in how we power our economy, we reached out to get his analysis on what is in the bill and what the actual impact is likely to be.
Among his many achievements, Kennedy co-founded Sungevity, (the company that created remote solar design), was the first backer of the major solar loan provider, Mosaic, oversees the CalSEED.fund (nurturing early-stage California companies driving innovation) and is board chair of Third Derivative, a joint venture (with RMI) building the world’s largest climate-tech accelerator. He is the author of Rooftop Revolution: How Solar Power Can Save Our Economy – and Our Planet as well as the brand new podcast, Climate of Change (with Cate Blanchett).
Danny Kennedy spoke to Teo Grossman, Senior Director of Programs & Research at Bioneers.
TEO GROSSMAN, BIONEERS: You have a long history in this field and an interesting story for a person in clean tech, beginning as a dyed in the wool activist, becoming an entrepreneur and starting your own company to now leading New Energy Nexus, a collection of clean tech funds and accelerators. From your perspective, how much wind does this put in the sails of the clean energy sector?
DANNY KENNEDY, NEW ENERGY NEXUS: A lot. It’s worth believing at least some of the hype. Obviously during the Trump era this country was trying proactively to have a war on the war on coal, get out of the Paris accords, and God knows what. But even during the various Democrat regimes, it’s been hard to count on the federal government getting behind the energy transition in the way the Germans and the Chinese and others have. But now this is real federal industrial policy. The federal government just committed to clean energy for a decade at a time that’s really ripe. With a sustained set of incentives, a bunch of carrots, which is basically what the Inflation Reduction Act presents, plus the CHIPS Act, plus the infrastructure bill from last year, we now have a decade-long view for building out the clean energy transition that we all know we need.
Previous iterations of these incentives were two and three-year terms, and tax credits were available for limited horizons, so punks like me would try to build solar leasing businesses on the back of an announced solar investment tax credit. But it didn’t last long enough to get the business up to scale and so on. This is now committed until 2032, and even then, if we haven’t met 75% of emissions reductions targets, the tax credit finance will continue at the levels of this act.
There’s a real sense that this is the long-term strategic intent of the nation known as the United States of America, putting down serious coin on this side of the table.
TEO: For people who aren’t intimately familiar with solar finance and renewable energy development, is there a “regular person” version of what the impact is? Why is a 10-year tax credit transformational?
DANNY: Sure. I can try although I’m not an expert on legislative packages, particularly from the federal government, which I’ve studiously ignored for a decade, because I got burnt so often that I decided to stop believing in it and focused on state and local-level work, which is also quite fruitful.
I’ll try to break down the four areas, both consumer facing, for your audience, but also the other behind-the-scenes supply side stuff that matters in this bill.
To explain tax credit finance, the way I think of it as a kind of foreigner here (I was American born but lived outside the country and have built businesses outside the country), is that America likes to pretend we don’t subsidize things, whereas European countries, the Chinese and others will be quite explicit and say, “We’re going to back this business or this industry or whatever with money.” In America, we give tax credits instead. These credits, which allow the owner to forgo future tax payments, are fungible in a marketplace where they can be sold. Financiers or others who have a big tax bill can buy tax credits from an industry that’s been subsidized by the US via laws like the IRA. They buy that dollar’s worth of tax avoidance for 80 or 90 cents on the dollar, whatever the discount is that they negotiate, and then that saves them some money and they make a return effectively, rather than just paying the tax bill. The solar developer or whoever sold the tax credit now has investment capital to work with. Instead of the government giving money directly, it just doesn’t take future funds.
To be fair, this is the way Hollywood gets financed, how low-income housing has been built in many places in the US, and the energy industry has benefited from tax credits, historically, including the solar industry. But what we’re talking about here is tax credits both on the consumer side, ranging from better incentives for community solar – up to 50% of the community solar project in your community neighborhood could be funded by this federal financing – to EV purchases getting a tax write-off from your purchase of a car or even a secondhand car. One of the really creative elements in this bill is $4,000 for used EVs, which means that second hand cars will be cheaper, plus take $4,000 off the top. They’ve become quite accessible theoretically to lower-income folk who aren’t buying EVs yet, and benefiting from the total cost of ownership of the electric vehicles.
The bill also provides manufacturing tax credits, so battery supply chains might be “re-shored,” is the expression, given that currently most batteries are made in Asia, mostly in China. That’s a strategic issue, so the US government is now going to give factories 30% of their cost through tax credit finance, plus allow them to leverage loan guarantee money, which is also written into this bill, which then gets them additional benefits in the debt markets for their project finance. There are a lot of manufacturing tax credits we can talk about in different supply chains connected to the idea that we need to electrify everything. Heat pumps and induction stoves and all these things are prone to these types of tax credit benefits. Hydrogen, which is the fuel replacement we need for the hard-to-abate sectors like steel, and maybe some transport applications, gets significant tax credits.
There are also some dodgy things that I’m not big on, like Carbon Capture and Storage (CCS) and new nukes and nonsense like that, but that was the political compromise. There are definitely hairs on this, warts and all. It’s necessarily so, and the ‘Manchinian’ candidate was the key character to get this thing done. But there are vast gobs of dollars available for energy star-rated homes and good old things we know we need to make the energy transition real. It’s a big deal.
TEO: You’ve long been tracking the actual market competition of clean power against fossil fuels. Based on the data, clean power is already way more competitive on a cost basis and has been for some number of years. And yet we still have a long way to go to make the full transition we need to make. Short of drastic measures like nationalizing oil companies and taking them out of production, this cost competition between clean energy and dirty energy is likely to be the make-it-or-break-it race for whether we make this transition in time. From where you sit now, how close does this new legislation get us to where we need to be, to get 100% clean energy for 100% of people as you say?
DANNY: A good next lunge toward the try line (that’s a rugby metaphor, probably doesn’t translate to most of your audience) or toward the end zone, but not the last yards by any stretch. Now, forecasts are always wrong, and necessarily so, but all the models, the Rhodium Group and REPEAT scenarios along with a recent Department of Energy analysis, are all saying this gets us to 40% emission reduction by 2030. Biden’s electoral pledge, if you recall, was 50%. So it’s not there, but it’s a good stretch further than we would be on current trajectories.
The whole debate now is a race of rates. The energy transition is inevitable. It’s baked. We’re going to get off fossil fuels this century, let’s say that for certain. Shell will say that. They think it’s 70 years from now, and keep wanting to keep it 70 years from now. I think it’s 10 years from now, or should be, per the science. Probably it’s somewhere between those two poles. This act accelerates the US getting there, and the US is still the largest economy in the world, not on purchase power, but we’re a big fish, an 800-pound gorilla, really important in the world. So it’s a big step, but it’s not the end of the story. It’s just the first step, really.
We’ve now gotten serious, although not serious enough that we’re not still screwing around with the “all of the above energy policy” bullshit. I’m sorry, I start swearing when I start thinking about the fossil fuel side of this. The CCS incentives are just wasting money on prolonging the inevitable. And the idea of requiring oil and gas leases for every wind and solar farm lease on federal lands? What nonsense. That’s just hedging for Manchin again, and at the expense of communities. We have to recognize the work in front of us is to get rid of it; get it done, not try to fix it or tweak it.
There are some other elements in this that we haven’t talked about, beyond the finance piece, like the methane fee, which I don’t think anyone’s fully grappled with, just how far and deep that fee might impact the oil and gas sector. But fundamentally, we still have to accelerate the rates of adoption because meanwhile climate change is accelerating, as we’re all experiencing this summer, and it is literally that race of rates.
The question is whether the “green vortex” (a term which describes the positive feedback loop of innovation and “green” technology) will catch up and beat the greenhouse effects feedback loops that we’re seeing kick in. That’s the question before us. I wouldn’t discount the idea of the green vortex in an economy the size of America. What we’re going to see now is jobs across the rust belt, in red and purple states, in communities that have historically seen clean energy transition as a threat. Now because of this sustained industrial strategy that the United States has embarked upon, it will be seen as an investment opportunity – job creation not job loss. That will give the clean energy transition more social license, will allow more ambitious policy development, maybe getting rid of the compromise crap and moving on to just a very clear strategic industrial policy focused on clean energy. That’s the hope, that the next president picks this up and improves on it.
TEO: Some of the very justified criticism of the bill is that very little has practically changed for communities who have been getting a raw deal for decades as the fossil fuel economy developed on the back of their land and lungs and bodies. There are no mandates to transition away from the types of development these frontline communities have been dealing with and fighting for years. The CCS provisions are a prime example, allowing dirty plants to continue operating so long as they capture the carbon (even if it’s used for additional resource extraction). On the plus side, the bill actually contains some carrots in terms of additional incentives for just transition type projects that take place in communities that were previously home to large-scale fossil fuel projects: refineries, mines, power plants, etc. There are extra bonuses tucked in for developing in those communities.
The question is: How can those actors who are benefiting most from the new infusion of subsidies, this new clean energy boom, support some of the frontline and fenceline communities that are more or less in the same position they were in before this act?
DANNY: I should have said right up top that there is this very clear set of additional incentives to invest in what are being called “energy communities” in this bill. The idea is to broadly link investment to a lot of the frontline environmental justice communities on the fence lines of refineries and coal fields. If you’re in one of those geographies, yes, there are layers of extra incentive.
There’s also fantastic stuff in here around union labor and apprenticeship and the like. To dwell here for a second, as I said before, a community solar project, sub-five megawatts, could maybe get as much as 50% direct pay. But there are lots of conditions on that maybe, including a prevailing wage requirement and 15% of the workforce being apprenticeship. This will be a boon to the trades councils and job training programs and so forth. Then if you’re using domestic content, you can get extra, and if it’s in one of these “energy communities,” you get another 10% extra. Layer all these on top of the base 20-30% tax credit and your project finance booms. That’s an amazing screen across all of this.
At a higher level still, there’s something that I just don’t fully understand, and I don’t think anyone yet has interpreted the full implications of, which is Executive Order 14008, known as Justice40, requiring that 40% of investment in a set of categories including climate change, clean energy, transit, sustainable housing and more, is to flow to disadvantaged communities. Theoretically, all federal programs in these categories, including much of what is in this bill, might be subject to Justice40, meant to benefit communities that have historically been left behind.
To your question, what should people of privilege and those clearly benefiting from this bill do? If you’re a developer reading this interview, think about how you leverage these incentives, partnering with a coal community to build solar farms, tapping the transmission lines that used to run to the retired coal plant. If you’re a customer or an investor, how can you invest in projects that are conforming to these priorities? It’ll probably be to your financial advantage to do that, because of the way this law is written. Again, there may be unintended consequences. This might really be great and empower folks, which is the upside.
To talk about the equity and justice side of this, I feel like the way this was negotiated in basements by two white men, good old-fashioned American politicking at the end of the day, left communities that have always suffered with the short end of the stick. What madness is that, that these communities still have to suffer, and worse still, weren’t consulted at all? One of the backroom deals was to require oil and gas leases to be offered in order to get the solar and wind farm leases going on federal land. Now, my sense is that the oil and gas leases are unlikely to be taken up. They’re not being taken up at a high rate right now anyway because the industry is unsure it should develop upstream and is just trying to make hay with the projects under production now at this high cost of oil and gas. However, it’s terrible that that was even considered without environmental justice voices at the table.
I’m just appalled at the negotiation outcome. If Manchin was saying, okay, for every solar and wind farm that goes in offshore California or onshore federal lands, there must be oil and gas leases, at least there should have been a quid pro quo negotiated, something like, okay, for every oil and gas lease that goes in Alaska or the Louisiana Gulf, there needs to be a wind and solar farm lease offered as well. Just amateur hour outcomes. But whatever. The oil and gas industry in this country has run roughshod over Congress for 100 years, and expect to continue to do so. Hopefully this decade is when we begin to get rid of them once and for all.
TEO: Absolutely. Climate activism hopefully continues to be alive and well and will hold everyone’s feet to the fire.
DANNY: Exactly. My final thought is, like I said, the hype is real. This is a big deal. But don’t rest on laurels. There are no laurels here. This is just what we should have done a decade or two ago, and now we’re trying to do it. Politicians still need to be held to account and make sure this is done right, and even accelerate it. The next president has to do better. This is step one, not step last.