Apr 13 2023

IRA Part 2: Responses to the Act

Since it was passed last year and subsequently presented to the COP27 Summit in Egypt as part of America’s climate action plans, the Inflation Reduction Act (IRA) has raised concerns amongst several countries, particularly in Europe, but also amongst some Asian nations and even here in Australia in some quarters.

While The Economist described the act as all carrot and no stick because it doesn’t price carbon or place a cap on emissions (although there is a fee for methane emissions from oil and gas production), there have been claims it could start a “clean-energy arms race”.

This stems from the potential for the IRA’s incentives to draw in investments and skills and encourage companies to shift manufacturing and their supply chains to the US.

It has seen Europe respond in the form of its own Green Deal Industrial Plan – a plan that is intended to simplify EU programmes and streamline the approval of green finance.

The passage of the IRA has already prompted companies to act. Clean energy advocacy group, Climate Power US, estimates that at the beginning of this year there were over 90 new clean energy projects totalling $89.5billion in new investments as a direct result of the new policy. Plans include 40 new battery manufacturing sites, while 22 companies had announced plans for new or expanded electric vehicle manufacturing, including European giants Volkswagen and BMW.  Meanwhile Tesla has announced it would focus battery cell production in the US instead of its earlier plans to produce full batteries in Germany to take advantage of incentives.

GreenBiz points to EU startup Marvel Fusion, a company hoping to deliver zero-carbon fusion power, being pushed by investors to relocate to the US as a result of the Act and Italy’s Enel and Norwegian battery group Freyr have joined firms in expanding existing plants or building new plants in the US on the expectation of a growing demand for green products, according to the Centre for Strategic & International Studies (CSIS).

Holcim AG, the world’s biggest cement maker, expects the IRA to provide momentum for its North American activities, while major industrial gases firm, Linde has estimated the total investment opportunity for the company in the US alone could now exceed $30 billion over the next decade.

At a Macquarie Group Forum the CEO of Storegga, a company involved in carbon capture and storage and hydrogen projects, argued a key driver in the legislation were the time limits on incentives which would see a “use it or lose it” approach and encourage quicker investment decisions.

The View From Oz

Locally business leaders have suggested Australia needs to react. Macquarie has been amongst them along with Fortescue Future Industries (FFI) which says it has to take notice of the US IRA because it will skew where investment goes. FFI has highlighted that the scope of the IRA means that a project worth $2 billion in Australia would only cost $1 billion if developed in the US with government support covering the rest. According the Australian Financial Review that translates into an immediate $3 per kilogram reduction in the cost of green hydrogen.

Woodside Energy is also considering a string of hydrogen projects for heavy transport and has said the IRA had given the hydrogen market in the US “a big kick forward”, while Deloitte last month claimed Australia was facing a “hydrogen tipping point”, as big support packages elsewhere added to the urgency of getting a domestic industry off the ground.

The US Act has also raised concerns with the Australian Hydrogen Council which released a policy paper with 6 recommendations for responses in light of the IRA and other international incentives “that are increasingly attracting investment in hydrogen”. The Clean Energy Council, meanwhile, has suggested the Federal Government needs to act to stimulate developments locally and to use the May budget to promote investment. While the Government did a deal with the Greens to increase spending on energy efficiency measures to pass its Gas Price Cap legislation late last year, it is yet to be seen what the scope of any funding might look like in what the Treasurer has described as a ‘responsible budget, with spending restraint its hallmark’. Regardless, it is hard to see how Australia could look to match or outspend the US or EU in providing grants and subsidies.

Santos has pointed to the IRA support for carbon capture and storage (CCS) and noted that Australian support is lagging the US in the rollout of the technology.  Despite that there is some light locally for CCS from the reformed Safeguard Mechanism. According to Wood Mackenzie there are 27 CCS projects that are proposed or under development in Australia and they expect the technology could receive a boost from the Mechanism because it will require new gas developments to abate carbon emissions and comes into effect 1 July 2023.

There are also concerns that the IRA could not just draw investment away from other countries, like Australia, but also skilled workers. Ryan Carroll, Regional Director of Airswift, a provider of workforce solutions to industries, said Australia was not the first choice for renewable energy talent and the US Government has now made its intentions clear with the brightest talent likely to be drawn to the best opportunities as a result.

Based on Airswift’s Global Energy Talent Index 2023 Europe is the top choice for those working in the renewables sector (39 per cent, see figure 3.), but the US has risen quickly to second place “following several positive moves from the Biden administration, including the Inflation Reduction Act”.

Figure 1: Preferred location for renewables workers

Source: Global Energy Talent Index

For workers in power systems, Europe remains the leading location and this is attributed to the region’s push for decarbonisation of power and electrification of industries from transport to manufacturing. Recent US Government investment in grid modernisation, however, has seen North America rise to second, on 18 per cent (figure 2).

Figure 2: Preferred location power sector workers

Source: Global Energy Talent Index

The counterpoint to concerns about the IRA is that the US Ambassador to Australia, Caroline Kennedy, has said the US incentives will not impact the competitiveness of trading partners like Australia and suggested Australia should partner up on initiatives.

US Treasury Secretary Janet Yellen has also talked about ‘‘supply-side investments’’ and ‘‘friend shoring’’ of supply chains.

In the Driver’s Seat?

One major target of the IRA is the production of electric vehicles (EVs).  The Act’s support for clean vehicles includes rules requiring them to be built in the US with critical minerals and batteries to come from North America or countries where the US has preferential trade agreements. It has raised questions from countries including EU members, South Korea, Japan and the UK.

The South Koreans and Japanese are reportedly “exchanging notes” with partners in Europe on the issue with a proposal to for their concerns to be accommodated by the US.

With China holding more than 80 per cent market share for battery components, according to Wood Mackenzie, and with battery manufacturing from China and other so-called foreign entities of concern (FOEC) blocked from the IRA incentives, US automakers are seeking clarification on a range of issues with battery raw material supply chains a key area of focus.

While it may take some time to see the full extent of the impacts from the IRA globally, there’s one thing we can be certain of; it has made a lot of people sit up and take notice.

Related Analysis


National Energy Performance Strategy: What’s In it?

On 5 April, the Department of Climate Change, Energy, the Environment and Water released the National Energy Performance Strategy. The strategy is intended to provide a long-term framework to manage energy demand, “so our community can enjoy the economy, climate and health benefits of improved energy performance”. It also designed to contribute to Australia meeting its legislated emissions reduction and renewable energy targets. We take a look at what is included in the strategy.

Apr 18 2024

Queensland’s pumped hydro plans

In September 2022, then Queensland Premier Annastacia Palaszczuk announced plans to construct two new pumped hydro projects: Borumba Dam – a 2GW facility located in Imbil, 50km west of Noosa, and the Pioneer/Burdekin facility which plans to offer 5GW of storage, located 75km west of McKay. We take a look at pumped hydro and how it can support the energy transition.

Apr 11 2024

Reviewing the Reviews, Part II

The first meeting of the Energy and Climate Change Ministerial Council (ECMC) for 2024 brought to the fore the extent of change underway in the energy sector. The ECMC’s communique hints at the breadth of reviews and assessments into the energy sector and operations of the National Electricity Market (NEM). It's part of a now long-established pattern. For well over a decade, energy has been at the forefront of policy developments, largely because of the significant changes to our grid. Along with those changes has come a heightened political involvement. With political interest has come a myriad of reviews, assessments and interventions to make the NEM “fit for purpose”. We take a look at the latest ECMC work and the extent of reviews underway.

Mar 07 2024
Do you have a question or comment for AEC?

Send an email with your question or comment, and include your name and a short message and we'll get back to you shortly.

Call Us
+61 (3) 9205 3100