- The Inflation Reduction Act (IRA) includes approximately $370b of energy-related spending; both the clean energy theme and the electric vehicle theme are key components and the primary focuses of this commentary.
- The clean energy theme could benefit from tax credits, grants, and favorable loans for electrical infrastructure.
- Electric vehicles and the broader EV value chain could experience accelerated demand from tax credits, government EV purchases, loans and grants.
- In our view, investors seeking to capitalize on this significant milestone may want to consider pure-play ETFs investing in clean energy and the electric vehicle value chain.
The Inflation Reduction Act’s impact on clean energy and EVs
Aug 16, 2022 Industry
KEY TAKEAWAYS
INFLATION REDUCTION ACT TARGETS CLEAN ENERGY AND ELECTRIC VEHICLES
The Inflation Reduction Act will deliver approximately $370 billion of new investment in several areas including clean energy, electric vehicles and other related themes. We see this investment potentially accelerating the structural growth trends behind these technologies.
At the time of the deal's passage by Congress, Alastair Bishop, portfolio manager on the BlackRock Future Climate and Sustainable Economy ETF (BECO) “The passage of the Inflation Reduction Act has been positive news for clean energy and other themes; it is likely to further power investment in solar, wind, and hydrogen while supercharging electric vehicles.”
This law advances an additional prong of the Biden administration’s economic agenda, building on last year’s Infrastructure Investment and Jobs Act (IIJA), which drove historic spending in U.S. infrastructure and included tens of billions for clean energy, electric vehicles and other related technologies. We anticipate that this spending has the potential to translate to significant revenues for clean energy companies and electric vehicle firms for years to come.
Investors have long paid attention to the potential for a multifaceted package that could support clean energy and lay the groundwork for greater EV adoption. From late 2020 through early 2021 (8/31/20 – 2/28/21), when markets anticipated similarly historic spending in this area, we saw $14 billion flow into clean energy and electric vehicle ETFs while the S&P Global Clean Energy Index and the NYSE FactSet Global Autonomous Driving and Electric Vehicle Index were up 51% and 32%, respectively.1,2 Some of those gains were then given back when support fell apart for the package. Markets are already responding — the S&P Global Clean Energy Index and the NYSE FactSet Global Autonomous Driving Electric Vehicle Index gained 21% and 10%, respectively, since the bill’s announcement (7/27/22 – 8/12/22).3
WHAT’S INCLUDED IN THE INFLATION REDUCTION ACT
Paid in full
Amid volatile energy costs, the Inflation Reduction Act's energy-related provisions have the potential to strengthen domestic energy security and support domestic electric vehicle production. To achieve this, it plans on investing roughly $370 billion across:4
Clean energy production — Production tax credits for clean electricity generation and investment tax credits for new clean energy projects across wind, solar, geothermal, bioenergy, hydropower, energy storage, and clean hydrogen, as well as approximately $30 billion in grants and loans to modernize utilities’ and states’ electric infrastructure.
Electric vehicles — Offers consumers $4,000 - $7,500 tax credits for EV purchases and manufacturer tax credits for producing EVs, EV batteries, and building new EV manufacturing facilities. It also offers up to $20 billion in loans and $2 billion in grants for new and existing EV facilities, as well as $3 billion to procure zero-emission vehicles for public transit and the federal fleet.
Clean technology manufacturing — Production and investment tax credits of $30 billion for manufacturing solar panels, wind turbines, heat pumps, EVs, batteries, and critical minerals; $10 billion for facilities to produce them; and $6 billion (including grants) for carbon capture. Direct spending includes $7.5 billion for clean technology products and $29 billion in breakthrough energy research.
Adoption of enabling technologies — Significant tax credits, $9 billion in rebates, and a $1 billion grant program to fund residential electrification and energy efficiency technologies, including heat pumps, rooftop solar, electric HVAC, water heaters, and home appliances.
It is also critical to note that the IRA includes a range of features in areas with broad bipartisan consensus — specifically nuclear power and natural gas. And, though funding was a primary sticking point, negotiations yielded agreement on provisions that could raise on the order of $700 billion of new revenue and reduce the national deficit by over $300 billion, fighting inflation and addressing several hot button issues across taxation and healthcare.5
ACCELERATING CLEAN ENERGY PRODUCTION
Tax incentives further reduce costs
Tax credits from the 2000s and 2010s helped accelerate the scaling of wind and solar power in the U.S., bringing down costs, and ultimately making clean power more affordable than fossil fuels.6
Clean energy production and investment tax credits have historically driven significant clean energy capacity additions in the US
Note: Tax credit expenditure reflects budget estimate from nearest fiscal year total tax expenditure release (FY2011 – 2021). Represents sum of production and investment tax credits for clean energy sources.
Source: US Department of the Treasury Annual Tax Expenditure Releases, 2011 – 2021; BP, Statistical Review of World Energy, 2022/2021 Editions.
Chart description: Combined stacked column and line chart with columns showing the annual wind and solar power generation capacity gains and with the line showing the annual total federal expenditure on production and investment tax credits. The chart shows how increased federal spending on tax credits historically contributed to new clean energy generation capacity.
This new round of tax incentives could further accelerate the growth of clean energy production through subsidizing additional projects to achieve greater scale and increasing the profitability of producers.
Projections show the importance of extending federal clean energy tax credits for growing US clean power generation
Note: Case with credits assumes extension of tax credits through 2050; without assumes 2023 expiration.
Source: US Energy Information Administration, July 2022.
Chart description: Line chart showing combined annual wind and solar power generation in the US across two scenarios: with investment/production tax credits and without. The chart shows how tax credits can contribute to increased power generation over time.
Manufacturers of clean energy technologies could realize similar benefits. Production and investment tax credits for manufacturing could make producing key clean energy components, like solar panels and wind turbines, more profitable. They may also make building new manufacturing facilities less costly. This could accelerate the production of these technologies and drive further gains in manufacturing capacity in the U.S.
Investors seeking to capture this theme may want to consider ETFs that offer exposure not to any one clean power source, such as solar or wind, but the full range of producer types and the many enablers of these technologies, including solar panels, wind and tidal turbines as well as energy transmission tech.
BENEFITS TO THE ELECTRIC VEHICLE THEME
Back in the fast lane
Traditional and incumbent EV automakers are likely to see higher demand driven by consumer tax credits. The lifetime ownership cost of EVs is already lower than that of internal combustion engine (ICE) vehicles, and while the average sticker price of EVs is still higher, they are rapidly approaching parity.7,8 The Inflation Reduction Act could seal the deal. The IRA's $7,500 tax credit offered for purchases of new EVs could lead consumers to switch from traditional autos.
Consumer tax credits were essential to driving US EV demand. Similar initiatives and more affordable EVs could have even greater effect
Note: Tax credit expenditures reflect federal budget estimates from nearest fiscal year total tax expenditure release.
Source: US Department of the Treasury Annual Tax Expenditure Releases, 2012 – 2021; IEA, 2022.
Chart description: Combined column and line chart, with columns showing annual EV unit sales in the US and the line showing annual federal expenditures on clean vehicle tax credits. The chart shows how increased spending on clean vehicle tax credits contributed to increased EV sales.
Manufacturers of electric vehicles and related components could realize similar benefits from tax credits, favorable loans and direct investments that could drive increased manufacturing capacity in the U.S. For automakers, this would be particularly meaningful, as the impending costs of shifting to electric vehicles have been daunting. And with global supply chain pressures still hampering manufacturers’ ability to meet demand, the focus on domestic production should make the U.S. transition to EVs more seamless. Moreover, new capacity to produce batteries should help drive the economies of scale needed to bring EVs to cost parity with their ICE counterparts.
Investors anticipating the EV growth potential that could result from the IRA may want to consider ETFs that invest in companies with significant revenue exposure across the full EV supply chain, including manufacturers, battery producers, battery material suppliers and tech enablers.
CONCLUSION
We believe the Inflation Reduction Act would directly benefit companies from several themes including clean energy and electric vehicles. The indirect impacts could be equally immense. The IRA could have profound implications for both the global clean energy and electric vehicle industries, potentially offering additional near- and long-term boosts. In many ways, this law could serve as a catalyst for clean energy and EVs, which we have long seen as megatrend themes that may be poised for long-term structural growth (see Three reasons why clean energy is at a tipping point and Is it the right time to buy electric vehicle (EV) stocks?).
In our view, investors looking to capitalize on a potential period of acceleration in the clean energy and electric vehicle spaces, may want to consider ETFs that invest holistically across these two Megatrend themes.
