The global energy industry is undergoing dramatic change. Technological change, shifting environmental preference, the ever-present role of geopolitics in energy trade and energy access, and energy security concerns interlaced with national welfare and economic growth priorities all dominate the current discourse on energy transitions. The future is uncertain, but, as has always been the case, economic growth and innovation will dictate how energy markets transition and the pace of change, with current and emerging policies providing important steering currents. The U.S. government has taken some rather significant legislative steps over the past couple of years that could have a lasting impact on energy investment and choice, but there is an important caveat: infrastructure.
The IIJA, CHIPS Act, and IRA
Three recent pieces of legislation have bearing for the future of energy in the United States.
- The Infrastructure Investment and Jobs Act (IIJA) was introduced in the House of Representatives as the INVEST in America Act on June 4, 2012, and passed on July 1, 2021, by a vote of 221-201. After amendment, the IIJA passed the Senate on Aug. 10, 2021, by a vote of 69-30, signaling broad bipartisan support. President Joe Biden signed the IIJA into law on Nov. 15, 2021.
- The Creating Helpful Incentives to Produce Semiconductors (CHIPS) Act was introduced in the House as the Supreme Court Security Funding Act on July 1, 2021, and passed by a vote of 215-207 on July 28, 2021. After amendment, the CHIPS Act passed the Senate on July 27, 2022, as the CHIPS and Science Act. It received a vote of 64-33, also a strong signal of bipartisan support. Biden signed the act into law on Aug. 9, 2022.
- The Inflation Reduction Act (IRA) was more contentious. Originally introduced as the Build Back Better Act, it passed the House on Nov. 19, 2021, by a vote of 220-213. After several amendments, the IRA passed the Senate on August 7, 2022, along a party-line vote of 51-50, with the tie-breaking vote cast by Vice President Kamala Harris. It was signed into law on Aug. 16, 2022.
The IIJA sets aside significant funding for certain types of energy investments, in addition to a host of other types of infrastructures. For energy, the focus is on the electricity grid, low-carbon forms of electricity, hydrogen, and carbon capture and sequestration (CCS) infrastructure, among other things. In the end, the funds provided through various grant programs will help to de-risk certain investments in an effort to accelerate the development of new energy technologies and infrastructures and the creation of market hubs for long-term growth. Notably, the available funding through the IIJA for the establishment of “hydrogen hubs” has catalyzed significant coordination in various regions across the country, as large coalitions of producers, consumers, transporters, and technology providers seek access to funds aimed at propelling low-CO2 hydrogen to the fore.
The CHIPS Act provides subsidy support for research and development and, ultimately, the domestic production of semiconductors. Its primary aim is to counter mounting concerns that energy transitions in the U.S. will increase reliance on countries that already have a pronounced advantage in the production of critical components for new energy technologies, such as China. In this way, the CHIPS Act was largely viewed as vital for U.S. national security.
The IRA, which was the most contentious of the three acts, passed along a party-line vote. It addresses more than just energy, with significant implications for the health care industry and for tax imposition and collection. For energy, the IRA provides significant subsidy support on energy and climate. Many of the energy provisions are embedded in the tax code, with enhancements and additions to provisions for low-CO2 hydrogen, CCS, energy efficiency, electric vehicles, and renewables. There is already significant positioning to win the subsidies provided for CCS and low-CO2 hydrogen production, but the market awaits clarity on how certain provisions will be administered, such as Treasury guidance on the 45V tax credit, which is critical for a full commercial assessment of potential projects by private sector actors.
Legislative Staying Power
The IIJA, CHIPS Act, and IRA are transformative because they are legislative acts. This especially matters when considering the staying power of contentious legislation that passes along a strict party-line vote. Given the bipartisan nature of the passage of the IIJA and CHIPS Act, they are unlikely to see any concerted efforts to being undone. The IRA, however, was anything but bipartisan, passing the House and Senate along clear party lines. Nevertheless, the IRA is also unlikely to be undone, a point that has been made by many others.
To begin, legislation is distinctly different from executive orders (EOs) or agency rulemakings. The risk of governing by EO is manifest when elections result in a change in party power. History is riddled with incoming presidents taking steps to undo their predecessors’ actions by issuing their own EOs. Agency rulemakings are undertaken through the Administrative Procedure Act (APA), whereby an administration publishes a notice of proposed rulemaking in the Federal Register followed by a period for public comment that must be considered before a final rulemaking is issued. While agency rulemakings have more resilience than EOs, the Congressional Review Act provides Congress a fast track to undoing such rulemakings through a resolution of disapproval, which must be signed by the president to take effect. Interestingly, new administrations have used executive memoranda to suspend rulemakings that have not yet been finalized.
Legislation, such as the IIJA, CHIPS Act, and IRA, faces a more burdensome path to being undone than EOs or even actions through the APA. While presidents have run on campaign pledges to undo legislation passed under previous administrations, such a path is not as simple as the stroke of pen; it requires new legislation. Previous legislation, therefore, tends to have staying power. A recent case in point is the Affordable Care Act signed into law by President Barack Obama in 2010, which, despite much protestation, has not been undone.
Moreover, if the benefits of a particular legislative act accrue to populations in districts represented by members of the party that originally opposed the legislation, it may be even more difficult to overturn. For example, it is highly likely that “red” districts will benefit the most from new jobs and infrastructures associated with the IRA, which will, for reasons related to cost-competitiveness and siting, highly correlate to the location of existing energy infrastructure. Hence, it will be increasingly difficult to alter course once the train leaves the station.
An Infrastructure Achilles' Heel
Does this mean the intent of the IRA will be fully realized? Not necessarily. One of the most significant barriers involves the development of new infrastructure, which will be critical for a full realization of the intent of the IRA, not to mention the IIJA and the CHIPS Act. As one example, the subsidies provided by the IRA for CCS may not lead to any fruitful investment in the technology if CO2 pipelines cannot be built and sequestration wells cannot be permitted and drilled. Each of these is tied up in other parts of the regulatory process, but each is necessary for executing the intent of the IRA.
This example involving CCS is not unique, as permitting issues, as well as market access, also apply to electricity and hydrogen infrastructure — from production to transport to storage to delivery for end-use. Thus, addressing impediments in the permitting process for infrastructure is a must, lest opportunity be confined to regions with existing infrastructures that can be leveraged and/or expanded without having to traverse an arduous approval gauntlet for new “greenfield” projects. This will limit the multiplier effect of government fiscal support and limit the macro-level impacts of the IIJA, CHIPS Act, and IRA on the energy system.
In short, the potential impact of these three acts is tied not to their staying power, but to the ability for market participants to execute projects to take advantage of their provisions. Permitting reform at the federal level is being discussed (and has come up multiple times over the past year in hearings at the Senate Committee on Energy and Natural Resources) with little dissent on the critical need for infrastructure. But the ultimate effectiveness of ongoing discussions remains to be seen.
Addressing impediments in the permitting process at a local level also matters, particularly because local agencies can intervene, and when steel and cement are involved, things get local very fast. This is nothing new for the hydrocarbon industries, and we are starting to see it play out with wind and solar as they become larger parts of the energy mix. In fact, it is arguably part of the maturation process, as the permitting and approval process for the first coal plant looked nothing like the last one, nor will the permitting and approval process for the next wind or solar farm look like the first.
To be clear, permitting reform should not run roughshod over private citizens, landowners, or other vested interests. In fact, the concept in economics known as “social efficiency” indicates as much; trade-offs matter and all factors are relevant in determining the best possible outcome. Realizing the full intent of the IIJA, CHIPS Act, and IRA requires recognizing other constraints that must also be addressed. In many ways, this very simple point highlights exactly why energy transitions are complex. They require navigating a multitude of considerations that link to economic, social, and environmental issues.
What Comes Next?
It is likely that the IIJA, CHIPS Act, and IRA will have tangible impacts in multiple locations. But a confluence of factors will drive the greatest impacts to locations with existing industrial corridors, favorable geology, plentiful infrastructure, large market centers (such as ports), and an abundance of physical, natural, and human capital resources — all of which, by the way, contribute to a lower likelihood of local opposition. Ultimately, the private sector will capitalize on the ever-present principle of comparative advantage to drive the future of energy through innovation and growth.
In the near term, constraints on the ability to develop new infrastructure effectively segment the market for new energy technologies that advance low-CO2 solutions. As it stands now, there is a distinct first-mover advantage for firms that can leverage existing infrastructures to advance CCS strategies or that already have a footprint in nascent hydrogen markets and/or regional power markets. As a result, such firms will be better positioned to fully leverage the recent legislation. But greater market participation is needed to drive depth, liquidity, and growth, and infrastructure, as well as access to it, is central to that outcome. So, while the likelihood of future legislation undoing the IIJA, CHIPS Act, or IRA is near zero, infrastructure is critical to any future, no matter how different that future may look from today.
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