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Welcome back to Energy Source, coming to you from New York today.
The push for pipeline consolidation is gaining momentum, with Energy Transfer announcing another major deal yesterday. As new fossil fuel infrastructure faces opposition in the US, we can expect the drive for midstream mergers and acquisitions to continue.
It has been a year since the Inflation Reduction Act (IRA) shook up global clean energy markets and propelled the US into a new era of industrial policy. Since the passage of this legislation, billions of dollars worth of manufacturing projects and thousands of new jobs have been announced across the country.
President Joe Biden has made the green revolution a key focus of his re-election campaign. However, polls show that voters are not yet convinced of its benefits. Today’s newsletter examines the changes that have occurred in the 12 months since the IRA became law.
Data Drill reveals the widening global oil supply deficit, which is increasingly depleting US inventories. Thank you for reading. Please note that Energy Source will be taking a late-summer break and will return to your inboxes in the first week of September. — Amanda
Happy Birthday, IRA!
It has been exactly one year and one day since Joe Biden signed the Inflation Reduction Act into law, marking the most significant climate action taken by the US government to date. This $369 billion spending package has not only brought the country closer to its emissions targets but has also transformed the US into a leading market for cleantech manufacturing, much to the frustration of its trade partners. “The passage of the IRA gave the United States the opportunity to be the leader in clean energy, not just a participant, but finally a leader,” said Peter Faricy, CEO of SunPower, a residential solar developer.
Here are four key takeaways about the current state of affairs one year after the law’s passage:
Industrial revival is in full swing
The IRA is not just a climate policy; it is also an industrial policy. Since last August, approximately $84 billion in large-scale cleantech manufacturing projects have been announced in the US. Construction spending on manufacturing plants has increased by 55%, according to Moody’s. “The IRA really underpinned the business case to stay here and focus on getting the factory expansion initially in the United States,” said Jorg Heinemann, CEO of EnerVenue, a company that recently announced a $264 million battery factory in Kentucky. While these projects are spread across the country, certain regions are receiving a disproportionate share. Georgia and South Carolina are leading in new projects, and nearly three-quarters of all projects are headed to Republican districts. This poses a dilemma for the party as it approaches an election year, balancing the desire to criticize Democrats for overspending in Washington with the need to attract new investment in their districts.
Foreign investors are eager to participate
Although domestic companies are responsible for the majority of project announcements, foreign investors are also vying for a piece of the US supply chain. South Korean and European companies are leading the way, with 19 and 16 projects announced, respectively. LG Energy Solution, a South Korean battery company, has announced three new factories in the US since the passage of the IRA. The influx of foreign investment comes as the IRA faces criticism for distorting markets and creating an uneven playing field. In an attempt to address these concerns, the Biden administration has extended an invitation to Europe and Japan, allowing countries without formal free trade agreements with the US to participate in its clean vehicle tax credit.
Challenges lie ahead
While the wave of project announcements is encouraging, the main challenge will be turning these plans into reality. Clean energy projects face various obstacles, including raw material constraints, labor shortages, permitting issues, and long wait times for grid connection. “The proof will be in the pudding to see if [the IRA] can live up to its expectations. A lot will depend on the ability of these announced projects and their commercial activity to turn into actual facilities on the ground,” said Sasha Mackler, Executive Director of the Energy Program at the Bipartisan Policy Center. A recent report from S&P Global warned of a persisting struggle in sourcing enough supply of lithium, nickel, and cobalt under the IRA tax credit restrictions. The report also highlighted the potential for US-Chinese rivalry to further complicate energy transition supply chains.
More action is required
While the IRA is a significant step in the right direction, it is not sufficient to reach net-zero emissions. Further government action is needed. According to Rhodium Group, US emissions could fall 42% below 2005 levels by the end of the decade based on current policies, which falls short of Biden’s target of 50% by 2030. BloombergNEF estimates that the US will be 22% short of this target. While the IRA’s tax credits will drive significant emissions reductions in the power and transportation sectors, analysts argue that hard-to-abate sectors such as heavy industry and aviation require stricter regulations to decarbonize. “Sticks are needed to complement the IRA carrots. The IRA only provides positive incentives but does not force anyone to take action,” said Tom Rowlands-Rees, Head of North America at BloombergNEF.
Data Drill
Oil demand is reaching record highs at a time when supply cuts are tightening. This imbalance is expected to further deplete US oil inventories, which are already at multi-decade lows. The International Energy Agency reports that global demand reached a record of 103 million barrels per day in June and could rise further this month. With global economies relying heavily on fossil fuels, the IEA estimates a need for 30 million barrels per day of OPEC supply. However, Saudi Arabia’s production cuts have kept the group’s output at approximately 27.8 million barrels per day, with no signs of an increase in the near future. This suggests a global supply shortage of 2.2 million barrels per day in the third quarter. “This is a very significant global deficit,” said Bjarne Schieldrop, Chief Commodities Analyst at SEB. “As such, it should start to impact US oil inventories.” US crude stocks are already at their lowest level since the early 1980s, and with weekly drawdowns hitting a record of 17 million barrels at the end of last month, elevated figures are expected to persist.
Power Points
– European cleantech start-ups receive less than half the funding compared to their US counterparts.
– The lack of electric vehicle chargers is hindering the Great American road trip.
– Inside an English village’s fight against power lines and its impact on the energy transition.
Please note that Energy Source is written by the FT’s global energy team. You can reach us at [email protected] and follow us on Twitter at @FTEnergy. For past newsletters, please visit this page.
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