Home Policy How the Inflation Reduction Act Makes Renewables More Lucrative

How the Inflation Reduction Act Makes Renewables More Lucrative

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IRA and renewables
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Incentives Given by the IRA

As companies shift their focus to sustainability and ESG initiatives, the oil and gas industry is investing in a long-term future that goes beyond their reliance on fossil fuels. The world is beginning to transition towards renewables and other lower-carbon alternatives. Government incentives, like the Inflation Reduction Act (IRA), can help the industry’s decarbonization journey by making cleaner energy more economically viable. 

Thus far, the IRA  stands as one of the best opportunities to speed up the pace of the clean energy transition. We can expect substantial acceleration in the coming years due to the incentives contained within.

These incentives will remain in place for a decade, allowing companies greater certainty as they consider investing in renewables. The IRA is anticipated to encourage more deal activity and investor interest, specifically in cleaner assets and technology. In the coming year, PwC projects that companies are likely to focus on monetizing non-core assets to expand portfolios in new directions. These areas include carbon capture technology, liquefied natural gas (LNG) and renewables, especially hydrogen and biofuels.

Assessing the IRA’s Effect on Deals

As executives consider how carbon reduction could change their company’s cost structure, they need to understand the far-reaching impact the IRA makes on the cost of doing business.

Beyond potentially making it easier and more economical to advance their company’s cleaner energy agenda, provisions within the act could also have negative implications for their margins and cash flow.

The IRA’s 15% minimum tax on corporate profits requires a deeper assessment of how it’s calculated. It’s imperative to understand where the 15% will get applied and how companies can protect their business and value for shareholders. Also, operating costs could change as companies continue to decarbonize. Offering the same product that is decarbonized, versus one that is not, could come at a price differential with profit and loss (P&L) implications.

Of course, it depends on how much the end customer values decarbonized products. For instance, sought-after sustainable aviation fuel can cost four-to-five times as much as standard fuel. This can offset the cost to produce the product, add more margin and positively impact P&L. Conversely, if there is no price premium to capture, the cost to produce decarbonized products can have a negative impact. 

The act also allows more flexibility with direct pay for qualifying companies and transferable credit options. This flexibility could have a significant impact on companies relying on financing arrangements for energy-related projects. While not a requirement of the provision, the ability to transfer credits to another entity may encourage companies to form new partnerships or joint ventures to gain more access to clean energy, tap into new revenue sources, or explore new business configurations.

For instance, we could see more strategic relationships where a traditional energy company teams up with a small, modular reactor provider offering nuclear as a zero-carbon backup to wind and solar. Or, more hydrogen producers and nuclear operators could forge symbiotic relationships where the output from nuclear supports hydrogen production. All players in these scenarios could potentially benefit from various IRA incentives.

Hydrogen: An IRA Beneficiary in Focus

Before the IRA was enacted, deals in the energy sector focused on renewables may have taken several years for companies to see a return on investment. The credits awarded via the IRA make these deals more lucrative, with companies seeing their ROI quicker. As a result, we expect to see an increased interest and investment in renewables, especially hydrogen.

Take refiners, for example. While downstream deal activity has remained sluggish for many years now, refiners are making an effort to increase their ESG initiatives, focusing on renewable diesel, biofuels, etc. Hydrogen investment appeals to downstream players, offering the potential for an alternative, clean-burning fuel. Given that the IRA offers incentives that make biofuels and hydrogen production more economical, it would behoove refiners to consider making more significant investments.

In fact, they should probably consider the option sooner rather than later, as players who have already placed big bets on the energy transition are likely reaping the benefits more than anyone. Those who moved early on the research and development of hydrogen now have the green light to keep the momentum going, thanks to the IRA’s 10-year production tax credit for clean hydrogen.

Other industries working to reduce their carbon footprint may drive long-term deals focused on developing blue hydrogen, otherwise known as hydrogen made from natural gas in which the emissions are offset by carbon capture. The IRA creates longer-term incentives that may make investing in blue hydrogen development more attractive.

Carbon Capture Generates Tradable Tax Credits

The Inflation Reduction Act is accelerating our collective energy transition and presents the energy sector with a great opportunity to take the lead on reducing its emissions. Over the long run, it may encourage a flood of deal activity and investor interest in areas such as carbon capture, a technology that can help companies on their ESG journey and is more attractive because of tax credits. Likewise, the provision that allows for the transfer of credits to another entity may lead to an uptick in companies forming new partnerships, seeking joint ventures or exploring new markets to expand or evolve their portfolio.

All that is to say that while it’s up to oil and gas companies to decide whether they want to invest in renewables, the Inflation Reduction Act helps make it far more economical than in years past.

Author Bio

Seenu Akunuri is PwC’s US Energy, Utilities and Resources Deals Leader, where he consults with both audit and non-audit clients on deals, valuation trends, hot topics and industry issues. With 20+ years of worldwide business valuation experience, Seenu has built a solid reputation for solving complex valuation issues around mergers, acquisitions, divestitures and other domestic, global and cross-border transactions.

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