In green-subsidy race, energy companies are beginning to respond
By Brendon Moran, Co-Head of UK Corporate Coverage & Senior Banker (Energy, Natural Resources & Utilities)
If there’s a sign that the renewable energy industry’s attention is shifting from Europe to the United States, it could be the relocation of key decision makers. A few are moving to America’s east coast; others to hubs like Houston; others to the west coast. Admittedly, this flow of people and intellectual capital across the Atlantic is currently small – but in a year or two it might well be exponential.
The catalyst is the Inflation Reduction Act (IRA), which became law in August 2022 with a stated aim of cutting US greenhouse gas emissions by 40% by 2030 compared with a base of 2005 levels. The legislation’s unstated aim, though, appears to not only incentivise a massive expansion of renewable energy generation but also dominate clean energy’s technology, intellectual property, innovation and supply chains on a global basis. The playbook looks very similar to what the United States achieved in the late 90’s and early 00s with the Technology and Digital sector.
With a complex package of USD 369 billion in tax credits, loans and grants over 10 years, the act transforms the economics of energy transition projects and related businesses. Take wind and solar. While no two projects are the same, the sheer amount of capital chasing these projects has squeezed returns on equity down as low as 5-10%. In this context, the new US incentives can significantly enhance a project’s revenue and return profile while the costs remain the same.
These incentives apply not just to the more mature renewable technologies of wind and solar but also the newer areas of carbon capture and storage, and hydrogen. They also encompass the supply chain, with the US administration keen to avoid dependence on suppliers like European turbine blade manufacturers or Chinese solar panel companies.
In principle, President Biden is following the example of the Clinton administration in the 1990s when the US edge in technology was beginning to erode. President Clinton introduced a program of targeted tax credits and research spending: the rest is history. The United States has since established clear leadership in the global technology industry, with world-beating companies like Microsoft, Apple and Google.
Challenged to respond to the IRA, the EU has introduced the ‘Net-Zero Industry’ and ‘Critical Raw Material’ acts in March this year, which aim to streamline existing grants and subsidies but offer no new money, leaving flexibility for member states to set up temporary public incentives. Likewise, the REPowerEU Plan introduces a myriad of policy responses to tackle climate change and wean the continent off Russian energy. However, tangible results are yet to manifest.
As for the UK, much has been made of a “green industrial revolution” and the “Ten Point Plan” announced by the Boris Johnson government in 2022. While some progress has been made in areas such as mobility and improvements to energy efficiency, there is still a long road to travel on many of the goals that have been set out and a narrowing window in which to implement if Net Zero goals are to be met.
Ultimately, there’s a contrast between the US financial carrot and EU policy stick approaches to developing clean energy. Since 2005, the EU has limited companies’ rights to emit CO2, allowing them to be traded under its Emissions Trading Scheme. That has worked well and is credited with driving Europe’s emissions reductions. But the IRA is a gamechanger because it gives energy companies the incentives to act over a short 10-year timeframe (or until grants run out) and the opportunity to not only boost a tough return on capital, but also accelerate the deployment of clean energy generation and – critically – invest in supply chains to deliver the energy transition.
While the United States lags far behind Europe in terms of low-carbon energy generation, it evidently aims to catch up fast. The EU generated 38% of its electricity from wind, solar, hydro and bioenergy in 2022 – almost twice the United States’ 22%, according to the Global Electricity Review 2023 published by Ember, an energy think tank. It will take a huge amount of investment for the US to just match the EU.
In a sign of things to come, numerous offshore wind projects are being accelerated on America’s Atlantic coast, such as: Empire Wind (816MW), Atlantic Shores (1.5GW) and Ocean Wind 1&2 (combined 2.2GW). Likewise, a lot of solar projects are in development across the lower 48 states and many are eyeing up the offshore wind opportunity presented by the Pacific coast. Societe Generale has closed two deals already in 2023, with several more in the pipeline. Notably, in the key area of offshore wind alone, many developers are European, including EDF, Shell, BP, Equinor, ENGIE and EDP Renewables.
The IRA’s incentives are also rippling across supply chains. Over the past 20 years, Europe and more recently China have built up and established supply chains – the former in areas like wind turbine blades and the latter in batteries and solar panels. But in 2022 the US Department of Energy released “America’s Strategy to Secure the Supply Chain for a Robust Clean Energy Transition”. This lays out dozens of critical strategies to build a secure, resilient, and diverse domestic energy sector industrial base, with the clear objective to establish the United States as a global leader in clean energy manufacturing and innovation.
What we are hearing from energy companies tells us that they are quickly turning their attention to the United States as they look across the globe at how best to deploy scarce resources and capital to deliver renewable energy. As they do so, they are beginning to send resources there in a development that challenges not just Europe’s clean energy industry but also those in Asia and especially China, correlating with the growing number of enquiries we receive at Societe Generale about the bankability and financing of projects in North America.
The EU and the UK are now under pressure to respond – witness the IRA being a specific line item on the agendas of French President Emmanuel Macron, German Chancellor Olaf Sholtz, and UK Prime Minister Rishi Sunak in their recent Washington visits over the past six months.
However, when it comes to hard incentives, there is a sense of a real first mover advantage being present when looking at the United States. The EU’s response is likely to be protracted as it does not wield the same powers as the US Federal Government. Energy policy and fiscal incentives through taxation remain largely a national member state affair and getting the necessary agreements to relax policy and or subsidy rules across 27 member states could take time.
The UK, however, may find more flexibility to respond in a post-Brexit environment. This would need to see a more rapid translation of the “Ten Point Plan” into concrete action. However, the ability to move swiftly may be constrained by the UK’s twin dilemmas of manoeuvrability and bandwidth; namely, is there sufficient budget manoeuvrability available and is there the bandwidth available in government given economic pressures and an election likely before the end of 2024?
History will ultimately judge who dominates the clean energy arena as Net Zero by 2050 looms closer. However, if the movement of key decision makers, intellectual capital and pipeline of projects is an indicator – the victors may once again lie across the Atlantic.