How IRA Tax Credits are Fueling the Clean Energy Sector

Federal tax credits play a critical role in lowering the cost of investing in renewables and encouraging the growth of the clean energy workforce. In 2022, the federal Inflation Reduction Act (IRA) was signed into law, introducing and expanding numerous tax incentives for investment in the clean energy sector. Of these tax incentives, the Investment Tax Credit (ITC) and the Production Tax Credit (PTC) provide enhanced financing opportunities for clean energy developers, particularly if projects are eligible to receive additional incentives through bonus credits, such as the Domestic Content Bonus and the Energy Community Bonus. Eligibility to receive the highest base tax credit also requires meeting labor standards aimed at ensuring livable wages and a certain percentage of construction work performed by apprentices, thereby strengthening and investing in the clean energy workforce.

In Lazard’s 2024 Levelized Cost of Energy report, combined operating and capital cost ranges are compared for various standalone and hybrid renewable energy systems given the utilization of either the ITC or PTC. In every scenario presented by Lazard, taking advantage of these tax credits reduces the operating and capital cost range, for some resources more than others. The two tax credits can be combined for co-located systems, shown in Lazard’s Levelized Cost of Energy graph for onshore wind and storage, further reducing the costs of and encouraging clean energy development. Ultimately, strategic use of these federal tax credits can accelerate the transition to a cleaner and more equitable energy future.

Elisabeth Seliga

Assistant Researcher

This is a part of the AEC Blog series

Individual and Environmental Risks of Gas Stoves

A study recently published in the international Journal of Environmental Research and Public Health found that on average, about 13 percent of childhood asthma in the United States is attributable to gas stove use. Pennsylvania, Massachusetts, New York, California, and Illinois are all above the national average, with 21 percent of childhood asthma attributed to gas stove use in Illinois. Gas stoves emit pollutants such as methane, nitrogen dioxide, carbon monoxide, and formaldehyde. When released indoors, even in low concentrations, these toxic gases can worsen breathing problems for residents that already have asthma.

The use of gas stoves is harmful to the environment as well. Methane leaks occur throughout the entirety of the fuel production and supply chain that allows for the operation of gas stoves. Despite the risks to public health and the environment, more than one-third of U.S. households are currently cooking on a gas stove. Replacing a gas stove with a modern electric induction stove may not be an option due to the high cost of buying a new appliance. For households that are not able to replace their gas stoves immediately, there are still ways to minimize the effects of harmful pollutants. For example, good ventilation when cooking—by using the range hood fan and opening windows—can reduce indoor air pollution.

Elisabeth Seliga

Assistant Researcher

Nicole Yang

Communications Assistant

This is a part of the AEC Blog series

Our Loss Is Their Gain? The Societal Costs of Fossil Fuel Industry Profits

Data Sources: (1) U.S. EPA. U.S. Greenhouse Gas Inventory. https://cfpub.epa.gov/ghgdata/inventoryexplorer/#iallsectors/allsectors/allgas/inventsect/all; (2) The World Bank. N.d. "GDP (current US$) - United States." Available at: https://data.worldbank.org/indicator/NY.GDP.MKTP.CD? locations=US; (3) The World Bank. N.d. "Oil rents (% of GDP) - United States." Available at: https://data.worldbank.org/indicator/NY.GDP.PETR.RT.ZS? locations=US; (4) The World Bank. N.d. "Natural gas rents (% of GDP) - United States." Available at: https://data.worldbank.org/indicator/NY.GDP.NGAS.RT.ZS? locations=US; (5) The World Bank. N.d. "Coal rents (% of GDP) - United States." Available at: https://data.worldbank.org/indicator/NY.GDP.COAL.RT.ZS?locations=US. (6) The World Bank. N.d. "Inflation, GDP deflator (annual %)." Available at: https://data.worldbank.org/indicator/NY.GDP.DEFL.KD.ZG.

Over the past 30 years, the total societal costs of annual emissions—based on a social cost of carbon of (inflation-adjusted) $51 per metric ton of carbon dioxide emissions—from the U.S. economy have remained relatively steady, between $250 and $300 billion per year. In contrast, U.S. coal, oil, and gas industry profits have experienced substantial ebb and flow over the same period, ranging from a high of $335 billion in 2008 to a low of approximately $33 billion in 2015. Despite fluctuations in industry profits, for every year except 2008, annual societal costs exceeded annual industry profits, indicating a disconnect between fossil fuel companies’ market performance and the societal costs inflicted by their activities.

To reinforce this point, the cumulative value of societal costs (the total area under the red line in the above figure) is more than double the magnitude of the cumulative industry profits (the total area under the black line): Across the last 30 years, cumulative societal costs of U.S. emissions have amounted to $8.4 trillion while cumulative U.S. fossil fuel industry profits add up to $4.1 trillion.

According to House Committee on Oversight and Reform Chairwoman Carolyn B. Maloney, fossil fuel corporations continue to profit—bolstered by U.S. government subsidies and tax credits that amounted to roughly $662 billion in 2020 alone—while actively lying to the public about their stated commitments to addressing the climate damages their own activities have caused.

Despite the fossil fuel industry’s financial dependency on public dollars, the public cost of the industry far exceeds its profitability.

Sachin Peddada

Assistant Researcher

Elisabeth Seliga

Assistant Researcher

This is a part of the AEC Blog series

Risks of Investing in Gas Going Forward

Across the United States, utility shareholders are looking to decarbonize their investment portfolios. Influential shareholder groups such as Vanguard, BlackRock, and Goldman Sachs, have signed on to the Net Zero Asset Managers Initiative, an international group of asset managers, that requires signatories to set climate goals in alignment with the Paris Agreement to ensure that global warming is limited to below two degrees Celsius. Signatories to the Net Zero Asset Managers Initiative commit to net-zero greenhouse gas emissions by 2050, as well as to investing in companies that align with this goal. Moreover, in accordance with the Paris Agreement, the Biden administration recently pledged for the United States to transition to a carbon-neutral power sector by 2035 and reach net-zero emissions by 2050.

For shareholders, success in reaching decarbonization goals hinges on how well their investment decisions align with a transition away from carbon-emitting resources. The Climate Action 100+, an investor-led initiative that focuses on ensuring that large corporate greenhouse gas emitters take necessary climate action, sets benchmarks in accordance with the Paris Agreement for climate change governance, emissions reduction, and financial disclosures. The Initiative found in its 2021 study that many utilities are failing to meet these benchmark criteria. Investments in utilities, or utility parent companies, that are still primarily reliant on fossil fuels (e.g., fossil gas, coal or oil) expose shareholders to a range of risks, including increased volatility of gas pricing, more stringent climate regulation, and increased competition with renewable energy.

The United States has become more intertwined with international markets, rendering domestic gas prices susceptible to changes in global gas prices. As a result, gas prices are becoming increasingly unpredictable, particularly in the wake of the COVID-19 pandemic and political conflicts. For example, in February 2020, U.S. natural gas prices were at $2.50 per thousand cubic feet, one year later in February 2021 prices had reached $16.29 per thousand cubic feet, and by March 2021 prices had fallen to $3.40 per thousand cubic feet. This level of unpredictability jeopardizes the profitability of gas plants, which in turn puts stock values—and the shareholder investments they represent—at risk.

Data source: U.S. EIA. 2022. "Henry Hub Natural Gas Spot Price." Available at: https://www.eia.gov/dnav/ng/hist/rngwhhdd.htm

In addition, stricter climate regulation and increased public sentiment against fossil fuels across the United States have prompted additional scrutiny of utility portfolios. Energy companies with substantial reliance on gas may be significantly impacted by such regulations, such as requirements to reduce carbon emissions or reallocate large amounts of spending toward climate adaptation and mitigation. For example, in New Mexico in 2019, the Senate passed the Energy Transition Act which mandates that electric utilities must only supply carbon-free energy by 2050. This legislation set in motion the premature closure of the San Juan coal-fired power plant, reinforcing the fact that stricter state legislation puts pressure on utilities to transition to clean energy. While this primarily affects ratepayers who see higher energy bills as a result, public opposition that arises from higher bills may generate animosity between investors and the public. The effects of increased public opposition to gas can arise not only in fluctuations of stock value but also in public perceptions of the shareholders that invest in a utility with a gas-heavy portfolio.

Moreover, renewable energy is now competitive with gas generation, making gas expansion a less economically sound expenditure for utilities, and the price of clean energy technologies is still falling. The U.S. Department of Energy has set a goal to considerably reduce the cost of solar for the residential, commercial, and utility sectors by 2030. As renewable energy continues to claim a competitive advantage in the energy market, utilities with a reliance on gas risk falling stock values. Shareholders are then affected by a decrease in stock values, putting their investment decisions at greater risk, particularly if they choose to sell.

Going forward, utility shareholders face important choices in how to balance their investment decisions, particularly those with gas-heavy portfolios. Utility shareholders wanting to decarbonize their investment portfolios must ensure that their client portfolios are aligned with the same goals to minimize the risks involved.

Elisabeth Seliga

Assistant Researcher

This is a part of the AEC Blog series

Energy Burdens in the District of Columbia

Within a single town or city, households pay the same energy rates (all residential customers pay the same rate for energy on a per unit basis). However, even for the same size of house or amount of energy use, households with lower incomes spend a larger share of their income on their energy bill than higher-income households do, leaving less for other expenses like rent, healthcare, or college tuition.

Recent research by the American Council for an Energy-Efficient Economy (ACEEE) found that the median energy burden (energy costs as a share of income) in the United States is 3.1 percent: For example, in 2018, the U.S. median income was $62,000; therefore, half of households pay less than $192 and half pay more in energy costs.

In the District of Columbia, the median energy burden is only 2 percent, but lower-income households pay a lot more. Half of the low-income District households (defined by ACEEE as those which earn less than or equal to 200 percent of the federal poverty level, or $55,500 for a family of four) pay more than 7.5 percent of their income in energy costs (a household making $55,000 annually pays $340 or more per month). One in fourteen of District households are “severely” energy-burdened—meaning they pay more than 10 percent of their income in energy costs.

In 2018, half of all District households made more than $90,600, and half made less. The half that make more than $90,600 pay just 1 percent of their income in energy bills. In contrast, District households earning less than $27,000 per year spend almost 20 percent of their income on energy.

There are also racial/ethnic disparities in energy burdens both in the District and across the United States. According to ACEEE, households of color face higher energy burdens compared to their white counterparts. The inequitable distribution of energy burdens is confounded by several other disparities facing racial/ethnic minority populations. For example, because of historical and systemic racism, racial/ethnic minorities on average earn less income, are less likely to own a home, and have poorer health outcomes.

Most policies to address energy burdens aim to either provide energy bill relief (e.g., the Low-Income Home Energy Assistance Program (LIHEAP) or the Weatherization Assistant Program (WAP)) or rebates for energy efficiency upgrades that reduce energy consumption. For instance, the District‘s Sustainable Energy Utility (DCSEU) offers rebates for the purchase of energy-efficient appliances, making energy savings more attainable for low-income households. More recently, states have started to work towards capping energy burden. For example, New York State developed an initiative called Reforming the Energy Vision (REV), which sets an energy cost target of 6 percent of income for low-income customers. Similar policies exist or are in the works for California and New Jersey.

In our report, Equity Assessment of Electrification Incentives in the District of Columbia, we identify three priorities to ensure equitable decarbonization efforts; one of which is to prevent existing energy burdens from worsening. Addressing disparities in energy burden provides more money to spend on other key expenditures that maintain household’s quality-of-life, such as healthcare, childcare, and college tuition. This increased spending also puts more money into the community, spurring economic growth.

Tanya Stasio

Researcher

Elisabeth Seliga

Assistant Researcher

This is a part of the AEC Blog series