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Energy Gang
How are energy supply chains changing as electricity demand surges? A special episode from the ACORE Policy Forum in Washington
00:48:48
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This episode is brought to you by acor, the non partisan, non profit organization uniquely operating at the intersection of energy affordability, reliability and clean energy deployment. ACOR is focused on strengthening the electric grid and driving clean energy investment that delivers for the American people. ACOR's membership includes industry leaders across the clean energy economy. Utility scale clean energy investment has been booming in the U.S. nearly 80% of it was financed, developed, owned, equipped or contracted by ACOR members. Visit www.acor.org to learn more about ACOR's work and upcoming events like the ACOR Finance Forum on May 12th 13th in New York City.
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I think there's an evolving conversation about what is the role of clean energy in meeting the electricity demand needs of the nation.
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C
You have to build out energy. The CEO of Nvidia said this I think really well. It's a five layer cake in the very bottom of that cake that supports all of the AI buildout and use that is energy. And it isn't just because energy demand is also because we have parts of an aging grid. And then that aging grid requires continuous investment to be able to continue to use it.
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A
ACCOR is one of the leading organizations for the power and renewables industry and its Policy Forum brings together policymakers, investors and other experts to debate the big issues for the power and renewables industry. Today we've been talking to some of the leading speakers at the event and asking them about the big questions that are on their minds. And in this first show we're going to be discussing challenges and opportunities in the clean energy supply chain. So on with the show. So we're going to talk now about one of the issues that was debated in the panel that's just finished here at the ACOR Policy Forum which is the question of supply chains for renewable energy. It's a great pleasure to be joined by two of the panelists who were in that discussion, joined by Dr. Sarah Kapnick who is the global head of Climate Advisory at JP Morgan. Hi Sarah. Welcome back. Great to have on the show again.
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C
Always fun to be here. Thank you.
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A
Fantastic. Great to see you. And also it's pleasure to welcome for the first time Peter Toomey who is the Chief Development Officer at Cypress Creek Renewables, which is one of the country's leading renewables developers. Welcome to the show.
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D
Thank you.
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A
So as I thinking about the supply chain and challenges in the supply chain, there seems to be a lot of focus now on difficulties in energy supply chain in general, but perhaps specifically in the low carbon energy supply chain, the demand doesn't seem like it's a problem because of AI, new data centers being added all the time, expectations of tens, hundreds of gigawatts of increased demand coming. It's clear the demand for additional electricity generation is very real. How are you experiencing that, Peter, at Cypress Creek? Do you see supply constraints is a real problem for you?
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D
Yeah, I mean, I think we, you know, we have managed to deal with that as we've commercialized our projects, you know, over the last couple of years. But it's been a challenge, you know, not just in the last 12 to 18 months, but certainly, you know, since COVID and probably even before that. We have established relationships with suppliers for, you know, what we call owner furnished equipment. So solar modules, battery storage modules, transformers, other pieces of equipment. But the number of suppliers in each, in each category is very limited. And you have to consider that for many of our projects we are looking to earn a domestic content bonus on the itc, which further limits the number of suppliers that we can source from because there are only so many suppliers that can demonstrate the level of domestic content in their product to allow us to qualify for that bonus. So it's definitely been a challenge. We've worked through it. I would say the supply chain is not as robust and diversified as we'd like it to be. You know, given that without it we can't build our projects.
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A
Right. And I was going to ask how this has changed following the one big beautiful bill act passed last year that of course phased out those tax credits, PTC and the ITC for wind and solar. So when you talk about trying to find domestic content to meet ITC eligibility requirements, is that in this window when it's still possible to get the ITC for wind and solar, you're talking about storage here or what are the kind of investments you're thinking about?
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D
Yeah, I mean we're talking, I would say we're talking primarily about, about solar in the near term, trying to make sure that we can get domestic content equipment on the project schedules that allow us to meet certain placed in service cliff dates for our projects. And that's all driven by when we would have safe harbored equipment to qualify for itc. Because if you hadn't done that, you need to be online by the end of 27. If you, if you have done that by July 4th of this year, 2026, then, then you have four years from that date or from the year in which that four year anniversary would fall to, to bring your project online and get tax credits. But it's Definitely. It's definitely made more complicated by the, particularly on the solar side, the cliff. Because now you're, you have, you know, domestic manufacturers that are bringing facilities online, you know, and those don't always go to plan in terms of their schedules to bring on manufacturing capability. But then you have a, you know, a back end date, hard stop date on the back end where you have to bring your project online. Right. So you're getting pinched a little bit there. That does create some challenges.
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A
Right. And so as you say, particularly for the solar manufacturing industry, that seems to be a real disconnect then. I mean, is the idea that the hope will be the industry remains viable, that manufacturers can remain viable even once the ITC goes away because of tariffs or whatever else protection they have. That seems to be more kind of hope than expectation. I don't know how confident I would be about investing in solar manufacturing right now, given, as you say, that cliff that's rapidly approaching.
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D
Right?
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A
Yeah.
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D
And I think, I mean, folks continue to bring manufacturing facilities online, but it's definitely a question mark and I can't speak for them certainly, but I'm sure it's, you know, that they weren't thrilled with the, with OB3 from that perspective. But certainly we will want, you know, we will, we will be developing solar beyond, you know, the sunset of the itc and we will want to source that from domestic content. And I think we will have to see how that market evolves. I think at this point most developers are still focused on projects that will be placed in service prior to the cliff. Right. That's the focus near term bringing near term generation on both for our businesses, but also to meet increasing demand.
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A
Right. And you say you'll be wanting to source from domestic suppliers even after the cliff. Why is that? Just because you believe in buying American or what's the, what's the incentive for you?
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D
Yeah, I mean, the incentive for us is supply chain certainty. I think that there's obviously a, a interest from a national policy standpoint to move away from sourcing product from unfriendly places
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B
and
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D
domestic makes that easier than any other place. But obviously to the extent that personally expecting to get everything domestically is probably not realistic long term, but I think we would still, if given the opportunity, want to source it domestically.
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A
Right. Because there's a big tension here, isn't there really? When you step back and think about the overall strategy, the administration is both trying to encourage domestic manufacturing and that's something they want to build up. That's a priority for them. They also have priorities for meeting growing energy demand. That's very important. And they also have energy affordability and bringing costs down as much as possible as another priority. Feels like there's got to be some tension there. Those three things are not always going to be easy to reconcile. And definitely if you want to encourage domestic manufacturing, that's going to have a very specifically a monetary cost in terms of making the cost of investment and therefore the cost of power higher than it would otherwise be. If you could source the lowest cost equipment from wherever in the world, 100%.
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D
I mean, I think, you know, I don't know where the, the current spot market price is for, for solar modules, but I would say it's probably half the price of sourcing domestic, domestic modules. So it's it. There is certainly tension there and I suspect that tension is not going away and we will have to figure out how to, how to sorted out.
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A
So Sarah, how do you think about this then when you think about that tension between wanting to develop domestic manufacturing and also wanting to accelerate deployment to increase electricity supply as quickly as possible and as affordably as possible, what's the right way to reconcile those competing objectives?
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C
Yeah, there isn't a simple optimization problem for all of it. And it's going to come down to how. If, if you're just looking at trying to bring as much electrons onto the grid as possible, you're going to try and do whatever is cheapest. But then there are timescales that those take place that you might not be able to build out at the timescale that is needed with whichever technology is cheaper and then you have to go to a different one. So it all is optimized of what are you trying to solve for? Because it won't be the same answer necessarily in every single market, every single region where you're trying to build.
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I suppose as you say, it's a tricky optimization problem. You could still be kind of at the frontier of doing the best you can possibly do in terms of that combination of availability, affordability and supporting domestic production. Do you think the US is at that frontier now or are there improvements that could be made, other things that could be done better to kind of make progress on any or all of those objectives simultaneously.
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C
Yeah, I think there, there will also be questions around policy about how do you enable the build and the build quickly, how do you enable the permitting and everything else to get it all online and in the places where we've seen the build out of energy systems that is also happen quickly, like in Texas it's been solar and it's been storage. So if you're optimizing in that location where the price hasn't gone up as much, those are the two things that have gone, then put online at the fastest rate possible recently. But it depends on the market. And I turn to you of your view more on this as a developer.
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D
Well, I mean, thinking of the tension, my view is as you also think past the ITC cliff and other things to really bring the cost down for domestic, because ultimately you can't have a domestic product that is double the cost of what you could source it from globally. So I think to do that you need competition domestically. Right. And we started seeing that with all the, there's many announcements and many manufacturing facilities getting built, but maybe not as many as were announced. Starting to get to the point where you're going to have domestic competition and start building out the, the ecosystem around that. Right. And that's, that's critical. I think with, without that, the tension will be there to the point where I think it might undermine, you know, at least one of those objectives. Because, you know, if you, if you don't have competition, you're not going to bring prices down, and if you don't bring prices down, you know, you're not going to achieve your affordability objectives.
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A
Right. So that makes a lot of sense. And that makes a lot of sense in terms of thinking about government support of various kinds as being necessary to kind of prime the pump to help that ecosystem develop to the point that it can become self sustaining. Do you think we've reached that point in some of these critical supply chains? I mean, is that true in solar, for instance? Is it true in battery storage?
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D
I don't know the answer to that, but it definitely is something that concerns me.
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C
It's all of the components that go into building these things. If you look through every single component, there are certain bottlenecks of where some of the, some of the fundamental raw materials come from, which could create bottlenecks and volatility in that price, which would then affect your outcome. There's also having the labor supply to be able to actually scale this up across the country. That concerns me over the coming years that we need to be developing that labor supply as you are developing that manufacturing capability, because otherwise you're not going to meet that. And then you also have an increase in cost and labor. And so all of these things need to be managed together and it's a matter for the companies. But then there's also large policy pieces of this as well.
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D
Yeah, yeah. I mean, you definitely, you need to build the ecosystem, you need the people that will learn how to manufacture these things more efficiently. I remember talking to one of our suppliers and they were just talking about manufacturing the exact same thing here in the same factory, the same equipment, same type of factory, same equipment as they do overseas. And the efficiency is just not there. And it's not, you can't pinpoint necessarily exactly what it is, but just they haven't been doing it. The, you know, the labor they hired haven't been doing it as long. Right. So it just, it just takes time to, to drive the efficiency up. Right. And drive the cost down. And you need to, it's years and years and years. And I think we've had some volatility in terms of policy there. That, that makes that more challenging, right?
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A
Absolutely. That was exactly what I was about to ask you about, Sarah as well, which is exactly that question of policy volatility. And as Peter was just saying, if you think about these technologies, they require long term investment, long term consistency, then of policy support would seem to be really important. And that's hard to deliver. It seems in the United States in particular, where with each political change in Congress, in the administration, you get a very different set of energy policies.
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C
Yeah, the policy volatility creates a lot of uncertainty around this space. But it also, in this time of the last year, in talking with investors and business leaders that are focused on this, it's making them really heavily focused on all the economics again, that if the economics didn't a lot of them, when the economics worked well, when the policy was supporting, and then the policy left made them rethink that their decision process around being so reliant on certain policies. And so we're seeing some of the technologies that are still doing well and still scaling and growing were the ones that weren't as reliant on those policies over that time period. And we see that with the investment funds that are continuing to do well, were the ones that were really trying to avoid that policy variability really like calling it political risk for that policy changes. Those are the ones that are doing well right now. And that's the constant conversation I have now with my clients is a lot of them are thinking through what is going to be steady for the coming years and across administrations. And how should I be thinking to position myself no matter who the administration is, as I'm trying to navigate through this, that perhaps there will be some bumps and changes in policy along the way. But where do I think everything is headed right.
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A
So does that mean actually you get to industries that are in a much healthier long term position because as you say, they're not so reliant on a particular policy that's going to be time limited because of swings in the political cycle. Do you think long term that's going to be beneficial?
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C
I think it builds resiliency in the long term. However, if there isn't sustained support for emerging technologies to get through that point, that perhaps would die without political variability or instability, that doesn't allow them to grow. If those are really important industries or companies or technologies for national security or other reasons, they will not be achieved as they go through that uncertainty and those swings. And so I think we're also seeing that with discussions in the us, discussions in Europe, elsewhere as, as investors, but also countries are starting to think about what are the national security concerns of some of these technologies, which ones matter. And so you see a lot of discussion around what is actually viable with current economics. But then what might need policy support if it's a long term objective to be able to develop something out. And we see that in different behavior in certain other parts of the world as they're building out their renewable energy grids, their solar grids and others, is that they're saying we need energy development because we don't want to be, we don't want volatility in price due to other sources of energy. And so we're going to build the policy to be able to support that over the build time period so that once we're in production, we no longer have exposure to policy swings.
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A
Right. And then when you talk about national security concerns associated with that, obviously everyone thinks about China, China being massively dominant for some of these supply chains in solar modules, in lithium ion batteries, in EVs. So when you think about this, do you think about the need to diversify supply chains away from China? Does it make sense then to use policy to try and reduce other countries reliance on, on those Chinese supply chains?
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C
When I'm technologically pessimistic, it makes me think we need to diversify supply chains and be able to build up those new supply chains for those fears. Technologically pessimistic, I think that there won't be new technologies that are able to not use those supply chains. I think we need diversification, we need to build them out elsewhere. We need to create those supply chains ourselves if we're trying to avoid a choke point in a certain region or supplier or country. When I'm a technological Optimist and I'm a scientist, so I'm prone to this. I think. Well, actually innovation and there's a lot of science around this innovation actually and creativity increase when you have some constraints. And so actually the constraints of fear of shut off of a certain supply chain or fear of a lack of a certain critical mineral may actually change the technologies and the innovation in those areas to no longer need that mineral at all. And so we've seen this in the US recently in the news in the last week of the new iron air battery capability where you can actually have 100 hours of storage potentially from these new types of batteries that don't use lithium. And I've also seen sodium type chemistries for batteries and others that are trying to get off the traditional chemistries. And that has all been built out of concerns about supply chain, but also concerns about the future general supply of certain minerals. And so that constraint may actually get us in many years or a decade to a better place in terms of the technologies that we have through that constraint leads to that innovation. So it depends on the day and the specific technology. If you get pessimistic Sarah. Or optimistic Sarah. On the technological development side.
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Right, got it. And just to add to the pessimism though, is there not often an issue with these new technologies? Even if we're being optimistic about innovation, getting those new technologies to scale up and to become viable in their own right without sustained government subsidy is often difficult. Right. I mean, to take storage as an example, as you say, you talk about these new iron air batteries sound very exciting. They're starting to win big orders and so on. This Google announcement the other day, for Form Energy's batteries is really important. I agree. But lithium ion batteries are massively dominant in the global storage industry. They've got huge economies of scale. It's a proven technology. Costs are still falling. There's sort of innovation within that. The shift from nickel and cobalt based batteries to lithium ferro phosphate has apparently improved safety, reduced cost and so on. And so you've got this big incumbent technology in that industry which new technologies have to battle against. That can be very difficult, can't it?
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C
You're hoping for those unicorns that based on economics alone are able to scale. But often to be able to get through that point, you need either government support or policy to be able to support in the early stages, then be able to grow. And I'm a scientist that developed a bunch of technologies that commercialized out of government in my career and I've seen that work so there are then choices around those policies of which technologies are critical that get that support that then come out of it. But ultimately for these industries to last long term, particularly with the political variability that we've been seeing and also concerns about exports and trade, these companies are going to need to be able to get to that point where they don't need that support long term because it's not guaranteed. And that uncertainty is, is also altering the costs of these types of companies, the cost of capital for the companies to be able to develop because of that uncertainty in some of these areas, particularly for the newer technologies.
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A
So Peter, what do you think about some of these cutting edge new technologies? Iron air batteries for instance, or other new battery chemistries? Is that something you'd want to start using for your projects?
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D
I mean, it's definitely something that we talk about, but I would say we don't have a lot of near term projects that have any of these technologies planned into the design. Right. Just because of all the things you talked about. I mean, just cost, finance ability, reliability. So I think there's, there's probably a lot of promise there. But to your point, how long does it take to be a truly commercial technology? I don't know the answer. Getting back to your other question, I feel like we have this chicken or egg issue. Like you need to support domestic manufacturing long enough for it to be able to stand on its own. And if you don't do that, it just never works. I feel like we sort of with Ira, made a commitment to doing this, but we're kind of scaling that back now. So are we going to get there with some of these technology? And if we don't get there and we don't make the commitment, should we be having the level of tariffs and duties and other things on these other, on the imported versions of these technologies if we're not going to make the commitment to doing domestically? Because then you're just raising the cost or you're just not going to do it at all. I think there's a lot of tension there.
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C
I'm also seeing this come up as people are trying to get energy onto the grid. As they're thinking about this and they're thinking about what are the new technologies 5, 10, 20 years from now. And they're trying to think about in their design because it's so hard to build the infrastructure where there are. They're starting to think, if I build this infrastructure for today, what might it look like 5, 10, 20 years from now? Or are there ways that I'LL be able to retrofit in that future. And there aren't traditional ways of financing through that full retrofit and long term time period. So they're also. So they have to focus on the right now. What can I do now? But those conversations are starting as people watch what is there. But as you said as you're making those plans, it's not in the today. It's the scientists and technologists like myself that are thinking about what's after and how does that all transition.
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D
Yeah. And designing optionality into projects is not free. Right. I mean there's and, and generally, you know, it's a competitive marketplace so you need to develop the most cost effective project in order to get a contract. So if you want to incorporate the optionality into design, that may result in you not having a project at all.
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Right.
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And it's interesting Sarah, going back to your point about then the role for government here we've had just today this big announcement. I don't know if you've seen from the Department of Energy the largest ever loan commitment by a US federal government outside the financial crisis. I think it's $26 billion going to support investment in nuclear power, in upbringing of nuclear power plants, going to support new gas fired plants, investments in grid, grid enhancing technologies, new transmission particularly benefiting Georgia and Alabama going to Southern Company. So we have that position where definitely on a bipartisan basis both the current administration and previous Democratic administrations have seen a role for governments in financing energy infrastructure. Does that make you think then that that is going to be something which will continue to be available at some times for some technologies in the future?
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C
Oh absolutely. It's going to continue on the energy side and I've written about this in my reports on energy geopolitics is that part of this is right now in this age we think that the future of innovation and the future of industry, not just the industrialization, requires energy, but also all of the AI requires energy. And that the future of innovation comes from AI. And so you have this expectation that you need to constantly feed that AI and build it out, make it stronger, be able to use it and apply it. You have to build out energy. The CEO of Nvidia said this I think really well. It's a five layer cake in the very bottom of that cake that supports all of the AI buildout and use that is energy. And so it's going to be consistent throughout. As long as we all agree and I don't see that changing anytime soon, the AI really will drive innovation and drive the future of the economy and future of economic dominance, that it is going to continue to receive this investment in AI, broadly across that entire cake, but especially to building the fundamental infrastructure of it. And it isn't just because energy demand is increasing. It's also because we have parts of an aging grid. And that aging grid requires continuous investment to be able to continue to use it. And so the funding isn't just building out new and bringing new supply on. It's also actually reimagining the grid, rebuilding what was, but then also making it all work for the new technologies and
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D
new capabilities for folks that are developing the power infrastructure that's going to allow all this to happen. Yeah, maybe it's reasonable to say we will continue to see support, but can we plan around that support? Like, can we, can we say what that's going to look like ahead of time so you can start developing projects that meet those needs and have a level of confidence that you will get the support from the government needed to make those projects real? I think that's one of the challenges in the current environment, is these projects, even if we are trying to move as fast as we can, you know, projects take time and we need to understand if there is going to be government support, what does that look like? So we can, we can plan our development with that in mind. And if not, that's, you know, that's, that's a decision and we will plan accordingly. We will, we will, we will, you know, develop projects without that. But if it's, if it's on again, off again constantly, it's, it's very hard
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A
to plan and talking about things being on again, off again. The other thing we've had just in the past week, injecting a lot of volatility into economic policy in general, I guess, but it certainly has impacts on energy. Specifically is the Supreme Court decision on the tariffs, the ipa, the International Economic Emergency Powers Act. I think I'm getting that right. Basically, the legal basis that was used by the Trump administration to justify roughly half of the tariffs that they've announced over the past year or so were struck down by the Supreme Court said that law cannot be used in that way. There are plenty of other laws that can be used to support tariffs, and the administration has announced some of them are going to be used just in the, the few days after that ruling. But still, that seems to be creating more uncertainty about the way things are going. Is that affecting you at all, Peter, when you think about your planning and costs in the supply chain and what tariffs you're going to have to pay on what bits of imported equipment. Is that something else that is kind of looming large in your calculations?
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D
I mean, it's definitely there, right? This is like relatively new news. Right. And we're still digesting it and thinking about what it means past the 150 days that he's enacted the new tariff rates. But my expectation is that there will be some replacement tariffs for what have been struck down. Obviously there are temporarily for the next 150 days. But even beyond that, I would expect there to be something that some of these other tariff authorities, whether it's, you know, national security reasons or other reasons, I suspect they'll find some, some way to, to enact them. My concern would be that they, because of the types of authorities they are, that two things. And Sarah, you gave me one of these ideas, but two things. One of them is that they'll be more sector specific. So they could end a sector that has historically been targeted, I would say with tariffs, has been renewables. And the second would be that because the authority and the process of implementing some of these tariffs is more robust, that they may be more enduring.
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C
Yeah. And from when we were discussing before this, what I saw serving in commerce for majority of my career was that once you start implementing these, particularly when you go through those long processes with all the technological reviews, with all the reviews of policies, it's a multi month process, but it creates all the documentation that creates a lot of robustness around that tariff and their argument for it, which makes it difficult to have counter arguments later without a full reopening and review of it. That takes time. But then additionally, once a tariff is in place, it's very sticky to remove because everyone then has some certainty around how to operate and what the costs are going to be and you start developing industries that are thinking about that in terms of the costs and then are trying to develop or start to develop. And so if you have a discussion around closing it, you then have all these groups that are saying wait, I now had certainty and I'm doing something now. You're throwing a wrench in this. Again, it creates a lot of stickiness, I think from it once they're in place.
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A
Yeah, no, that's a great point actually, I hadn't thought about that. But as you say, it's disruptive when you put tariffs on, it's also disruptive when you take them off. And so actually maybe it may be the least worst option once they exist to leave them there because as you Say at least then that stability allows people to plan. So just as a final thought, then I want to put you both on the spot, if I can, and get you to give your thoughts on where we are possibly going to be ten years from now. Do you think it's plausible that the United States will have a vibrant and healthy supply chain and manufacturing industry producing key bits of equipment for the electrical industry in general and for renewables in particular and low carbon energy in particular? Is that something really which is a realistic objective? Peter, what do you think?
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D
I'm going to skirt this one a little bit. I would say on some of the more high tech, more high value components of the value chain, I could see that happening. I think on the more commoditized components, I think it will be challenging because I think you do have other parts of the world where you're going to have lower costs and you're going to. They have a history of doing, you know, doing manufacturing this stuff at a low cost with. And it's not just the cost of the inputs, it's also the know how is that something we're going to have the nerve to invest in through subsidies, through tariffs, long enough to allow it to stand on its own, especially if it's more of a commoditized product? I'm skeptical of that. And I don't even know if that's the right answer either in the sense
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A
of you don't know if it's right. You mean to bring everything domestically?
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D
Yeah, I don't, I don't. Should. Should. I mean, there's a whole other podcast I'm sure we could do on the value of international trade and we can almost leave that there. But I think on certain more high tech components, I think we could see that.
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A
Yeah, but just to give us the 32nd version of that podcast, then what? You would argue that there is a value in international trade. And actually because of all this very well known, all these very well known ideas about comparative advantage, it's good for countries to specialize in what they do best. The global trading system has an enormous number of benefits. People, I think, often tend to focus on the downsides. There's a lot of positives to it as well. Is that what you mean?
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D
I mean, there are always things that you need to do to protect yourself from a national security standpoint. But I would say in general, I agree with that.
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C
Yes.
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A
Sarah, what do you think?
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C
I think trade on certain areas where there is competitive advantage, I think there'll be a lot of care in thinking who those trading partners are in support of that. And even right now we see that happening with the Ex IM Bank. What's coming out of discussions of Ex IM bank and DFC about how they're trying to shore up critical supply chains in the funding that are coming from those. And so it's already giving us an indication of a realization there are certain things that will not happen domestically that require those partners and then may require financial support to be able to drive those going forward. And then technological optimist Sarah also thinks that with technological breakthroughs we could scale certain industries, but they will look very different than what they have traditionally. Those are in processing technologies, those would be in steel production, they would be in potential certain types of storage technologies that I see having had multi year support, could have the opportunity to scale over the next 10 years in the time horizon that you've given me, that allows for me to actually have that technological optimization towards commercialization.
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A
Excellent. As you say, that's certainly an encouraging thought. I'm glad we gave Optimistic Sarah the last word in this one, but we do have to leave it there, unfortunately. It's been fantastic talking to you both though. Peter Toomey, Sarah Kaepnick, thanks Faith very much indeed.
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D
Thank you.
- [35:47]
A
Take care. Well, I'm joined now by Alice Lynn who is a senior advisor on tax at the Natural Resources Defense Council, the environmental group. Hello, Alice. Welcome to the show.
- [36:00]
B
Thank you for having me.
- [36:01]
A
Yeah, thanks very much for joining us. Just before we get into the question of tax policy and the way it's affected renewable energy, tell us a little bit about your background. You've worked on this for a long time, right? You were at the treasury and before that in Congress.
- [36:14]
B
Yes, that's right. I was most recently with the Treasury Department for the last stretch of the implementation of Inflation Reduction act for clean energy tax credits that we'll get into. But previous to that I was in Congress and took part in writing that law when I specifically was with the House Waste and Means Committee, the tax writing committee.
- [36:31]
A
Right. As you say. So clean energy tax credits is the big thing we want to talk about now. There's been a lot of change in those over the past year, in particular because of the passage of the one big beautiful bill, OP3, as people seem to call it nowadays. Can you talk a bit about what effect that has had and how that has changed the tax environment for renewable energy?
- [36:54]
B
Yeah, absolutely. So OP3 passed last year and I think it's, it's certainly made a lot of changes to energy tax. It shortened the timeline for some credits, extended the timeline for others and made new requirements that I think a lot of people are trying to deal with now that are, that are meant to get at certain foreign entity kind of influence and supply chain issues.
- [37:19]
A
Right. To break that down a bit by sector. So for wind and solar, basically the credits are going away and there's a sort of a transition period. Right. But essentially by the end of this decade, they'll be completely gone.
- [37:31]
B
So wind and solar has to begin construction by, by July 4th of this year, which is the. One of the most kind of early timelines for termination. The electric vehicle credits were also terminated very early. But there are a lot of other technologies, including batteries, nuclear, geothermal, clean fuels, a lot of manufacturing credits that are still in place for a lot of timeline that they were before.
- [37:54]
A
So as you say, a lot of those tax credits were left in place, but there are these new restrictions on them. In particular, the thing that seems to be a really big issue is this question on fiac, foreign Entities of Concern, and the way that those rules restrict eligibility for tax credits. Can you explain a little bit about those and how they work?
- [38:15]
B
Yeah. So the Prohibited Foreign Entity requirements, or FIAC as some people call them, are really a kind of new, novel, very complex set of rules that touch everything from ownership to debt issuances to contractual relationships to supply chain. And so I think it takes a lot of these concepts that have been in other parts of the tax code to some extent, but it kind of puts them together in this, like, very novel way that I think taxpayers are trying to figure out how to comply with now and treasury is figuring out what guidance to issue.
- [38:51]
A
Right. Because I remember we talked to people at a previous ACOR event at the GRID forum in Washington last year when OB3 had passed, but the guidance from the treasury had not been issued on how they were going to apply this new law. And there was still, I think, a great deal of confusion then, great deal of uncertainty. People didn't know exactly how it was going to work. We have now got some of that guidance, haven't we?
- [39:12]
B
Yes, we've gotten our first piece of guidance. So we have some information on the new supply chain requirements that will hopefully allow people to figure out how they can move forward deals in this kind of transition period before we see more guidance. But there are a lot of questions still unanswered and, and people are poring through that guidance now to see whether or not it provides the certainty they need.
- [39:35]
A
So the basic principle is it's trying to cut four Countries in particular out of the clean energy supply chain. Right. It's what China and what are the other ones?
- [39:44]
B
And Russia, Iran and North Korea.
- [39:46]
A
Right, got it. And so as you say, that guidance has been issued and people can look at it, people are studying it. What's your assessment of its impact? How do you think it's going to affect how the industry operates in the
- [40:00]
B
U.S. well, I think the guidance is, is, is going to provide some answer to some people who are, who have been trying to figure out these kind of basic definitional questions and like, and how to apply some of the previous guidance and how it maps on to kind of this new question. But there are a lot of questions even just on the supply chain requirements that are left unanswered. And I think people are trying to figure out what, what documentation they need from their suppliers and what do they need to do in order to be compliant with these rules.
- [40:32]
A
Right. So to take an example then, in the battery supply chain, I know that's one of the ones where these rules are particularly going to bite because China globally is absolutely dominant in battery supply chains, right up from processing lithium right through to producing finished cells and batteries. So what are companies going to have to do in the US if they want to avoid falling foul of these rules and claim tax credits for their battery projects? Which means that to do that they have to not fulfill the fiat rules, which means they need to not have Chinese influence involvement in the supply chain.
- [41:14]
B
So these supply chain requirements apply to two types of credits, the generation and storage credits and the manufacturing credits. For the manufacturing credits, you have to meet a certain percentage of your, the inputs into the product you're producing. So if you are looking at producing battery modules, you'll have to look at everything that you purchase and put into your battery module. And for those, those grid battery projects that those projects will have to look at in general, two steps of supply up the supply chain. So for example, your battery module and cell. So if a grid battery project is buying battery modules, they'll have to take into account the sourcing of not only the battery module, but the battery cell that goes into that module.
- [42:05]
A
Right, got it. But you're saying then there's what's still quite a lot of uncertainty about exactly what that means in terms of who you can buy yourselves from and what you have to know about the materials that went into that sale and so on.
- [42:19]
B
Exactly. For example, the one way that this regime is different than the prior domestic content rules is the prior domestic content rules under the IRA were about where the product was produced. Here it is not about where the product is produced, it is who produced it. And tracking down who produced something can be a quite complicated endeavor because it gets into global ownership structures and just the sheer ability to know things about the business.
- [42:50]
A
Right, got it. So what's your sense of what effect this is all having on the industry then? If people are uncertain about exactly how this is all going to work, even after they've seen this treasury guidance, does that lead to people stopping making decisions, stopping making investment commitments because they just can't be sure what their eligibility for those tax credits is going to be? I mean, what are we seeing in the industry?
- [43:18]
B
I think that's the big question right now. I think people have a number of areas of uncertainty. This notice is trying to answer some of the questions that people have, but there are a lot of other questions there to be seen. And I think people are currently developing market practices to, to try to figure out whether or not they can keep moving these investments forward. But the. But it is a rapidly evolving environment.
- [43:45]
A
Right. So how do you think it is going to play out then? Do you think we will ultimately get more guidance from the treasury that will clarify all those remaining questions that people still have?
- [43:54]
B
We will certainly get more guidance. We expect there to be hopefully more comprehensive guidance later this year. But it is a very big project for treasury to undertake. So I think people are trying to figure out what answers they can, they can feel comfortable on prior to that.
- [44:11]
A
And in the meantime, do you think then that is putting a brake on activity because people don't want to make commitments that they then find out are going to fall foul of these rules?
- [44:22]
B
I have certainly heard a lot of
- [44:24]
A
uncertainty, just thinking back then to the IRA and everything that went with that. We have been through this period where there's been this rapid shift in policy. And the Biden administration and Congress during the Biden administration were very much committed to supporting low carbon energy, wanted to incentivize that in a whole range of ways under the Trump administration and the present Congress, much less support for low carbon energy. As we've been saying, maybe half of the IRA tax credits by value have been cut, give or take, something roughly in that ballpark. And the credits that remain, we've been saying, face these restrictions, which are unclear, and putting a brake on activity, at least for the time being. Obviously there will come a time when there'll be a different administration, be a different Congress. Future administrations and Congresses may want to try again to support renewable energy. What lessons do you think they will have learned from the ira. And what happened to that?
- [45:36]
B
Look, I think from a perspective of what worked on the ground, I think the IRA wanted to unleash a kind of wave of private investment into clean energy, into clean manufacturing. And I think all signs point to that worked. I think the first thing is that just understanding what is the effect of the policy lever that was pulled then I think the question of what are the policy purposes of the future and what can Congress legislate on. I think that right now there's a lot of focus on affordability and there's a lot of focus on electricity prices. So I think there's an evolving conversation about what is the role of clean energy in meeting the electricity demand needs of the nation.
- [46:25]
A
And something like these fiat rules then, and this whole strategy of trying to encourage domestic production within the United States. Do you think that's going to change or is that always going to be a feature of any tax regime for energy in the future?
- [46:40]
B
There's been a lot of support for domestic manufacturing, and I think that focus is likely going to continue. The. I think one of the things that we actually lost in this bill was the domestic content bonus credit in solar and wind.
- [46:55]
A
Sorry, in this bill being in OB3.
- [46:57]
B
Yes, yes, that's right. That's right. So the IRA had provided not only these tax credits for clean energy technology, including solar and wind, but by terminating those credits, you not only lost the tax credit for the deployment of the technology, but also the fact that a portion of that credit was rewarding people for using domestically produced components.
- [47:19]
A
Right. So you could think about it as a sort of carrot and stick approach. There were carrots. The carrots have been taken away and they've got the stick instead. Right, right. And so you think again, thinking about what a future Congress might do, reviving those kind of incentives and that support for domestic manufacturing, that might be a way to go.
- [47:37]
B
Certainly something that members continue to care a lot about.
- [47:40]
A
Right. So that's one thing which is probably still going to be important for future congresses, is supporting U.S. manufacturing. The other thing you mentioned is affordability. That's clearly a huge issue at the moment. It's very much on people's minds. I know it's something the White House cares about a lot at the moment. It's something a lot of politicians across the country are very much focused on. How do you think that might play out in terms of what Congress does and how future energy policy treats renewable energy?
- [48:12]
B
I think there is clearly a lot of focus on meeting the electricity demand of the nation, not due to new large loads, but also due to the prominence of electricity bills in the current environment. And so I think the question is how do we get low cost renewable electricity to be to be part of that solution and how do we address those needs quickly, which renewable energy is poised to do?
- [48:41]
A
Right. And it's certainly going to be very interesting to keep an eye on that to see how policy evolves the next time Congress comes back to it, which I am certain it will. For now, though, Alice Lynne, thanks very much indeed. Great talking to you.
- [48:52]
B
Thank you.
- [48:53]
A
So that's all from this first day of the ACOR Policy Forum. Thanks again to Alice lynn. Thanks a Dr. Sarah Kapnick and Patrick Toomey. Thanks to our producers, Dan Cottrell, Harry Weston Cottrell and Toby Biggins Gilchrist. And above all, as ever, many thanks to all of you for listening. We really do value your feedback, so please do keep that coming. You can leave a comment here or contact us on social media. And we'll be back tomorrow with all the latest news and views from the ACOR Policy Forum. Until.