President Biden’s Inflation Reduction Act (IRA) has been hailed as welcome boost to US clean energy ambitions. The law will raise a total of USD $738 billion and authorise $391 billion in spending on energy and climate change measures by 2032. Some predict that the IRA will generate billions in renewables investment, thousands of clean energy jobs and hundreds of new businesses.
The IRA has the potential to stimulate entirely new offshore wind supply chains in the US. The creation of Advance Manufacturing Production Credits provides new incentives for US renewable energy manufacturers. Local content is further encouraged with additional tax credits for developers meeting local content requirements. For offshore wind these are 20% of all equipment to be US-manufactured for projects installed before 2025. This rises to 55% for projects installed after 2027.
The wave of US States announcing offshore wind auctions provides a strong indication of future demand. The IRA could enable the development of cost-effective local supply chains to meet those demands. This combination of demand and supply has raised the fear that resources and investment will be floored in other markets.
The “Green Deal Industrial Plan” is the EU’s attempt to parry this potential threat. It aims to simplify, accelerate and align incentives to preserve the competitiveness and attractiveness of the EU as an investment location for the net-zero industry, but is still at an early stage of development. The most significant new aspect of the deal is the relaxation of EU state aid rules, the ‘Temporary Crisis and Transition Framework’. This effectively leaves each EU member free to develop its own support for renewables, including potential any supply chain subsidy.
What impact could this transatlantic subsidy slug fest have? Firstly, the IRA’s domestic content requirements will hurt non-US producers: most commentators agree that the level of support will make a material difference to stimulating a local supply chain. This may lead to a World Trade Organisation dispute, increasing perceived risk of any investment in US based capacity. Secondly, the Green Deal Industrial Plan abandons the single market for renewable energy supply chains.
These risk reducing the EU’s influence in the global offshore market. Further, rather than a defence against US subsidies, the deal could mean EU nations end up in fighting each other for offshore wind investment.
In parallel, other countries are actively supporting key industries involved in the energy transition, including China, India, Japan and the UK. They face some difficult decisions in how to respond. Do they start punching back and develop matching incentives? Do they seek regional cooperation to create markets large enough to be attractive in their own right? Do they just accept whatever local content happens to come their way? The best approach will depend on each country’s relative economic, political and industrial circumstances.
Of course, there are many details still to be provided for both the IRA and the Green Deal Industrial Plan. It is thus too early for any precise predictions. Even broad predictions based on current details are difficult. Previous, more general, US business tax cuts have not stopped foreign investment decline in the US. Investments in manufacturing plans are long term decisions. There is often a highly-charged political atmosphere around any “green” initiatives, especially in the US. This may lead manufactures to fear that a different administration would reverse any supply chain subsidy. Similarly, the word ‘Temporary’ in the title of core EU package does not inspire long-term thinking.
The most significant impact of this sparring is that clean energy is at the forefront of global economic and political, as well as environmental, debate. This can only be good news for the planet, economies and the wind industry.