Austin Vernon on the IRA (from my email)

I’ve thought about this some, but honestly some of the subsidies are so mind bogglingly large that I find myself constantly going back to read the rules to make sure I’m not getting it wrong.

So I think the first thing is that the law is not fiscally sustainable because the subsidies are large and uncapped. I would expect it to quickly get into the trillions over the ten year period without adjustments.

One example is that with all the adders, solar panels get a $26/MWh subsidy when using the production tax credit. Lazard says solar can cost as little as $24/MWh in the best spots in its latest release. So it will spark a boom and all kinds of inflation in the solar supply chain, while also favoring utility scale solar over distributed solar since distributed is more hamstrung by regulation so the impact isn’t so dramatic. The process of selling these tax credits can be pretty complicated, though there are provisions to make it slightly easier in the bill. So the finance industry should earn a lot of new business.

Most attention has gone to the factories, but batteries already made sense before the IRA and you can see this in pre IRA announcements. So I think a lot of those factories would have happened, anyway. Car makers like to have their suppliers local and with batteries being such a big portion of cost there was no other way to do it. And naturally these factories are going near car manufacturing regions like the southeast or the upper midwest. There is no reason to ship batteries further than necessary.

Solar panel factories are a different bag of worms. I think we would have gotten more module assembly and possibly more polysilicon. That is because most of the module weight and volume is low value stuff like aluminum or glass that is expensive to ship. And we have restrictions on using Chinese polysilicon from the Uyghur provinces. But wafers and cells would have been slower to come over. Also some module assembly might have been in Mexico instead of the US. Of course these factories are going to states with lower labor costs where it is easier to build, which happen to be Republican. Another wrinkle with solar factories is that they depreciate at an extreme rate. Usually they are obsolete after 2-3 years and need to shut down. So there is a real possibility at the end of the law that you see a massive drop in solar deployment because the inflated supply chain will have to rationalize to non-subsidy conditions and then our factories will not have the revenue to upgrade to the next generation. That will then kill the supplier ecosystem, etc. So the earlier the subsidies get ratcheted down to prevent the boom-bust cycle, the better for long term health. It may also be like the wind PTC a decade ago where things collapsed after lapse of the subsidies and they brought them back.

Hydrogen also has crazy subsidies similar in magnitude to the solar PTC, especially because you can stack the solar PTC on top of the hydrogen one. Who knows where that will show up. But it will be frothy. We should be able to tell how crazy these were because I imagine few other countries will be so generous and we’ll be able to see what use cases happened here that made sense nowhere else. Hydrogen is the lazy answer to decarbonization problems and there is almost always a better way. Free of subsidies hydrogen demand would probably fall because refining lighter fuels like gasoline and diesel is the main use case. I’m optimistic about hydrogen and CO2 feedstocks for chemicals on longer horizons, but the US is the last place they make sense because of our inexpensive natural gas.

So overall you have inflationary/budget pressure on the negative side while support could be relatively bipartisan at the national level because of a climate/economic development alliance. I don’t think local and state will align as well. Probably there will be more local bans if people are building solar to mostly farm subsidies. And state utility regulators and ISOs might resist further solar+wind deployment where the natural gas lobby is strong (you could rename IRA “natural gas demand destruction bill”). The sweet spot would be solar + wind directly powering local industry by providing things like process heat (sorry geothermal!).

Here is the Substack of Austin Vernon.