*Industry trends* Energy crisis, green hydrogen and the US Inflation Reduction Act – implications for cleantech markets
October 2022
There has rarely been a more disruptive period, with inflation, interest rates and geopolitical tensions combining to create a testing time.
Global interest rates are increasing, shown by the US effective federal funds rate
Federal funds chart
Source: Federal Reserve Bank of New York
Climate-finance plans and agendas are under pressure in almost every region, as the global energy crisis buffets businesses, households and government agendas.
At the same time, there are opportunities and reasons for optimism as we look ahead to the 2022 United Nations Climate Change Conference, COP27, in Sharm El-Sheikh next month. Sure, the energy crisis is complicating the green transition – in both the short and long term – but it’s also compounding the pressure on policy makers and officials to enact support, with initiatives like the European Hydrogen Bank and the green initiatives contained within the US Inflation Reduction Act.
What’s clear is that today’s crises exacerbate the need for investment in renewables, waste-to-energy, batteries and green hydrogen, and underscore the impetus on us all to do more to channel capital to where it is needed most.
Much has been made of the idea that Europe’s energy transition is under threat as supply disruptions worsen, and it is clear to see why.
With Russia supplying 39 per cent of EU natural gas imports and around a quarter of oil and petroleum product imports in 2021, according to Eurostat1, suspensions and reductions of supply weigh heavily on the region’s economies and citizens, and are forcing governments to reassess their moves away from fossil fuels. The closure of Nord Stream 1, a key Russian gas pipeline to Europe, only makes the situation more grave2.
Some European countries including the Netherlands and Poland are returning to coal3, while Germany has delayed the shutdown of some of its coal plants as it seeks to ensure its power supply4.
1 Europa2 BBC3 Bloomberg4 Reuters
Reliance on Russia
Extra-EU imports of natural gas by partner, 2020 and 2021share (%) of trade in value
Source: Eurostat database (Comext) and Eurostat estimates
Source: Eurostat
That leaves policy makers in a quandary – how do you shore up energy security, reduce dependence on fossil fuels, both from Russia and from other sources, and remain focused on the goals of the green transition?
While in the short term these forces put the global transition to net zero at risk, according to the Climate Action Tracker, there are some reasons to be optimistic in the medium and long term5. Saving energy, diversifying supplies and scaling up the renewable energy rollout and investment are the key ways the EU says it will secure the future6.
The Director-General of the International Renewable Energy Agency (IRENA), Francesco La Camera, says the crisis underlines the importance of renewables.
He told Reuters in an interview7:
“In the mid and long term, the Ukraine crisis will bring an acceleration to the energy transition because governments finally realise that going for renewables is not only good for the environment, jobs, GDP, but also good for ensuring higher energy independency.”
5 Climate Action Tracker6 Europa7 Reuters
From my point of view, there’s never been more need for thought, innovation and investment, and we see market forces moving in that direction, with demand for green tech investment on the up and large companies shifting their focus.
TotalEnergies CEO Patrick Pouyanné says his company is increasing clean power spending in the wake of the crisis8, while Germany’s largest power producer, RWE, has agreed to buy US company Con Edison’s clean energy business for USD6.8 billion9.
What’s clear is that we are reaching a tipping point in terms of focus and finance, as the rising cost of fossil fuels changes the financial dynamics and opens up new frontiers for less-polluting energy sources.
The competitiveness of renewables continues to improve, according to the IRENA Renewable Cost Database, with the lifetime cost per kilowatt-hour of new solar and wind capacity added in Europe in 2021 averaging at least 4–6 times less than the marginal generating costs of fossil fuels in 202210.
8 Energy Voice9 Reuters10 IRENA
Changing cost comparisons
Source: IRENA
These forces are shaping global attitudes and the cost competitiveness of hydrogen from renewable energy sources11.
Green hydrogen is gaining momentum as governments around the globe get behind the technology. The US Inflation Reduction Act – signed by President Joe Biden in August – incorporated tax credits for green hydrogen12, and in September the EU announced investment through the creation of a European Hydrogen Bank.
In fact, hydrogen is at the heart of the EU’s strategy to transition towards net zero, with European Commission President Ursula von der Leyen outlining plans to invest EUR3 billion to “help build the future market for hydrogen” in her annual State of the Union speech on 14 September13.
These initiatives add to those already underway around the globe, for example in Saudi Arabia, where the government plans to develop a large-scale clean hydrogen industry – encompassing blue and green hydrogen14. In India, Union Minister of Power and New and Renewable Energy, RK Singh, said on 8 September that the time to focus on green hydrogen has arrived, as he indicated that India will set up manufacturing capacity for hydrogen electrolysers15.
11 The Guardian12 Atlantic Council13 CEENERGY News14 CSIS15 DownToEarth
The opportunities are there for green hydrogen and there is scope for private investment to crowd in alongside public investment. With the European Commission approving around USD5.2 billion in public funding for hydrogen in the EU, it anticipates that private funding will come in alongside this16.
Air Liquide, Shell and Uniper are among the companies already benefitting from EU investment17, and as momentum for green hydrogen builds around the globe, others are attracting investment from public and private sources.
16 Reuters17 Capital
Investing in hydrogen
Source: European Commission
The US Inflation Reduction Act also has wide-ranging implications for cleantech18. While the legislation aims to lower energy costs and shift Americans’ reliance away from fossil fuels19, it has also allocated USD369 billion to spur investments in zero-carbon power generation, emissions-reduction technology and energy affordability programs.
The steps contained in the act that aim to foster renewable energy and tackle the climate crisis – like tax credits and incentives – are set to decrease climate technology costs by 40 per cent on average, according to Climate Tech VC20. And the ramifications go way beyond US borders.
18 The White House19 Brookings20 CTVC
Bringing down climate technology costs
IRA credits decrease climate technology costs by 40% on average
Source: Climate Tech VC
Many companies are likely to be affected, since some of the incentives are contingent on parts or raw materials being supplied domestically. For example, tax credits for consumers who purchase electric vehicles only apply when final assembly of the vehicles occurs in North America.
That means we’re likely to see more volatility of supply chains as companies shift manufacturing and sourcing of cleantech inputs and components to qualify for these US incentives.
Production Tax Credits are set to change the equation on international cost competitiveness for many cleantech products.
And it is hard to overstate the way the tax breaks for clean hydrogen shift the economics of production, with green hydrogen having a subsidy of roughly USD3 per kilogram21. So far, the US clean hydrogen industry has been nascent, but these incentives will likely see it expand at pace, unlocking opportunities for investors, companies and startups.
The act “will very likely turbocharge the energy transition,” according to Joseph Webster, a Senior Fellow at the Atlantic Council Global Energy Center22.
It is also likely to result in greater capital flows to the US from Europe and Japan – capital that’s perhaps been diverted from Asia and other markets. There’s also potential for prices to rise for the materials and technologies that underpin cleantech, as the act bolsters demand, especially for distributed generation and other microgrid technologies.
While there are reasons to be cautious about the outlook for cleantech, I also see a great many opportunities coming to fruition as major political forces fall behind financing, creating a tipping point and allowing investors to crowd in and multiply the impact for new technologies, innovators and green entrepreneurs.
21 Utility Dive22 Atlantic Council
