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How the Inflation Reduction Act is Reshaping the Investment Landscape
By Tom Osborne, IFM Investors
IFM Investors' Executive Director, Infrastructure Tom Osborne looks at how the Inflation Reduction Act is leading the world in showing how to accomplish a just transition while unleashing significant investment opportunities for asset owners.
IFM Investors' Executive Director, Infrastructure Tom Osborne looks at how the Inflation Reduction Act is leading the world in showing how to accomplish a just transition while unleashing significant investment opportunities for asset owners.
This is an excerpt from NCPERS Summer 2024 issue of PERSist.
This article is provided for informational purposes only. It does not constitute an investment recommendation, offer or solicitation and should not be relied upon as investment advice or as the basis for any contract or commitment. This information does not constitute investment, legal, accounting, regulatory, taxation or other advice. IFM Investors Pty Ltd (“IFM Investors”) recommends that before making an investment decision, each prospective investor should consult a financial advisor and should consider whether any investments are appropriate considering their particular investment needs, objectives, and financial circumstances. Tax treatment depends on each prospective investor's individual circumstances and may be subject to change in the future. This information should not be reproduced without the written consent of IFM Investors.Following decades of decline in public infrastructure spending and the failure of successive U.S. Administrations to properly address the funding shortfall, President Joe Biden's flagship Inflation Reduction Act (IRA) was heralded as a welcome investment in the future of U.S. renewables, manufacturing, and skills and training.
The $1.2trn IRA and companion Infrastructure Investment and Jobs Act (IIJA) are the envy of many countries, helping the private sector deliver the energy transition the U.S. requires while promoting a just transition that delivers apprenticeships and well-paid jobs. However, it initially drew the ire of some commentators outside the U.S. over concerns it would unduly distort the flow of private capital. Re-adjusting the U.S. investment tax credit (ITC) to a base rate of 6%, rather than 30%, projects are now instead rewarded with a 24% bonus credit where they meet wage and apprenticeship requirements – with the ITC rising as high as 50% depending on an investee's ability to draw on local steel, iron, and other goods. As a result, IRA-eligible projects immediately became more attractive to build stateside than nearly anywhere else in the world, placing the emphasis on the private sector to make investment decisions capturing the value of tax credits for their investors, rather than applying for the government grants offered through the IIJA where a successful application was not guaranteed.
It is hard to overstate the impact of the IRA. From the $739bn total funding under the IRA, $369bn will be provided for clean energy and climate investment, including tax incentives for investments in renewable energy, decarbonization, and energy security. Making the U.S. a highly attractive investment destination was a stated goal of the legislation. The IRA has led to significant investment inflows into the U.S., estimated by the White House at $110bn one year after its ratification. However, as it has shifted the weight of investment decisions towards the U.S., it has led to concerns of protectionism, which the U.S. Administration has addressed by opening up the benefits of the Act to other friendly nations and jurisdictions, such as those within the European single market, Australia and those with which the U.S. enjoys free trade agreements.
The IRA's introduction nevertheless resulted in calls from parliaments across the world for similar targeted tax breaks and subsidies to ensure each country's domestic manufacturing base and private capital market did not focus entirely on projects in America and could be similarly turbo-charged.
The transferability of tax credits
Benefits of investing under the IRA principally stem from the allocation of the tax credits – but also the ability to trade those credits if they are not fully utilized by the company that qualify for them. As the IRA is set to support the growth of renewable energy and other, newer climate change mitigation technologies, many projects taking advantage of the tax credits will be start-ups with little-to-no tax to pay. These entities may now trade their tax credits on the open market and bring forward their benefit by several years, thus further improving potential returns.
While a typical tax equity scheme allows project tax credits to be acquired by another entity, a specific allowance in the Act for transferability of credits greatly widens the field of buyers for those projects. As a result, the broader market means credits can be sold faster and on more favorable terms. Credit Suisse estimated that the tax equity market will grow to $49bn in 2024, a near doubling compared to 2022, and overall trade in tax credits will reach $500bn in the decade since the Act's introduction.
Prospects for pension capital
Ultimately, the large-scale rollout of renewable energy generation and transition to net zero will not be successful unless private, long-term capital can be deployed to support and accelerate the transition. This sustained investment can come from a number of places, but notably, pension funds will be a key source of this patient capital.
The IRA not only allows investors to benefit from the transferability of tax credits, but it should also ease the investment risk associated with a range of renewable energy projects. Overall, the IRA increases the potential returns for many climate-aligned and transition-friendly projects and is already driving immediate investment in both production and energy generation – creating a decade of policy certainty by expanding tax credits to a broad range of green and renewable projects in need of funding. From that perspective, the legislation is, arguably, unprecedented.
Bio: Tom Osborne, Executive Director, Infrastructure at IFM Investors, is responsible for the origination, analysis, structure and execution of IFM Investors' global infrastructure investments.
Prior to joining IFM Investors, Tom was Head of Americas - Infrastructure in the Investment Banking Division of UBS. In this role, Tom was the founding group head of the Americas Infrastructure advisory practice with responsibility for strategic advice, mergers and acquisitions, lending and capital markets finance for major investors. At UBS, he also held the roles of Co-Head of US Infrastructure and Managing Director - Power and Utilities. Previously, Tom was a Director in the Power and Utilities Group at Credit Suisse First Boston and a First Vice President - Utilities Group at PaineWebber Incorporated.
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