Theodore Roosevelt famously proclaimed: “It is not the critic who counts.” There are many who criticize the energy transition, and the easiest thing to do is to either blame regulators and policymakers or wait for the silver bullet of an emerging technology that will save the day. With that in mind, we wanted to share five ways we believe the energy transition can be accelerated without regulatory changes or breakthrough technologies.
End tax equity
Tax equity is great. It’s been the driving force behind the US renewable finance industry for the past 15 years. Tax equity is the mechanism under which tax credits are monetized by renewable project developers. The Inflation Reduction Act (IRA) changed the role of tax equity, we believe. Pre-IRA, tax credits could be earned only by the owner of the asset. Post-IRA, credits can be more easily transferred.
As a result, we may have finally outgrown the concept of tax equity. The current size of the tax equity market is roughly $25 billion per year, and the demand (i.e., projects wanting to get financed) for tax equity dollars will quickly outstrip supply with an increase in renewable development and new industries such as CCUS and H2 vying for the same supply. This will create a bottleneck for development. Just one CCUS project could eat up a quarter of the annual supply.
Thankfully, there are solutions out there such as transferability, direct pay, and the larger IPPs and developers directly investing in and putting projects on their balance sheets. It’s difficult to break the status quo, but renewable finance mechanisms will be an inevitable outcome of easier tax credit transferability.
Hire more engineers to process interconnection queues
The total megawatts of projects in interconnection queues across the US more than tripled over the past three years while the number of people reviewing submissions at utilities and independent system operators (ISOs) stayed flat. Chewing through these studies is happening at a glacial pace, despite valiant efforts on the part of individuals at ISOs. It comes down to being simply understaffed. Not only does this mean delays in bringing on renewable power as climate change marches on, but it also introduces uncertainty and rising costs for project developers, who may be forced to drop projects as funding for rent payments, interconnection deposits and salaries runs out.
ISOs and the utilities that manage interconnection queues are rate-based, cost-of-service entities that should be able to pass through the cost of hiring more engineers, if regulators deem the investment prudent.
Invest in supply chains
There is no silver bullet for this, but it boils down to two main strategies: domestic manufacturing and long-term procurement agreements. FirstSolar’s $1.2 billion plan to expand US solar manufacturing is an example of one of these big bets. The IRA’s domestic content incentives should spur onshoring: if more incentives are required, providing them appears to be a US government priority.
Invest in the teams with the best carbon reduction track record
This means converting brag-a-watts to megawatts by being thoughtful about grid dynamics and project costs. It means developing nature-based offset projects that genuinely reduce or avoid carbon emissions by confirming additionality, leakage and permanence. Yes, we’re looking at you, random REDD project in South America. Ultimately, this means supporting teams committed to results and not ones checking the “we do energy transition” box.
Leverage data & analytics
No surprise, given our business, but we believe data and analytics are an important part of the story. The annual capex deployed in the energy transition space in the US is expected to increase five times from 2021 to 2030. You can’t do that by hiring 5x the consultants, 5x the employees or with 5x the handshake deals. (See Point 2 for an example of how this is already playing out). Investors and corporates alike need to make better decisions faster, with all pertinent data and analytics tied together at their fingertips.
While Orennia doesn’t directly build or invest in energy transition assets or companies, we are doing our part in accelerating the energy transition by empowering our clients with clean data and analytics across wind, solar, storage, CCUS, carbon markets, H2 and renewable fuels. In short, we put you in a position to go from being a critic on the sidelines to being front-and-center in the energy transition arena.
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