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Welcome back to Energy Source, coming to you from New York today.
The pipeline consolidation push is gaining steam, with another big ticket deal announced yesterday by Energy Transfer. With new fossil fuel infrastructure facing heavy opposition in the US, expect the midstream M&A drive to continue.
It has been a year since the Inflation Reduction Act upended global clean energy markets and propelled the US into a new era of industrial policy. Billions of dollars worth of manufacturing projects and thousands of new jobs have been announced across the country since the passage of this legislation.
President Joe Biden is making the green revolution a big part of his re-election pitch. But polling numbers suggest voters are not yet convinced of its benefits. Today’s newsletter looks at what exactly has changed in the 12 months since the IRA became law.
Data Drill looks at the widening global oil supply deficit that is increasingly sucking up US inventories.
Thanks for reading. A note to readers that Energy Source is taking a late-summer break. We’ll be back in your inboxes the first week in September. — Amanda
Happy Birthday, IRA
It’s been exactly one year and one day since Joe Biden signed into law the Inflation Reduction Act, the most significant action the US government has ever taken on climate. The $369bn spending package has propelled the country closer to its emissions targets and transformed the US into one of the top markets for cleantech manufacturing (much to the ire of its trade partners).
“The passage of the IRA gave the United States the opportunity to be the leader in clean energy, not just a participant, but finally a leader,” said Peter Faricy, chief executive of SunPower, a residential solar developer.
Here are four takeaways about where things stand one year after the law’s passage:
Industrial revival is in full swing
The IRA is an industrial policy as much as a climate one.
Roughly $84bn in large-scale cleantech manufacturing projects have been announced in the US since last August, according to a Financial Times analysis of projects worth at least $100mn. Moody’s estimates that construction spending on manufacturing plants is up 55 per cent.
“The IRA really underpinned the business case to stay here and focus on getting the factory expansion initially in the United States,” said Jorg Heinemann, chief executive of EnerVenue, which announced a $264mn battery factory in Kentucky in March.
While projects are now dotted across the US, some parts of the country are getting more than their fair share.
Georgia and South Carolina lead the country in new projects. And nearly three-quarters of all projects are headed to Republican districts. This presents a growing conundrum for the party as it heads into an election year balancing a desire to both excoriate Democrats for overspending in Washington and welcome new investment in their districts.
Foreign investors want a slice of the pie
While the bulk of projects has been announced by domestic companies, foreign investors are also competing to secure a stake in the US supply chain.
South Korean and European companies lead among foreign investors announcing projects, with 19 and 16 projects, respectively. Among the largest investors is LG Energy Solution. The South Korean battery giant has announced three new factories in the US since the IRA’s passage, including one in Arizona, and two joint ventures with Honda and Hyundai.
The influx of foreign investment comes as the IRA draws international backlash for distorting markets and creating an uneven playing field to compete.
In March, the Biden administration offered an olive branch to Europe and Japan by allowing countries that don’t have formal free trade agreements with the US to participate in its clean vehicle tax credit.
The road ahead could be bumpy
While the flood of project announcements is a good start, the big challenge will be getting them built. Clean energy projects face numerous obstacles across the supply chain, from raw material constraints and labour shortages to permitting issues and long wait times for grid connection.
“The proof will be in the pudding to see if [the IRA] can live up to its expectations. A lot will depend on the ability of these announced projects and their commercial activity to turn into actual facilities on the ground,” said Sasha Mackler, executive director of the energy programme at the Bipartisan Policy Center.
A report this week from S&P Global found that demand for lithium, nickel and cobalt will be 23 times higher in 2035 than in 2021. Sourcing enough supply under the IRA tax credit restrictions will be a “persisting struggle”, the report warned.
“The energy transition is already adding to the pressure on mineral supplies . . . and the IRA is really adding to the heat,” said Dan Yergin, vice-chair of S&P Global.
“The supply chains for energy transition are going to become very much tangled up in the US-Chinese rivalry.”
More action needed
The IRA may be the most significant action the US has taken on climate, but it is not enough. More government action is needed to reach net zero.
The Rhodium Group predicts US emissions could fall 42 per cent below 2005 levels by the end of the decade based on current policy, short of Biden’s target of 50 per cent by 2030. A BloombergNEF report estimates that the US will be 22 per cent short of this target.
While the IRA’s tax credits will drive massive declines in emissions within the power and transportation sectors, analysts say hard-to-abate sectors like heavy industry and aviation need a tougher regulatory push to decarbonise.
“Sticks are needed to complement the IRA carrots. The IRA is all about positive incentives. It doesn’t force anyone to do anything,” said Tom Rowlands-Rees, head of North America at BloombergNEF. (Amanda Chu)
Oil demand is hitting fresh records just as supply cuts pinch. That imbalance looks set to increasingly suck up US inventories that are already dwindling at multi-decade lows.
The International Energy Agency said global demand hit a record of 103mn barrels a day in June — and could rise again this month.
With global economies in gas-guzzling mode, the IEA reckons there is a need for 30mn barrels a day of Opec supply. But Saudi Arabia’s cuts left the group’s output at about 27.8mn b/d last month and there is no sign of that picking up any time soon.
That suggests a global supply shortage of 2.2mn b/d in the third quarter.
“This is a very significant global deficit,” said Bjarne Schieldrop, chief commodities analyst at SEB. “As such it should start to turn up and impact US oil inventories.”
US crude stocks are already at their lowest level since the early 1980s after Biden raided the country’s strategic reserves last year to calm markets following Russia’s full-scale invasion of Ukraine.
Weekly drawdowns hit a record of 17mn barrels at the end of last month. Expect that figure to remain elevated. (Myles McCormick)
European cleantech start-ups attract less than half as much funding compared with US counterparts.
The Great American road trip is hitting a speed bump with a lack of electric vehicle chargers.
Inside an English village’s battle against power lines and how it threatens to slow the green energy shift.