Energy & Commodities

How the Inflation Reduction Act Impacts Utilities

The IRA is the most impactful piece of environmental legislation in over a century. It accelerates the growth of the renewables market and creates entry points for organizations both big and small to participate in—and take advantage of—the transition to clean energy.

Traditionally, regulated utilities in the United States have been limited by arcane accounting standards that curtailed their ability to take full advantage of the production and investment tax credit systems available to “competitive” developers, commonly referred to as IPPs. Consequently, they were not the lowest-cost builder or owner of solar and wind projects.

Instead, "non-regulated" IPPs were provided an economic advantage that perfected the use of tax credit policy over the last several decades, allowing them to offer the lowest power prices in the market. One way that they did this was by leveraging tax equity investors as financing partners, creating a competitive advantage that eliminated the economic rationale for a regulated utility organization to even try building renewable projects. This ultimately left utilities and end consumers reliant on the operational and financial stewardship of IPPs and their partners.

The IRA completely changes these competitive dynamics. In a bid to deliver more energy on a larger scale from sources like wind and solar, the act levels the playing field in the renewables market between regulated utilities and IPPs through a combination of new pathways to tax credits.

The available tax credits are diverse, far-reaching and uncapped—though they have some qualifying provisions like prevailing wage requirements. The IRA also includes stackable bonuses as sweeteners to the “base” value of investment and production tax credits. These sweeteners, combined with a new ability to sell credits on the open market as they are produced, create an entirely new mechanism for utilities to compete with IPPs.

The IRA also incentivizes the planning of renewable energy projects in “energy communities,” or communities whose livelihoods have been entwined with fossil fuels (e.g., mining or oil and gas towns). By building renewables in these special locations, utilities can access credit bonuses while creating new job opportunities that counteract the economic damage these communities may suffer as the market navigates this latest wave of investment aimed at sustainability.

Furthermore, these communities’ economies have historically relied on coal or natural gas power facilities. Since utility companies owned and operated these assets, those same companies can access their own transmission network during interconnection more easily than IPPs, thereby reducing costs and simplifying transitions.

These incentives should empower regulated utilities organizations to enter the renewables market with confidence, even as IPPs face an increasingly challenging project development landscape.

Electricity customers also stand to benefit from IRA incentives due to the nature of their relationship with the local utility. It is the obligation of the utility to provide safe, reliable and affordable power to their customers; to achieve those three obligations, the organizations charge ratepayers what is deemed to be a reasonable return on their investment. As such, power production tax credits and investment tax credits technically belong to the ratepayer as a direct offset to what the utility spends to operate a renewable facility, creating a huge advantage for utilities to offer much lower power prices than the nearest competition.

The IRA accomplishes this by introducing a credit transfer policy that permits the sale of tax credits to any interested third party. This allows utilities to monetize and pass proceeds directly to customers through lower-cost power.