LGIM believes the IRA will be a catalyst for clean energy investment in the United States
LGIM Legal & General Investment Management is one of Europe’s largest asset managers and a leading global investor, with total assets of €1.55 trillion (as of June 30, 2021). The firm works with a broad range of global clients, including pension funds, sovereign wealth funds, fund distributors and individual investors.
Europe Stepping Back: The Green Industrial Deal Plan (GDIP)
The Reducing Inflation Act of 2022 is one of the most important climate legislation in US history, providing financing, programs, and incentives to accelerate the transition to a clean energy economy and likely to lead to significant deployment of new energy resources.clean electricity.
According to LGIM, European policy makers and investors are concerned that the subsidies provided by this provision may disqualify many research and development activities and the development of many projects in the sector. To this end, the EU intends to fight back with the Green Industrial Deal Plan (GDIP), which would allow local governments to implement various forms of aid to support the green transition.
In principle, the amount of resources and their beneficiaries are equal in the European Union and the United States, with different support packages that will lead to investments of hundreds of billions of dollars in energy produced from renewable sources or in other activities aimed at reducing carbon dioxide emissions.
Get credit – the advantage of the United States
However, the approaches of the two markets also have fundamental differences and one of the main ones relates to the disbursement of funds. In the US, this will mainly be implemented through a tax credit – a pre-determined mechanism, with well-defined rules that are known to different players in the market. On the contrary, the EU plans to support the goals of the GDIP by using funds already used in the past. It follows that although the actual amount of resources is impressive, the complexity of the procedures will make it difficult for companies active in the clean energy field to obtain credit, with requests for subsidies that may remain unanswered for years and with results that are only confirmation. On the other hand, in the USA, companies that benefit from tax breaks can access capital more quickly, have a better defined picture of timing and room to maneuver on these matters and have greater clarity about the costs that will be incurred.
Another potential hurdle is the imposed requirements. Both the USA and the European Union have imposed minimum requirements to allow access to subsidies; In addition, they will have to quickly develop several production facilities on site. Otherwise, we could see negative impacts on the construction of wind farms, solar farms and energy storage batteries.
Precisely battery production will be one of the sectors in which Europe will suffer the most from competition with the United States after the enactment of the IRA Act; The other is hydrogen production. This is bad news for the European Union, which has never hidden its desire to consolidate its leadership in the clean energy sector by spreading the latter in ways that are not limited to renewables alone. However, the entry into force of the IRA, and related subsidies, make green hydrogen production in the United States cheaper than producing gray hydrogen. Practically, only with the signature, the H2 producers became more competitive and a market so wide as that of the new continent was made available to them. Similar consequences can also be seen in batteries and this will require Europe to step up its efforts in this sector if it is to avoid losing out on the most innovative cleantech companies.
It is not a zero sum game
Despite the above scenario, the EU has an advantage in creating and sustaining demand for clean energy projects: for nearly a decade, clean energy production has been regulated through an auction system approved by member states. These auctions allow those who win them to ensure more clarity about the long-term direction of demand, as well as stipulate long-term agreements on prices, which are also often linked to inflation. Such a scenario not only significantly reduces project risks, but also reduces the cost of capital and accelerates access to it for the renewable energy sector. If this system is also applied to other sectors, such as green hydrogen, auctions could offer long-term fixed-price contracts, signed directly by the governments of member states or, perhaps, even by Brussels; A very attractive opportunity for a sector in its early stages of development.
The largesse of US subsidies has led many analysts to characterize the competition between the US and the EU as a zero-sum game, in which only one can obtain capital at the expense of the other. However, we at LGIM believe that the scenario is not static and could lead to the development of new regulation which will benefit all segments of the clean energy sector in both markets. This is because the new policies could attract new developers from other sectors and geographies, accelerating the energy transition on both sides of the Atlantic.
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