The Inflation Reduction Act will drive the United States' efforts towards net-zero

Specific support mechanisms to assist in facilitating the energy transition process are included in the table below. These are intended to improve the economics of clean/renewable energy production to incentivise their adoption. This is not an exhaustive list of mechanisms included in the IRA.

Benefits for US infrastructure-focused companies

The IRA improves the economics of clean/renewable energy production for utilities and contracted generation companies in 4D’s investment universe. This in turn improves their competitiveness, fast tracks investment and theoretically boosts earnings growth. It should also reduce the cost of energy for the end customer through the application of regulation or competitive dynamics.

Regulated energy production

Regulation sets the level of returns that utilities can earn on renewable and clean energy investments. Therefore, the improved economics of renewables and clean energy production facilitated through the IRA is passed onto customers through lower energy bills. This improved customer affordability and bill headroom allows utilities to increase the level of investment in the energy transition and grid support, while maintaining affordability. This increased investment is expected to improve earnings growth.

Specific regulated utility companies that are likely to benefit from mechanisms included in the IRA include American Electric Power (AEP-US), CMS Corp (CMS-US) and Portland General Electric (POR-US).

Contracted energy production

For contracted generation companies or companies that produce clean energy fuels (clean hydrogen, carbon capture) under long-term contractual arrangements, the IRA should result in improved returns. Although, depending on the intensity of competition, these improved returns could be diminished in exchange for lower energy costs for customers. All scenarios should incentivise increased investment and growth for companies.

A number of large European-based renewable/clean energy developers have indicated optimism associated with the IRA including Enel SpA (ENEL-MI), Energias de Portugal SA (EDP-LS) and Iberdrola SA (IBE-ES). A standout US contracted generation developer which is likely to benefit from the IRA is NextEra Energy (NEE-US).

Midstream oil/gas

Midstream companies which are attempting to extend the longevity of their business model by diversifying away from fossil-based commodities to clean fuels such as biofuels, renewable diesel, renewable natural gas, low/no carbon hydrogen and facilitating carbon capture, are likely to have more investment opportunities due to the IRA. The tax credits, rebates, and grants supporting these newer clean fuels improve their economics, making them a more attractive (and realistic) investment proposition.

Midstream names such as Kinder Morgan Inc (KMI-US) are going to benefit from the improved carbon capture tax credits, while Enbridge Inc (ENB-CN) investment opportunities will improve through a number of clean energy credits.

Unknown impacts of the legislation

As outlined, the spending package is expected to be partially financed through the implementation of a minimum corporate tax rate. The impact on infrastructure companies’ cash flow will depend on individual company factors but could have detrimental ramifications for some.

Conclusion

The IRA’s passage into law is a major piece of legislation in supporting the US efforts to decarbonise its economy while supporting efforts to develop vertical supply chains for clean/renewable energy in the US. The many support mechanisms included in the legislation primarily improve the economics of clean/renewable energy, and reduce the end cost for customers. Specific infrastructure companies in 4D’s investment portfolio that are likely to benefit from the legislation include NextEra, American Electric Power, Enel, CMS Corp, Iberdrola and Kinder Morgan.