The climate has changed for infrastructure

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Khaosai Wongnatthakan/iStock via Getty Images

By Michael McCarthy

After a year of clearly revealed vulnerabilities in water, energy and supply chain assets, some groundbreaking legislation suggests that governments are finally taking infrastructure investment seriously.

Today CIO Weekly Insights comes from guest contributor Michael McCarthy.

In the world of infrastructure, roads, bridges, ports and utility transmission assets aren’t the only things we build. You can also add anticipation to the list.

This year has seen a growing sense of infrastructural urgency in the developed world. The recovery from the COVID-19 pandemic has laid bare the remaining vulnerabilities in our supply chains, and the invasion of Ukraine was a stark warning of the extent to which we still depend on unreliable supply. in fossil fuels. Both have led to damaging levels of inflation. Then, an extremely hot Northern Hemisphere summer not only brought home the effects of climate change, but also pushed the American and European water systems to breaking point.

In response, governments have been busy legislating, the latest arrival being none other than the US Inflation Reduction Act (USIRA) which was signed into law on August 16th.

With this, and other similar legislative mandates, the world could finally take infrastructure investment seriously. And as important as these recent legislative initiatives are, we think things are just getting started.

net zero charge

The USIRA allocates nearly $350 billion in spending on carbon-free energy and emissions-reduction technology alone.

Analysts estimate it will cut annual U.S. emissions by one billion metric tons by 2030, and note it will give the United States renewed authority to lead net-zero load at G20 and World Summits. this year’s COP27.

Adding 950 million solar panels, 120,000 wind turbines, and 2,300 grid-scale battery power plants to the U.S. energy mix, it also represents a major infrastructure investment opportunity: $1.2 trillion in energy renewables until 2035, according to energy consultancy Wood Mackenzie.

Technology neutral

USIRA’s expenditure commitments are significant. But many analysts regard his reform of investment tax credits (ITCs) as even more important.

Currently, qualifying for ITCs means being able to demonstrate that you were investing in one of a short list of renewable energy technologies, or that your investment was directly related to a project deploying one of these technologies.

For example, to claim an ITC for an investment in battery storage, you must take the sometimes complex route of demonstrating that your investment is integrated into, for example, a solar or wind energy project.

From 2025, USIRA introduces technology-neutral ICT. All you have to do is demonstrate that your project does not generate any emissions.

This has the potential to make billions of dollars of renewable infrastructure investment opportunities economically attractive for the first time. This is a significant shift from the current top-down way of doing things, of “picking the winners”, to market-driven innovation, which implements investment opportunities autonomous, not only in battery technology, hydrogen energy, carbon sequestration and capture, but also, potentially, in a range of barely imagined technologies.

Transmission

Why do we think this is just the beginning?

First, while the USIRA has removed much of the uncertainty that has plagued U.S. renewable energy investments in recent years, in some respects it is offering less than the bill’s industry expected. Build Back Better, which failed before being voted on in the Senate. earlier this year.

Perhaps more importantly, USIRA does not extend ITCs to transmission investments, as was proposed in the previous bill.

Analysts predict that USIRA will help increase battery storage capacity five to six times over the next five years, allowing us to use existing transmission infrastructure more efficiently.

In our opinion, however, this falls far short of the modernization needed to make 20etransmission assets of the century correspond to 21stelectricity production of the last century. There is already twice as much solar power generation installed each year as it was a few years ago, for example, and the USIRA is expected to double again. Without new transmission infrastructure, much of our new electricity will likely be trapped in places where the sun shines and the wind blows.

That’s why we think the US government will eventually revisit the issue of transmission ITCs.

Works

Furthermore, we are seeing similar developments elsewhere in the world.

Governments are just starting to spend the €2 trillion sustainability stimulus foreseen in the European Union’s long-term budget and the NextGenerationEU recovery plan. As I write, Australia’s Labor government is passing new climate legislation that targets a 43% reduction in greenhouse gas emissions by 2030 and encourages a resource shift from the extractive fuels industry fossils to metals and minerals essential to the low carbon transition.

And finally, incidents like the Mississippi water crisis this summer and the drought in Europe are raising awareness and political stakes around the adequacy of our critical infrastructure to global warming. The threat of recession may also have drawn the attention of hitherto skeptical politicians, such as U.S. Senator Joe Manchin, to the quality jobs they can promise when they vote for renewable infrastructure spending. .

Two weeks after President Joe Biden signed into law the USIRA, he made 26 new appointments to his National Infrastructure Advisory Council. It didn’t make the same headlines around the world as the record legislation, but it does suggest a similar intent for the future. We believe there is a palpable change in the infrastructure investment climate.

In case you missed it

  • Non-manufacturing ISM PMI: +0.2 to 56.9 in August
  • Euro zone GDP 2Q 2022 (final): +0.8% quarter-on-quarter
  • GDP of Japan in the 2nd quarter of 2022 (final): +3.5% quarter-over-quarter annualized rate
  • Policy meeting of the European Central Bank: The ECB has increased its key rate by 75 basis points
  • Consumer price index in China: +2.5% year on year in August

To monitor

    • Tuesday, September 13:
      • US consumer price index
    • Wednesday, September 14:
      • U.S. Producer Price Index
    • Thursday, September 15:

-Andrew White Investment Strategy Group

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Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.

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