Don’t underestimate US infra’s political risk post-IRA

The Inflation Reduction Act has proven to be revolutionary, but there are some elements of the market that can’t be legislated away.

It’s hard to believe that the Inflation Reduction Act was only passed one year ago. Its impact on the US infrastructure investment landscape – when coupled with the impact of preceding legislation with the Infrastructure Investment and Jobs Act (IIJA) – has been deeply profound. Indeed, it’s nearly impossible to attend any industry event without having it mentioned.

Infrastructure investors like the legislation for a variety of reasons – perhaps the most important of which being the broad de-risking of many energy transition assets via extended tax credits. While the certainty brought about by 10-year-long tax credit extensions shouldn’t be discounted, it would be unwise for investors to forget the longstanding nature of the market they’re operating in.

Political risk has been a defining factor of the US infrastructure investment landscape. The number of public-private partnerships the country saw has been scarce, and those established were often on rocky ground. Politics was the culprit behind the premature deaths of many private sector infrastructure projects past.

It is unlikely that investors with deep roots in the country have forgotten those days – they’d have to have a very poor memory to do so.

Still, there has been an influx of new players eager to get a slice of the US infrastructure action, goaded in large part by the IRA and, to a lesser extent, its predecessor, the IIJA. Discussion of these landmark bills being walked back or even reversed in the future are few and far between. However, it would be dangerously complacent to ignore the potential for the IRA, in particular, to get caught up in the ongoing ESG culture wars rocking the US political landscape.

It was this past legislative session that Republicans in the House of Representatives, led by Speaker Kevin McCarthy, attempted to cut swathes of the IRA’s renewable energy tax credits during debt ceiling negotiations. If there were not a majority-Democrat Senate, who knows what the result may have been?

Most likely, though, any chipping away at these policies would happen piece by piece, and state by state.

Texas is one example of state legislators looking to undo federal clean energy incentives. Early versions of legislation passed this June sought to impose additional fees on renewable energy projects and some sought to cut all subsidies for renewables, point blank. The law that has ultimately come to pass still heavily favours natural gas and places additional onuses on renewable energy in the state to meet dispatchability requirements.

There is also the possibility of similar legislation being implemented on the national stage. For example, Senator Joe Manchin – who is openly considering a third party candidacy for the 2024 presidential race – skipped the one year celebration of the IRA’s passing this month.

This spring, he called the implementation of the IRA’s tax credits “extremism” and a “betrayal” to the original design of the bill. Meanwhile, right-wing opposition groups in his home state of West Virginia are seeking to unseat him in 2024 via a six-figure ad blitz targeting his initial support of the bill.

Democrats, too, are raising the IRA’s profile in swing states as the election looms, but in hopes that it will boost their reelection bids.

One thing is for certain: the IRA was never a bipartisan dream. Who knows what certain candidates may take aim at, promise to build up or vow to dismantle? And who knows which candidates will live up to these unforeseen promises when all the ballots are counted?

So far, the impact of the IRA and the IIJA has been largely positive. With any hope, it will stay that way. But that doesn’t mean investors shouldn’t brace themselves for the very real possibility that regulatory shifts between states and between administrations might occur.