Almost a year into Joe Biden’s presidency the political shift in favour of clean energy has been profound. He brought the US back into the Paris climate accord and followed that with the Infrastructure Investment and Jobs Act (IIJA), which delivered a broad $1.2 trillion federal package aimed at tackling crumbling domestic infrastructure. The recently passed Inflation Reduction Act (IRA) adds $369 billion in climate and low-carbon federal funding that will be music to the ears of energy transition investors.

Crucially, the bill showcases the government’s commitment and builds on Biden’s twin pledges of achieving a 50-52 percent reduction in US greenhouse gases by 2030 and net-zero emissions by 2050.

“This is a landmark piece of legislation that opens up a number of avenues of opportunity and, most importantly, gives some durability to federal policy support, which the industry was anxious to see,” says Keith Derman, partner and co-head of Ares Infrastructure Opportunities.

1Settling the nerves

A surfeit of new energy transition provisions and extension of renewable tax credits are among the main highlights of the ratified IRA bill. A new $3 per kilogram tax credit for clean hydrogen promises to put the nascent sector close to price parity with grey hydrogen, while expanded credits for carbon capture will further support sequestration of Scope 1 emissions.

“The fact that carbon capture and green hydrogen are eligible for ‘direct pay’ is a positive for the energy transition that the US is embarking upon and will provide important support for those two emerging technologies,” says Francisco Abularach, senior partner at Antin Infrastructure Partners.

Decarbonising transport is also a sector that the government has set firmly in its sights. Starting next year, the electric vehicle industry will no longer face a 200,000-unit-per-manufacturer cap, while new vehicles will be eligible for a tax credit of up to $7,500.

Domestic sales have boomed but been slowed by lack of charging infrastructure and high purchase cost. “The amount of money that is needed to convert the entirety of the country to EVs is massive and the bill is not going to come close to the amount needed but it will get things rolling,” cautions Himanshu Saxena, CEO at Starwood Energy.

Battery cell manufacturers will also receive a $35 credit for every kWh of battery produced domestically and a $10/kWh tax credit. The Biden administration has said it aims to bring low-carbon manufacturing back to US shores and will invest more than $60 billion in creating millions of new domestic clean manufacturing jobs.

“Encouraging domestic manufacturing is certainly a positive,” says Derman. “More supply of the components of climate infrastructure is a good thing for capital costs and deployment, as well as jobs and energy security.”

Batteries used in EVs with ‘critical minerals’ such as lithium, nickel and cobalt that are extracted, processed or recycled after 2025 by a ‘foreign entity of concern’ like Russia and China will be exempt from the tax credit benefits.

Increasing renewables capacity is another key pillar in the shift away from fossil fuel dependency. The IRA is offering a 30 percent tax credit for offshore wind projects that begin construction before 2026, again with the largest incentives directed towards operators that employ domestic manufacturing.

“The offshore wind industry is really poised to grow, and remarkably quickly,” says Clarke Bruno, chief executive of Anbaric, a transmission developer backed by Ontario Teachers’ Pension Plan.

The US wind industry is steadily catching up with Europe and project size is increasingly pushing past 1.4GW, with a New Jersey offshore contract to supply the grid with 7.5GW at a cost of $7 billion providing a notable example. The project has received 13 separate bids and the winner is set to be revealed in Q4.

“What the state of New Jersey is doing here is actually very novel,” says Kurt Summers, head of public-private partnerships at Blackstone Infrastructure Partners, an investor in Atlantic Power Transmission, a bidder on the New Jersey offshore transmission project.

2Taking stock of the situation

Biden’s efforts to pass key climate legislation are positive for the sector, especially with investors showing immense appetite for energy transition assets in recent years and the scale of private investment needed to meet net-zero goals, but the industry is not exempt from wider macroeconomic and geopolitical tensions.

Supply-chain challenges, rising interest rates and labour shortages caused by the war in Ukraine and the pandemic are all cause for concern, while many economists fear a global recession could be imminent. Energy is on everyone’s minds and this dynamic is also being played out in the fundraising space.

Energy funds accounted for three-quarters of North American funds closed across the first half of 2022, and just less than half of all capital raised, according to Infrastructure Investor figures. Renewables took a 13 percent share of funds closed against another 13 percent share of all capital raised.

The first six months of 2022 actually set a new North American infrastructure fundraising record, notably led by Stonepeak’s whopping $14 billion Fund IV. The region was also the most popular market for funds in market, with $408.9 billion in North America against nearest rival Asia-Pacific posting just $144.3 million.

3The power and the glory

North American digital infrastructure is another asset class that has boomed since the pandemic and faces increasing sustainability scrutiny. The vast volume of power and water needed to maintain servers is growing rapidly each year and the trend is unlikely to change.

Tech giants in the US are leading the shift to renewable power generation and the top six firms contracted more than 47GW last year, according to US credit rating agency S&P Global Ratings. “This is from an ESG perspective a very good story,” says Greg Blank, senior managing director at QTS Data Centers. “We expect to be 100 percent renewable in three years.”

Data centre construction has been particularly strong in the US East Coast this year. Northern Virginia led the market with more than half the national total, reports JLL, but there are signs that things might be starting to stutter.

“There’s a little bit of stress in the market in Northern Virginia,” says Dalmar Sheikh, director of global data centre operations at Actis. “There’s still some capacity, but not as much as there used to be.”

But even if the trend is starting to slow somewhat, data centres absorb considerable investment and managers have been raising their exposure to data and telecoms.

“This was formerly typically 5-15 percent of a diversified infrastructure fund; now it’s about 30 percent,” adds Brent Burnett, managing director and head of real assets at Hamilton Lane.

Consumer demand for digital infra is only set to grow and the IRA’s support for greater renewables penetration should complement the need to decarbonise data centres. Federal funding may prove to be a drop in the ocean compared to the capital needed, but the energy transition will be a long and onerous journey and the first package of its kind will importantly set the gears in motion.