Catalyst with Shayle Kann - How is U.S. industrial policy affecting actual climatetech investment?

Episode Date: October 12, 2023

In climatetech circles, the Inflation Reduction Act (IRA) was a big deal. The expectation was that, combined with other parts of U.S. industrial policy like the CHIPS and Science Act and Bipartisan Infrastructure Law, the IRA would transform the American economy and ultimately slash U.S. carbon emissions.  We can’t see the impact on carbon emissions yet, but we can measure the initial effects on the economy. So how’s it going so far? In this episode, Shayle talks to Trevor Houser, partner at the Rhodium Group, about the organization’s new Clean Investment Monitor, a database of climatetech investments developed with the MIT Center on Energy and Environmental Policy Research. Trevor highlights three different categories of policy impacts: Sectors where policy accelerated existing trends, like solar deployment and EV sales. Sectors where policy catalyzed new growth that probably would not have happened otherwise, like in manufacturing, hydrogen, carbon management, and sustainable aviation fuels. Sectors that are declining despite policy incentives, like the deployment of wind and heat pumps. They discuss the drivers behind these trends and cover topics like: The regional clustering of manufacturing investment and new geographic hubs, like the Southwest. The surprising growth in hydrogen made from steam methane reforming, also known as blue hydrogen. Recommended Resources: Rhodium Group: Clean Investment Monitor Canary: Made in the USA: Ramping up clean energy manufacturing Canary: US offshore wind pushes ahead despite industry turmoil Sign up for Latitude Media’s Frontier Forum on January 29, featuring Crux CEO Alfred Johnson, who will break down the budding market for clean energy tax credits. We’ll dissect current transactions and pricing, compare buyer and seller expectations, and look at where the market is headed in 2024. Catalyst is brought to you by Sungrow. Now in more than 150 countries, Sungrow’s solutions include inverters for utility-scale, commercial and industrial solar, plus energy storage systems. Learn more at us.sungrowpower.com.

Hello, Catalyst listeners. It's executive editor, Stephen Lacey, popping into your feed one more time to talk about Transition AI, New York. You've been hearing me talk about it a lot, and I won't be talking about it much longer because we're only one week out from the event. And that means you only have one week to get a ticket and network with attendees from Microsoft, AES, Oracle, Fluence, S&P, National Grid, PayPal, scale microgrids, GE Digital, and many more utilities, startups, and investors. all of whom are exploring and building artificial intelligence solutions for enterprises and for the grid. We'll have panels, demos, market research, a workshop, and, of course, networking on a wide range of artificial intelligence applications. Transition AI, New York, October 19th in Midtown Manhattan. Get your ticket now at transition-aI.com. Use the promo code PSPODs 10 for a 10% discount. And we'll see you there in just a few days. of PostScript Media and Canary Media.

I'm Shayal Khan, and this is Catalyst. We needed to go beyond just company announcements for how much they're investing to actually try to count steel on the ground. It's time to build. Clean energy, in the U.S., that is. When utilities need flexible capacity they can count on, they turn to Energy Hub.

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I'm Alfred Johnson, CEO of Crux, and host of a brand new podcast, Critical Capital. Each episode, I talk with people deploying capital, shaping policy and building the clean economy. Tune in as we unpack how progress is actually made. Listen to Critical Capital Capital on Spotify, Apple, or wherever you get your podcasts. I'm Shayal Khan. I invest in revolutionary climate. technologies at energy impact partners. Welcome. All right. So I'm on a panel at a conference in a couple weeks, and just last week we had our like panelist prep call. And it was interesting in the context of that prep call. One of the questions that the moderator laid out as a potential

question on the panel was what has been the impact, what have you seen as the impact to your portfolio and the companies you're thinking about investing in? This is an investment panel, obviously, of the IRA in the United States, the Inflation Reduction Act, and then the collection of bills that came before it, the IIA and the Chips Act and so on. And before I could give my answer, one of the other panelists said, well, as we all know, we haven't really seen that big an impact yet. At this point, it's mostly announcements and theoretical impacts, and, you know, it's only been a year since the IRA, so we don't really see a whole lot happening just yet. And I was sort of taken by surprise because my natural answer to that question is we've seen so much happen since then.

The impacts are already enormous, and yes, there's more still to come. But from the vantage point that I'm sitting in, it's been like transformative to multiple markets already today. And so I realized that I think there's a disconnect in the understanding and thinking about, like, what have we seen actually happen? What have been the real trends in investment since these bills passed in the United States as opposed to what is the rhetoric and what is the general vibe of a given sector. So fortunately for me, my friend Trevor Hauser, who is a partner at the Rhodium group, just put together a massive compendium of data trying to answer this exact question, called the Clean Energy Monitor, and they just released it. And it gets it exactly this,

which is, what are the actual trends and actual investment that we are seeing across the broad clean energy category in the United States, how have those been changing over time, and how does it break down geographically, by sector, and so on. So I brought Trevor on to talk through it. Here's Trevor. Trevor, welcome back. Hey, Shale. Good to be here. Let's talk about investment in clean energy, broadly defined in the U.S. and what's been happening over the past year plus in particular since the IRA passed. I think a lot of people recognize that it will have, should have is having some form of a transformative impact. But I also hear a lot from people who are saying, well, it's not really clear what's happening yet because it takes a while for

these markets to move and we're still waiting on guidance in some areas and things like that. So I think it's interesting to check in on what the data shows us at this point in terms of which markets are really moving and which are not. And I think we want to talk both about manufacturing, which is the big story that I feel like is underappreciated broadly, and also deployment of new technologies. So let's start at the highest level. What is the overall pace of investment in clean energy in the United States today, and how does that compare to recent history? Great. Thanks, Shell. Yeah, so just to back up a little bit, the question that you posed, what effect is the IRA? And more broadly, there were actually three pieces,

a legislation over the past couple of years that provide a lot of incentive for clean energy. The IRA was the largest, but there was also the bipartisan infrastructure bill or the I-IJA. And then the Chips and Science Act, which was mostly a semiconductor bill, actually had some meaningful incentives in it for clean energy R&D as well. And so the question that we wanted to answer in collaboration with the SEPER Center at MIT was, what effect are those pieces of legislation having on the pace of clean energy investment in the U.S. Both to know are we on track towards the projected emission reductions from those pieces of legislation. So, as you know, groups like Rhodium and others do these modeled estimates of what a piece of legislation like the IRA is likely to do.

But those are just modeled estimates and things change in the real world. And so we wanted as close to real time as we could get leading indicator of where investment and clean energy was advancing as expected and where it might be underperforming or overperforming. And then also to get a better sense of what's the economic effect. This is a lot of money being pumped into the economy, both private investment and public investment, and how is it shaping economies at the local level. So that was the impetus for this project for the Clean Investment Monitor that we launched last month. And to answer that question, we needed to do a couple things. One, we needed to go beyond just company announcements for how much they're investing to actually try to count steel in the ground. And that meant coming up with a method for quantifying investment timelines and for investments for projects where the company wasn't announcing the actual investment amount itself. And then two is we needed a historically methodologically consistent science.

series. So we had to go back to 2018 and build out a database from that. So the coin investment monitor, which is available online at coininvestmentmonitor.org, has all these data. We'll be updating it on a quarterly basis. And as of right now, it has about 20,000 individual facilities, 3 million individual zero mission vehicle registrations, 20 million heat pump sales, 4.5 million distributed electricity generation and storage systems. And our hope is that this provides a data resource for others to use and tracking pieces of the clean energy transition as big or small as they want. So whether you're interested in what's specifically happening in batteries in Tennessee or whether you're trying to get a sense of overall investment trends.

That's what we hope this provides. So anyway, that is background. So what are we seeing to date? And so the data we have now goes through the second quarter of 2023. We'll be releasing third quarter data next month. And And so in our initial report, we looked at the past 12 months of investment up to that point. So we're talking about Q3, 2022 to Q2, 2023. So that would have been the first year after the IRA was passed. And then if you look back the previous year, that would have been the year after IIA was passed. So we think the most likely kind of policy impacted time horizon is that mid-year 2021 to

mid-year 2020. Three, both because of the IIA and because of company expectations about legislative change that we're starting to form at that time. Okay. So with all of that preamble, give me the highest level headline, yeah. Yeah. So headline, so the past year, we saw $213 billion in investment in clean energy broadly defined. So that means both the manufacturer of clean energy technology and the deployment of that technology, both in wholesale energy production or industrial production and in the retail sector. And that was up 37% year on year, and up 165% relative to five years prior. We're trying to define investment as close as possible to how the Bureau of Economic Analysis defines investment for the country as a whole. So what that means

is fixed structures and equipment and durable consumer goods like vehicles. So if you measure it in that way, clean energy investment was 4.1% of total investment in the U.S. economy last year, up from 1.7% of total investment in the U.S. economy five years ago. So that's impressive. And I also think probably, I don't know, fairly unsurprising to the savvy listener to this podcast who knows that this market is growing pretty fast and that thanks in part to these policies, it's a bigger share of the overall economy. To me, actually, the one level deeper bit that I think people maybe recognize at the highest level, but don't have the numbers attached to, which I think is really interesting, is if you just focus on manufacturing, as you said,

these numbers, they include both manufacturing and deployment, and the deployment numbers are the ones that we're used to seeing grow year over year historically. This idea of this U.S. manufacturing renaissance of clean energy technologies, which we could talk more about which technologies we mean here in a minute, but that appears to be the newest thing, and that's where I think the numbers are most striking. So what do we see in terms of just manufacturing investment? Yeah, and so we'd put manufacturing in the first minute. So we think about the, there's kind of three ways to think about the effect that the pieces of legislation are having. So there's one category where it really is catalyzing a large-scale change in trajectory.

And we'd argue that manufacturing is in that ban, and I'll come back to that in a second. But that would also include investment in deployment of emerging climate technologies like carbon management, hydrogen, and SAF, where I think that those three pieces of legislation are having a pretty significant change in the overall trajectory. Then there's investment that was already on... To the extent that, by the way, changing the trajectory in the sense that, like, there wasn't much of a trajectory in any of those three, like creation of a trajectory. So I'd argue both for a lot of solar manufacturing and then things like carbon management, those, it's very hard to argue, be seeing almost any of it occur without the policy incentives in place, right? And then there's places where the investment trends, as you said, were already on a takeoff trajectory. And the legislation will probably accelerate it, but it's not creating a fundamentally different scope.

So that would be like solar and storage, EV. sales. And then the third bin is places where, and this was one of the surprises, where the incentives in the IRA are not able to overcome to date some other headwinds in the market, and where investment is actually declining despite the incentives in the IRA. And that's primarily a wind story, but there's some other pieces there, too. Yeah, okay, I definitely want to come back to that because that is another thing that I think there's a rising tide that is lifting most boats, but some, I'm going to torture this metaphor terribly as I try to finish it, but there's some boats that were leaking beforehand, and so the rising tide can only help so much.

So yeah, so let's dig into manufacturing. And like you, this was the one that was the most surprising to me. So I had seen a lot of the company announcements, and I assumed, you know, it's the bar to making an announcement about a plan or a hope to invest in the U.S. is pretty low. particularly because I would add like, and we've been digging into this somewhat recently too, there's a lot of, for example, there is an inordinate number of planned North American battery cathode manufacturing facilities slated for 2030 introduction. It's always 2030. Like, the number between the amount that it's, you know, if you just take the announcements as gospel, the amount that will be online in 2029 and 2030 is like ridiculously stark. And that just implies

to me that 2030 is a nice reaction. number. It's not like an exact thing, right? And so you see these announcements. You're like, okay, great. I'm happy we're thinking about building a bunch of manufacturing capacity in 2030, but what's really happening here? And to be clear, in our database, to even be counted as an announcement, we have a pretty high bar. You have to have picked a specific location. You have to have announced a timeline that's not like 2030. It's like we're going to break ground. And then you have to have a specific construction timeline. And for large projects, you have to be in front-end engineering and design for it to be an official announcement for us, right?

You don't have to have to have to have in feed before we're going to count it as an announcement. But even with that high bar, I still thought that the actual amount of investment activity would be relatively modest in manufacturing. Right, particularly given, again, if you believe that the IRA was the primary catalyst of this domestic manufacturing renaissance, maybe some of it from, the infrastructure bill, and you tell me what comes out of chips there, if anything. But if you sue the IRA is the main driver here, then the time period that we're talking about, the data set that we're referring to, is just a year, not even quite a year, post-IRA.

So you'd assume that even if we are going to have this big renaissance, that over that time period, most of what would be happening is just the early stage announcement seeking a site, you know, trying to get economic incentives from states, et cetera, et cetera. So what we saw as we went through the data and started going through like company filing, a lot of these data come from annual reports, investor presentations. And what we saw is there was a lot of companies that were making announcements based on an anticipated change in the policy environment, right? I remember Biden administration ran on climate being a top policy priority.

There were plans announced during the campaign. there was a pretty broad expectation that a Biden administration would make clean energy legislation and incentives a top priority. And there were rough senses of what the outlines of that might look like. And now I think a lot of those, if the legislation hadn't come through, a lot of those announcements would have ended up falling away, right? But you saw companies starting to move towards investment in new production capacity based on the expectation of that policy. But my expectation would be, so I can imagine how, so, you know, maybe we should talk through some of these markets specifically.

But on the manufacturing side, my presumption is the vast majority of those, we haven't even given the high, high level number yet, but the vast majority of those dollars probably going to either somewhere in the battery value chain, battery or EV value chain, or solar value chain is my guess. Yeah, 93%. if you look at the past two years combined of actual investment, 93% is in the EV value chain. So that's critical minerals, batteries, EV assembly, and charging equipment.

So that's 92%. The vast majority of the remainder is solar, and then there's a tiny amount of wind in there in manufacturing. Right. So I can see how if you're in the EV value chain, even prior to this legislation, you would have expected a growing market for EVs in North America and there's parts of that supply chain

that are better off domestic anyway. What you probably could not have predicted is like there's the pull incentive in the market in the form of the $7,500 EV tax credit, and then there's the push in the form of all the subsidies for manufacturing. And that part feels like you couldn't have predicted that, right, like a year in advance of the IRA.

So I think there was some, for EVs, I think it's safe to assume that if demand was growing, so take whatever your demand forecast with or without the $7,500 tax credit, if demand is growing, you're going to get a certain amount of localization of production

no matter what, both as a general political matter, auto companies know that the auto sector is of strategic national importance to the different major markets in which they operate. And so when they have the ability cost-wise to do it,

there's generally a preference for localization because it helps in the politics. And then there's also just logistic advantages in some parts of the value chain of being close to the customer. So I think you would have had some of that anyway. The, I think the anticipation both of 45X

and of things like the loan program office, even though the final contours of that as it ended up in the IRA, weren't completely known, they were broadly known a year or so before. Now, you're taking a bet on is that going to come through, right? Will the Biden administration successfully be able to get what was originally in Bill Back better? And then over the course of a year, got whittled down into the IRA. Are they going to get that through or not? And again, I think if it hadn't, you would have seen a lot of those plans fall away pretty quickly. But I also think it's pretty safe to say the magnitude

of battery investment that an EV supply chain investment that we're seeing now would not have occurred. Much of it would have, but the full magnitude that we're seeing now wouldn't have occurred if there was no expectation or reality of legislation. All right. So let's skip ahead to the numbers since we keep dancing around them. So what was over that one year period or that two-year period, what was manufacturing investment as defined by you guys compared to previous years? Yeah, so last year, $39 billion

in investment in clean energy and transportation manufacturing, and that was up 135% year on year. If you look back five years,

there was $2 billion a year. So there basically was nothing, very close to nothing. We had a little wave in wind investment in when the U.S. wind market first started

taking off, and then those wind facilities were in a constant, you know, then closure, open closure cycle. But there is very little else happening in the clean energy manufacturing space. And over the past two years, it's really exploded. My expectation would be, I know you don't have the data yet for Q3, Q4, and obviously we don't know what happens in 2024 yet. My expectation is that this number grows very, very fast over the next year or two, as just

measured by, you know, the earlier stage announcements that probably did not qualify for inclusion, but will soon. I mean, as you said, right, like in the data set you've got, it's all EV value chain stuff. It's in the battery world. And there's more of that to talk about. But it also doesn't,

you know, whatever it is, 7% or something is solar. And like we're seeing this crazy domestic solar manufacturing renaissance right now, which is all still to come, not to mention, you know, the, we have in our portfolio amongst others, like the first large-scale electrolyzer manufacturing facilities that are getting built. And, you know, none of this stuff.

is showing up in there yet, I presume. Yeah, exactly. So we've got pretty good line of sight on the next year of actual investment just based on the announcements so far. After a year out, then it becomes less if the announcement pipeline dries up after a year from now, the total investment numbers will start to plateau out to. But yeah, it's safe to say $39 billion last year is definitely the floor on what we're going to see over the next 12 months. All right. So let's talk about the markets, and we can put them in those three categories that you described, which is sort of like the pre-existing markets that were growing and these bills are potentially accelerating them or at least extending their growth. And then the second category being like creation of a market

or changing the trajectory of a market. And the third being the sort of most surprising one where like incentives are there, but it's not helping enough. The first one's probably maybe the least surprising, least interesting. Well, let's talk about it anyway, which is Like, these were the markets that were already hot. So which ones are those and, you know, how hot are they relative to a couple years ago? Yeah, so that's solar and storage, mostly, and then EV sales. And they're, you know, both are growing at like, you know, 15 to 40 percent a year. So really rapid growth, not the kind of triple-digit growth that we're seeing in manufacturing or in some of the emerging

climate tech, but continued pretty strong growth in solar and storage, both on the wholesale side and on the retail side, and then growth in EB sales. So, okay, so solar and storage, you know, basically a bunch of things in the IRA beneficial there in the storage case. They can get the standalone ITC now, which they couldn't get before in the solar case. You know, you can qualify for the PTC, and there's lots of dynamics around that. There's tax... credit transferability in both cases and things like that. So, you know, it feels like it is significantly beneficial, but as you said, it's not necessarily like trajectory changing. To me, the biggest thing

for both of those is just how long the tax credit extension land. So now we have visibility into 2032, which we've never had before. And so that just provides certainty for investment. And that's pretty consistent with what in the modeling that we and other groups did at the IRA and the IJA, both before they were passed and right after they were passed. projecting an acceleration in solar and storage installations, but not a fundamental change in their trajectory. They'd already achieved escape velocity, and so the incentives there just accelerate, which is important because acceleration from a climate standpoint really matters, how quickly we get to get emissions down is critical, so that matters, but it's not a fundamental

change in the trajectory of those technologies. It's also an interesting time period that we're looking at here because, you know, solar prices have been increasing, not decreasing over that period as well. So yes, we had these tax credit extensions and some other benefits, but it was like at the same time that there were a bunch of head. There are also trade issues and other headwinds in the solar market. So it'll be interesting to see how that settles over the next few years. I'm interested in the EV side, though. Do we have, do we have anything we can say at this point? about how these bills and the IRA in particular is affecting EV adoption, EV purchases? It's a little early. So we'll do an analysis at the end of the year where we look at full year. Because the way the credits were structured, they changed the credit structure immediately in the IRA. And so for the end of 2022, the EV tax credit structure was different than before. but then it changed again in a pretty significant way in January of 2023. And we can see looking through the make and model mapping that to who was eligible before and who is eligible now.

We can see really significant shifts in consumer behavior there, but it's hard to, in aggregate, yet, give a definitive answer on how much did the $7,500 tax credit extension accelerate sales in, you know, in 2023. So we hope to be able to get at that a little bit once we have full year data at the end of the year, but it's a little bit, it's a little bit tough to quantify it right now. Okay, so on the electric vehicle side, not clear yet exactly what impact that this legislation is having on purchases and adoption, very, very clear impact on what this legislation is doing for the manufacturing supply chain for that stuff. Exactly. And we think we're pretty confident that it's having a, like with solar, that the legislation is having a boosting impact on EV sales, but the magnitude, how much of that, how large the magnitude is, is unclear still.

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Together, we unpack how risk is priced, how incentives are structured, and how progress is actually made. Listen to critical capital on Spotify, Apple, or wherever you get your podcasts. We talk a little bit. We've bled into category two here of things that trajectory was changed. And so manufacturing of EV supply chain things from critical minerals to vehicle assembly, clearly in that second category. I think geographically there's an interesting thing to talk about here as well, because one thing that is starting to emerge right now that I'm seeing

is these announcements are clustered, regionally clustered, the manufacturing announcements in particular. And I wonder whether you think that will continue. And if it continues, are we introducing new regional manufacturing hubs, just like Detroit was the home of auto manufacturing in times of your, is there going to be a new home of battery supply chain somewhere in the U.S.

And, you know, it's going to revitalize some regional economy and like, what, you know, what are we seeing here in terms of the geographic trends of manufacturing? Yeah, it's a great question. So in the EV supply chain, it's, you know, to start with it's as you'd expect, there's announcements by the big three,

and those are largely in the Midwest, in Michigan and Ohio. and then the transplants, so the foreign automakers, Hyundai, Kia, European automakers, with announcements in the southeast, so Tennessee and Kentucky and South Carolina. We're seeing a lot of EVE investment occurring in. So that's not really surprising. What is surprising is we're starting to see this third EV manufacturing hub emerge in the U.S. Southwest, which is never really.

made cars before. Arizona, Nevada, tied to California in a lot of the innovation economy in California. And it appears to be clean tech innovators, and this is in other types of manufacturing as well, clean tech innovators, coming out of the Bay Area and other parts of California, looking for manufacturing locations that are a little more geographically proximate and creating these hubs of activity in Nevada and in Arizona. I mean, if you look at that history, I wonder whether that is, I don't know what's chicken or egg here, but like, you know, prior to any of these bills, right, Tesla was in Nevada already with the Reno Gigafactory in solar. First solar has been in Tempe, Arizona forever. You know, is it just that once there's one, it attracts a cluster? Because now you have a trained workforce that you can hire from and, you know, people have moved there and all that kind of stuff. Yeah, I think there's real path dependency and talent in relationships with state and local governments that are going to provide incentives and where permitting is a kind of known quantity and just familiarity of working, just word of mouth of, oh, we set up a factory there, worked relatively well. We were able to navigate these issues. Here's how we did it. As opposed to go into a completely new state where you have no experience. Your community within a field has no experience is a pretty high bar.

And so when we look at over the past year, manufacturing investment is a share of GDP across the country. So the top four states are the traditional auto hub. So it's Tennessee, Kentucky, Michigan, South Carolina. But then ranked fourth and fifth is Arizona and Nevada. And that's mostly EVs, but it's also solar as well, particularly in Arizona. and a lot of announced activity in those regions, too, including on the critical minerals side, so Redwood Materials facility, the giant lithium mine in Nevada, and so that kind of critical mineral supply base in the U.S. Southwest, I think will be another attractive aspect of the Southwest as a clean energy manufacturing hub. I don't normally wade too deep into politics here, but I don't normally wade too deep into politics here,

but I think this begs one question, which is there's always going to be, and there always has been sort of ongoing questions as to the durability of the IRA under a new administration potentially, and one of the counters you often hear to that is, look, by the time anybody would consider repealing the IRA at this point, there's going to be hundreds of billions of dollars maybe of manufacturing investment. And as you said, if you talk about those regions where we're seeing the hubs clustered, it's the Midwest, the Southeast, and the Southwest, all of which contain fairly important swing states. How do you think about that? Or do you, I mean, you have a lot more historical context on this kind of thing than I do. Like, how much does manufacturing investment in a given policymakers region typically affect their desire to change legislation that might sacrifice that investment?

So traditionally, it was very important and very predictive of elected officials' political choices. Hometown industries were able to shape elected officials' preferences when they went to D.C. in a fairly predictable way. The nationalization of politics and the partisanization of politics in the U.S. pushes against that, right? So there are places where the political rewards to an elected official of taking a very partisan approach that plays well in national media can be greater than the downside of doing something that hurts a local industry. So it's certainly not as predictive as it was in the past, but of the things at a local level that elected officials still listen to, investment in manufacturing. is still pretty high. On the list, and you can see in South Carolina, in Kentucky, in Tennessee, places with unified Republican control of the governor's office and the legislatures, pretty strong incentives packages being provided to attract EV manufacturing

companies to those states, West Virginia as well. And so there clearly is still strong political support within those states for incentives of manufacturing of any kind, even if it's clean energy manufacturing. They're elected officials from those states that have national ambitions will, if there's rewards to them politically at a national level for taking a more partisan view on climate or clean energy, then they'll probably do it. But at the state level, there's pretty strong bipartisan support for investment in these technologies. Okay, so let's wrap up the second category of trajectory-changing technologies from this legislation or the suite of legislation. So you mentioned, I think, as a group, like hydrogen, carbon

management, and SAF, sustainable aviation fuel. So what are we seeing in the data on those markets? Yeah, so what we would call a group of them together, let's call them like emerging climate technologies that we're starting to see real meaningful investment in. And for all three of those, there was, so for carbon management, there was an incentive that existed prior to the IRA called 45Q, and that got extended through the inflation reduction act. So the value is higher and it lasts longer. But we were starting to see some carbon management investment before at the cheapest sources of capture. So that's mostly ethanol refineries. in the Midwest. Since, over the past two years, with the combination of the IRA and the IJA,

the amount of announced investment activity in both carbon management, as well as in clean hydrogen, both blue hydrogen and green hydrogen, even some turquoise hydrogen, and sustainable aviation fuels has really taken off. So across those three technologies, over the past two years, there's been $80 billion of announced investment activity. That's, a full third of the investment, announced investment, across wholesale deployment. So if you pull together solar, batteries, wind, and these emerging climate technologies as a category, the ECTs have been about a third of the announced investment activity. And those are the ones in particular where I would expect that first year post-IRA

to have the least movement, the least investment relative to what's coming, just because, as you said, these are the markets that like barely existed before were pretty nascent. Or in the case of points there's carbon capture, it was limited to ethanol plants in the Midwest. Now all of a sudden it's an $85 credit or $180 if you're doing direct air capture. And so that opens up this wider aperture. And also, in addition to that, at least in the case of hydrogen, you know, it's a market that the IRA clearly is transformative to the economics of hydrogen production, but also the market in which we are still waiting on guidance from Treasury that is fairly important. to determining the types of projects one might invest in.

And so that has undeniably hampered, like, projects getting to FID because they're waiting to see what that guidance is going to be. Yeah, absolutely. So of that $80 billion in announcements, only $4.6 billion, has actually turned into steel on the ground so far over the past two years, right? So it's a big – that's the place where the gap between announcement, as you say, announced investment and actual investment is the largest. within hydrogen that's right for green hydrogen, where the big projects are still waiting on

Treasury guidance. One of the surprises to me out of this database was how much investment in blue hydrogen is happening, not just announcements, but actual steel on the ground and not just retrofits of existing steam methane reformation plants and chemicals facilities, but Greenfield Blue Hydrogen investment because 45Q is both an existing tax credit. So those plants presumably are investing based on an assumption that they will take 45Q as the credit instead of 45V. Which is an important point, right? You can't stack those credits. So 45Q is the carbon capture credit. Blue hydrogen is where you use Brun a steam methane reformer and then capture the

CO2. So you can either take the carbon capture credit, which is your $85 a ton CO2 credit, or you could take the hydrogen production tax credit, which is where there's uncertainty here. But let's assume if you're producing blue hydrogen, you're most likely to qualify for the dollar per kilogram level of a credit rather than the $3, which is the most stringent life cycle emissions criteria. So you're saying that it seems like the blue hydrogen world is electing to take 45Q and the economics pencil,

based on that alone, the carbon capture credit, so they don't need the hydrogen PTC. Yeah, of course, we don't know because everyone's tax returns are confidential, so we don't know what a given company is planning on doing. But when we model the economics, the 45Q economics for either a greenfield or retrofitted blue hydrogen facility are relatively attractive and the policy pathways much more predictable at this point than the 45V tax credit. Let's just spend one second on sustainable aviation fuel before.

before we move on to the next category, because that's such an interesting one right now. You see announcements, procurement announcements from airlines who are saying we'll buy up to whatever it is, a billion gallons of SAF. SAF is this super complicated category of lots of different technologies

and lots of different feed stocks, and as a result, lots of different, you know, LCA calculations and all this kind of stuff. But universally, everybody that I've talked to in that market says that we are in an extraordinarily supply-constrained market relative to the current level of

demand. And it's one of the few markets, I find it especially interesting right now, because at least at small scale, relative to the total size of the aviation fuel market, but at the scale that we're at today and the scale we're at the next few years, there's a proven green premium there.

Airlines are paying a premium for sustainable aviation fuel. Not as obvious in some of these other hard-to-abate sectors, like less clear in cement, for example, right? But and sustainable aviation fuel, it is happening. But the big question is like, does that scale? What happens when all of a sudden there's a lot of SAF on the market

as opposed to a tiny bit of SAF, which is where we are today? So I guess the question for you is, where are we on the path going from a tiny, tiny bit of sustainable aviation fuel to a meaningful amount to sustainable aviation fuel? Yeah, this one is, so one interesting thing that we saw, going through project announcements were a number of facilities that had been geared up for renewable diesel for either the California LCFS or for the RFS. And then the IRA is changing their focus. The incentives for SAF in the IRA combined with the airline demand that you mentioned and the willingness

to pay a green premium is prompting a lot of these projects to shift product mix and focus a little bit and start optimizing towards as much as they can with the technology towards sustainable aviation fuel and away from diesel. And then there's some big new Greenfield facilities that were announced as primarily SAF plays and were not previously targeting other low-carbon fuels markets. This is a place where, to me, the delta between, These are a lot of really big multi-billion dollar multi-year projects. And the delta between the announcement and what it'll take to actually bring these projects online seems pretty large.

I haven't done the full crosswalk of if they all came online, how would the output compare to projected aviation demand? My guess is for this first round we'd still be short. It would still be a tight market, but we haven't run those numbers to ground yet. All right. Let's move on to the third and least positive story, which is the markets where, despite there being something in this legislation for them, they're actually declining rather than growing. So which markets are those? Yeah, so there's two. One is a pretty troubling story, and the other is a half good, half bad story. So the pretty troubling one is wind, where investment and announcements in new wind capacity have been declining for the past two years. And wind got pretty significant incentives in the IRA and extension of the PTC, as you said, out to out to 2032. But we haven't yet seen that translate into a, into a, into a, into, a change in the downward trajectory of wind investment in the U.S. over the past couple of years. And, you know, I'm sure you've covered the various factors for that with other guests a lot on this show, but wind is obviously much more vulnerable to transmission, citing, and permitting constraints than solar. Solar is more evenly distributed around the U.S.

High-quality wind is not as evenly distributed around the U.S. offshore wind is really subject to slowdowns and permitting timelines, state procurement rules, et cetera. And then interest rates, the high interest rate environment, wind, particularly offshore wind, very large capital intensive, very interest rate sensitive projects. And so those things, I think, are affecting wind in a way that they're not affecting solar. Also, the relative delta. So giving solar the ability, wind has been able to claim the PTC forever. the IRA gave solar projects the ability to claim the PTC, which was a very large change in the economics for solar, putting it on an even footing with wind. And so the delta in policy support in the IRA for solar is much larger than it is for wind, but wind is also facing some not unique headwinds, but is disproportionately impacted by permitting an interest rate headwinds relative to its other clean electricity peers.

Right. Okay, so that's the one where this, you know, you could have imagined it being like solar, existing trajectory accelerated, except in this case the existing trajectory was downward, at least slightly. And so now it's a question of like, will the IRA help save the wind industry from further decline? And the answer is not yet, but maybe. Necessary but not sufficient. It helps get the generation economics right, but unless permitting reform and interest rate declines. materialize, it's unlikely that it'll be sufficient to drive the amount of wind deployment growth that we need. All right. And what's the other one that's a half bad, half good story? Heat pumps. So overall— Which is the surprising one, I should say, right? I think given all the excitement about heat pumps and everything you hear in the world, I think you would expect heat pumps are on this, like, on a tear. Yeah. So the bad news side is that overall heat pump installations were flat in investment

terms down a little bit in unit terms last year. relative to the year before. The good news is that their share of the market compared to furnaces continued to grow. So the overall amount of residential investment in HVAC systems declined last year. Is that a function of the macro environment? Like combo of...

Mostly, yeah. Interest rates, just higher interest rates, households burning through the pandemic, that they had built up, the combination of those two things. And so within a declining market for HVAC replacement, heat pumps are still gaining market share, but the overall clip of sales is still flat to down a little bit. Why would that be different from vehicles? Wouldn't you assume the same factors that affect the overall market for HVAC,

probably affect the overall market for vehicle purchases? Not as much. So vehicle purchases are not as interest rate sensitive as home renovations and new construction are. So when the Fed raises interest rates, it's residential construction activity that gets hit the hardest because of the sensitivity for the 30-year mortgage. And home renovations are pretty close after that. Vehicle sales do because of $5.5.5.

financing vehicle sales do take a hit when interest rates rise, but not as much as residential construction. We see the same thing, residential solar and distributed generation is also growing like EVs. And I think that's also because those still heat pumps are actually have much larger share of the market currently. There are much more mature technology than EVs and rooftops solar and storage. And so those technologies are still at an earlier part of their S-curve that's able to transcend the macro environment. Heat pumps are actually a much more mature technology. It's kind of regional, right? Like in the southeast, they're extremely mature. Like, you know, we don't need to do a whole lot to catalyze the heat pump investment in the

southeast, but in the upper Midwest, like nobody's got heat pump. Now, one downside is we don't have state, we know what the state distribution of heat pump stock is today, but we don't actually have state-level heat-pump sales data. And so one thing that would be interesting to see if we did was, is there growth in New England and the Northeast places that didn't traditionally have heat pumps? Is that continuing to grow, but it's being offset in an aggregate level by a decline in heat pump demand in the U.S. Southeast, the more mature markets, where, it's just riding an overall wave of slower residential investment. And so what about the impact of the legislation, right?

Like what was in the IRA for heat pumps? And would we have expected it to be enough to overcome the overall macro environment? Or I guess I'm just trying to work out like, how should we feel about this? As you said, it's good and bad, like growing share of a declining market is the way that we're at today. Yeah, so the IRA has a $2,000 tax credit for heat pump installations. The cost of any residential construction has been going up a lot, and that means the cost of installing a heat pump has gone up a lot as well, not because the heat pump technology itself has gotten more expensive,

but just because the cost of construction labor has risen quite a bit over the past few years. So I think that tax credit was coming into a market that is already constrained by construction labor costs and macro factors. And like with wind is not enough to really, the level of incentive is not large enough to transcend those barriers. So I think it has kept heat pumps on a pathway of gradually eroding market share from furnaces, but not enough to. to overcome the vulnerability to broader macro trends. And in general, to achieve the level of heat pump deployment that would be required for achieving 80 to 90% residential building electrification by the middle of the century, we'll need a lot more in different types of policy than just tax incentives

because of the barriers at a consumer level to installation. All right, Trevor. Well, this was a great check-in one-year-plus, hence of the IRA, and two-years-plus, hence the IIA-A. So I think we should make this an annual thing. Let's see where we're at next year and whether our forward-looking expectations that we laid out today are correct or not. But in the meantime, thanks for joining.

Yeah, my pleasure. Thanks for having, Michelle. Appreciate it. Trevor Hauser is a partner at the Rhodium group in the firm's climate and energy practice. This show is a co-production of PostScript Media and Canary Media. You can head over at Canarymedia.com for links to today's topics. PostScript is supported by Prelude Ventures, a venture capital firm that partners with entrepreneurs to address climate change across a range of sectors, including advanced energy,

food and ag, transportation and logistics, advanced materials, manufacturing, and advanced computing. This episode was produced by Daniel Waldorf, mixing by Roy Campanella and Sean Marquan, theme song by Sean Marquand. I'm Shayle Khan, and this is Catalyst.