At over 700 pages, the Inflation Reduction Act (IRA) is a dense piece of legislation. At the same time, its impact on the energy sector can be summarized succinctly: clean energy economics just got a whole lot better.
The legislation achieves this through a spate of incentives. There are enhancements to the existing production tax credit (PTC) and investment tax credit (ITC), which are now available to new solar and energy storage facilities, respectively; before the IRA, the ITC for solar was being phased down to a terminal level of 10% for facilities beginning construction from 2024 onward, and solar plants that were placed in service after 2006 were eligible for the PTC. Starting in 2025, there are new versions of the PTC and ITC available to all zero-emissions technologies, with phase-outs linked to aggressive emissions reduction targets. The phase-out begins in either 2032 or the year when the U.S. electricity sector emissions are 75% below 2022 levels—whichever is later. And then there are entirely new statutes, including an incentive for existing nuclear plants, which varies based on plants’ average revenues, and hydrogen, which varies inversely with carbon intensity.
We analyzed the cost impacts of the IRA by computing the levelized cost of energy (LCOE)—the average cost of electricity generation over the lifetime of a facility—for various technologies in 2030 with and without the IRA under a range of assumptions (see Figure 1). All of the technologies we analyzed see double-digit percentage declines in their LCOEs relative to their pre-IRA counterparts, with 100% green hydrogen-fueled combined cycle (CCGT) facilities seeing the largest impact. With such LCOE reductions, clean energy projects will, all else equal, be more cost competitive across the U.S.