The IRA in Implementation: An Idea both Democrats and Republicans can Embrace

It goes without saying that the nation’s politics are bitterly divided.  The recent straight party-line vote on the Inflation Reduction Act is proof of that.  But now that the IRA is law, here is an idea that both Democrats and Republicans ought to be able to embrace: whatever one thinks of the legislation, the financial support contained in it should, at the very least, be directed to help consumers.  It may seem an obvious thing to note, but the complex way utilities are regulated makes it less clear than Americans might imagine. 

Among the act’s provisions, it creates, extends and modifies a package of tax policies that support various clean energy technologies such as wind, solar, carbon capture & sequestration, clean hydrogen, and nuclear power.  But how can we make sure these subsidies, which will bring down the relative cost of clean energy investments, end up saving consumers money?  Put another way, how do we make sure the subsidies are not simply captured by project developers, without the savings being passed on to the people who pay utility bills?

In states where their regulatory commissions retain cost of service rate regulation, it is a straight-forward answer.   Regulated utilities will plan, procure and build new resources based on the updated cost profiles of various generation technologies.  The utility will be responsible for arriving at a plan that appropriately addresses customer needs for reliability, affordability and resource diversity.  If, for example, a renewable project is less expensive than it would have otherwise been without the IRA, then those savings will automatically flow through to customers.  Likewise, if a MWh of zero-fuel cost renewables displaces an equivalent amount of generation with (an increasingly expensive) fuel cost – then those benefits will also be passed along to customers.  In addition, the IRA’s provisions related to tax credit transferability will assist in ensuring regulated utilities can pass the value of tax-advantaged projects along to customers, and also create avenues for utilities to be able to develop these projects with new structures that can only enhance their cost-effectiveness.  These benefits will advance competition within the integrated resource planning model. 

In deregulated parts of the country, however, the answer is less clear.  Unregulated merchant generators have no obligation to pass savings on to consumers, nor to invest in anything other than what maximizes their own profits.  Their sole obligation is to their investors – often private equity or hedge fund investors seeking the outsized returns their well-heeled investors expect.  Merchant generators will be more than happy to capture the tax benefits of investing in renewables, but so too will they be thrilled to reap a king’s ransom from wholesale energy markets that are driven not by the actual cost of renewables – but by today’s high cost of natural gas.  Might there be some cost savings that eventually trickle down to consumers?  Perhaps, but make no mistake, there are a lot of entities between the federal tax credit and the customer’s bill that will be looking to pocket the subsidy for themselves, while simultaneously passing high costs on to consumers.  That is an outcome no policymaker should want.

We already know that states with economic regulatory oversight of their utilities will be able to ensure customers directly receive the benefit of the federal incentives which taxpayers are funding.  Democrats and Republicans in Congress should look for ways to make certain that customers in deregulated states will also benefit, because right now, it is far from clear that will be the case.