President Joe Biden signed the climate-and-energy-focused Inflation Reduction Act into law today, a turn of events that just a few months ago seemed impossible. The move will undoubtedly bolster the United States’ stance in the next round of climate negotiations. And by the end of the decade, it’s expected that the law will reduce the country’s emissions by 40% below 2005 levels. That’s enough to put the country within spitting distance of reductions that could limit warming to 1.5 degrees Celsius.
As with any legislation, there are winners and losers. In the new law, climate tech is undoubtedly a winner, with provisions that will bolster renewable power, net-zero buildings and zero-emissions transportation.
But the details matter, and some sectors got a better deal than others. Here’s a rundown of which companies are likely to benefit and which didn’t get what they expected.
The winners
At or near the top of the list are renewable-energy developers. Before the Inflation Reduction Act passed, tax credits on solar and wind were going to expire at the end of 2024. Now, they’re a little sweeter and are extended through 2032. For developers like Terabase, which recently raised a $44 million round led by Breakthrough Energy Ventures, and Arcadia, which recently closed a $200 million Series E, that’ll be a boon.
Those credits can be further sweetened if developers site their projects in low-income communities (20% bonus) and in so-called “energy communities” (10% bonus), which are old coal mines or brownfields or where the majority of residents are employed by oil and gas interests. New wind and solar projects that use American-made materials get a 10% tax credit. Altogether, the credits could amount to around 50% of the total project cost.
The law also gives offshore wind new support. American-made wind turbine installation vessels (WTIVs), the dearth of which has become a bottleneck for the offshore wind industry, are eligible for a 10% tax credit. Offshore wind projects that use domestic materials would get the same boost. For Rhode Island, which is positioning itself as the East Coast’s offshore wind hub, the combination of stackable tax credits and attractive local infrastructure investments could make the state ground zero for offshore wind startups.
Nuclear power also gets some help. Existing plants get a 0.3 cent per kWh production credit, which should keep them running for longer, and new advanced reactors coming online in 2025 or later get the same production credit, plus a 6% investment credit. That’ll benefit companies like Natrium and Oklo.
Fusion gets an indirect boost through additional research funding from the Department of Energy. The nuclear investment and production credits could also flow to fusion startups should their commercial-scale plants come online before 2032. Still, it’s unlikely that any startup will qualify for those — most are targeting the early 2030s for commercial sales — but if any of them could, it would be the frontrunners, including Commonwealth Fusion Systems, Zap Energy, TAE Technologies, Helion and General Fusion.
A big section of the Inflation Reduction Act is devoted to decarbonizing the country’s building stock. It prioritizes better insulation and air sealing of both new and existing buildings, and it offers significant tax credits for owners to install heat pumps and electric appliances like induction stoves. Homeowners can take advantage of this, but there’s arguably more potential for multifamily developers like BlocPower, which has already booted fossil fuels from over 1,200 buildings in 26 cities.
A few automakers could benefit from the bill, too, including GM, Ford, Tesla and Volkswagen. All four offer EVs that qualify for the revamped tax credit — or could qualify with a few tweaks. They all make EVs in North America (or will soon) and have at least one model that falls under the MSRP caps.
Relatedly, battery companies will also reap rewards. They’ve already been the breakout hit of the current climate tech boom, with manufacturing and materials startups reaping about $30 billion in investments in the last two years, and the Inflation Reduction Act will undoubtedly help bolster the sector further. But it also throws a curveball, requiring automakers that want to qualify for EV tax credits to buy batteries that are made in the U.S. or a free-trade-agreement country. The materials that go into those batteries have to follow the same country-of-origin requirements, too. Today, most battery materials are made overseas, predominantly in China, and much of the assembly is done in Asian countries.
It’ll take a few years to ramp up production in the U.S., and already large players like LG Energy and SK Innovation have partnered with automakers to start building gigafactories across the country.
But given the timeline, it’s very likely that smaller startups like Sila, Solid Power and Group14 will benefit. All three companies are working on advanced battery chemistries that will come to market in the latter half of the decade, and so far all are planning or currently building production facilities in the U.S.
The domestic material sourcing requirement is also likely to send business to companies like KoBold Metals, which uses AI to find the best mineral deposits, and lithium suppliers like Lilac Solutions, which extracts lithium from geothermal brines like those found in Southern California. Recyclers like Nth Cycle and Redwood Materials are also likely beneficiaries.
Hydrogen, another way to decarbonize transportation, gets special treatment in the law provided it’s produced using renewable energy. Early-stage startups like Hgen and SunGreenH2 could see additional investment as a result.
For companies that can’t easily decarbonize, the law offers significant support for carbon capture and sequestration (CCS) and direct air capture (DAC). Expect to see early leaders like Carbon Engineering and Climeworks take advantage of their new tailwinds.
The losers
Not everyone can be a winner, though. The new law dealt an unexpected setback for several startup automakers, which had staked their business plans on chasing high-cost, high-margin vehicles at the outset. Tesla pioneered the approach, and Rivian and Lucid have been the most high profile to follow.
Just a few weeks ago, that seemed like a very sound business model that allowed them to achieve profitability faster, in part by taking advantage of the $7,500 tax credit. Now, though, neither company will benefit from the new tax credit, which caps the MSRP for sedans at $55,000 and for SUVs and trucks at $80,000. Given that they’re both chasing high-earning customers and have long order lists, the law’s changes may not make that much of a dent. But for startups, unexpected headwinds, while par for the course, are never welcome.
The biggest losers, of course, are fossil fuel companies. They’ve long benefited from outsize government incentives, and the Inflation Reduction Act helps level the playing field. Investors have been lukewarm on oil and gas’ prospects for the last few years, and the new law doesn’t do them any favors.
That includes the offshore lease mandates. It may seem like the clauses are a net benefit because they require the government to offer oil and gas leases before it can offer offshore wind leases. But those leases may not be as attractive given the rest of what’s in the new law.
“If you’re an oil or gas company considering investing in new oil or gas fields, which will take several years to come online and produce well into the 2030s, your investment outlook is severely downgraded by this passage of the Inflation Reduction Act,” Princeton professor Jesse Jenkins said on Twitter.
This is just the tip of the iceberg. The new law is likely to change the energy and climate tech space in surprising and unexpected ways in the coming years as incumbents and newcomers react to the changing marketplace and regulatory regime. The times are a-changin’, and for entrepreneurs and investors, there’s nothing like a little disruption to create new opportunities.