Crux Connects: John Hensley of the American Clean Power Association on the economic benefits of transferable tax credits

Welcome to Crux Connects, Crux’s interview series with energy finance experts. In its first full year, the transferable tax credit market far exceeded forecasts to reach nearly $30 billion. While this growth is certainly impressive, so is the incredible impact of transferability — tax credits serve as the principal policy tool to drive sustained and predictable investment in domestic supply chains and low-cost, abundant clean energy resources. In fact, a recent report from our partners at the American Clean Power Association and ICF finds that transferable tax credits will catalyze $2.0 trillion in capital investments and $3.8 trillion in US economic activity, leveraging $4 of private capital for every dollar of tax credits.

In this episode, John Hensley joins Crux Partnerships Lead Madisen Obiedo to talk more in-depth about that report. John is the SVP, markets and policy analysis for the American Clean Power Association (ACP), where he leads efforts to evaluate policy and regulatory priorities for the industry and oversees the association’s clean energy industry data collection and reporting. They discuss the methodology behind the report, the findings, and the benefits of transferability across sectors and regions.

Get in touch to learn more about how Crux can support your activity in the tax credit market.

Transcript

Lightly edited for clarity

Madisen Obiedo: John, thank you so much for being with us today. 

John Hensley: Hi, Madison, it's great to be with you. Really looking forward to this conversation. 

MO: Before we dive into the detailed findings from the report, can you walk us through the methodology at a high level? What sectors does the report cover, and what types of analysis went into delivering the findings?

JH: At a high level, we wanted to commission a report that was really designed to evaluate the total net economic impacts that were flowing from the Inflation Reduction Act (IRA) — all the energy credits, the related programs that are in there that help support the grid, transportation, the building sector, sustainable aviation fuels, hydrogen, and manufacturing activity. In order to do that, we really had to isolate the impacts that were motivated by those tax credit programs. 

It effectively boils down into a three-step process that looks at two different scenarios for purposes of comparison. In one scenario, we look at a world in which the IRA exists, and it's motivating all this activity that we expect it to motivate across these various sectors. Then we rewind the clock and look at the world again as if the IRA never came into existence. And it gives us the ability to compare different outlooks between that non-IRA world and the IRA world. Of course, we looked at this across the variety of programs that are included in the legislation. So again, it includes everything from power — think tech-neutral credits, 45Y, 48E, 45Q on the carbon capture side — the transportation space, primarily EV credits; the building sector, looking at incentives to update HVAC systems, energy-efficiency improvements, and the like; hydrogen, the 45V credit to motivate the production of hydrogen fuel credits to help support sustainable aviation fuels; and then in the manufacturing space 45C and 45X, just to mention a couple. There are lots more programs that are part of that legislation, but that gives you a sense of everything that's involved.

We had ICF model those two worlds, tell us everything that happens across all these sectors if IRA is in place and remains in place, and then model that same world as if it never came into existence and most of those credits either never happened, or those that had expiration dates expired and were not impacting the market. Now, this modeling delivers a ton of information and data. It gives you details on deployment of things like new power plants and adoption of EVs and all the capital investment that's required to make that happen. It tells you what happens to energy system prices, fuel prices, and just a ton of other information comes out of that.

ICF takes all that information and uses it to estimate the macroeconomic impact. They've got a fancy model called REMI. You plug in all that information about what's happening from a capital spend standpoint, what energy prices are doing, how much volume of these different things are happening, and that model, based on years and years and years of empirical data and inputs, estimates things like how many jobs are created? What changes do we see to gross domestic product across the economy? How does household income change? What levels of spending do we see throughout the economy? And then, of course, we start to peel back the onion and understand where that's happening across the country and the magnitude of those effects. There are a lot of nitty-gritty details that are sprinkled throughout that process, but that at least gives you the broad brush strokes of what happens to pull all these estimates together.

MO: That's super helpful, thank you so much. It is quite a comprehensive report, as you said, and lots involved to deliver the final product. At the highest level, what are the major headlines from the report that you think are really significant for the audience to know?

JH: I think one of the challenges with this report is narrowing in on some of those key headlines. As you said, there's a wealth of information that comes out of this and a lot of good detail depicting what's happening across the energy sector. But if I were to boil down to just a couple of bits — and I'll walk you through the progression, because I think it not only tells us what is happening in terms of investment and job creation, but that spurs effects throughout the economy. 

So I've come to think of it this way: Between 2025 and 2035, so that 10-year period, the taxpayer is going to invest $740 billion into the energy sector. That $740 billion worth of investment is going to motivate $2 trillion of capital investment — that is, building new power plants, building electric vehicles and delivering them to customers, investing in energy-efficiency improvements, putting new, more efficient heating and ventilation systems in place. All of that is ultimately going to result in about $3.8 trillion of spending across the US economy — so, dollars transacting across the US economy. 

From that $3.8 trillion worth of spending in the economy, we are going to create 14 million jobs over that 10-year time period. The benefit from those 14 million jobs, people earning wages as part of that, combined with the energy savings that we'll see from all of the new investment taking place in the energy economy, means that households across this country are going to see a net gain of $845 billion in disposable income. That's more money in people's pockets as a result of more wage dollars and savings on their energy bill at the end of the day. That's going to grow the economy by $1.9 trillion. 

If you were to sum it all up in one single data point, the best thing that, I think, has come out of that is that the tax credits in the IRA are going to deliver a 4x return on taxpayer investment when you consider both the economic and the emissions benefits from the bill.

MO: Wow, those are some very impressive statistics, John, thanks so much for walking us through that. Of those, what surprised you the most about the findings in this report?

JH: It's hard to pick just one, maybe let me focus on a theme instead. The scale of these investments is something that really struck me. We're talking about investments over the next 10 years that are close to $2 trillion in infrastructure investment across the country, and it's coming with fairly minimal investment from the taxpayer standpoint. At the end of the day, the taxpayer is getting a really good return on that investment. For me, what was really surprising is just how good that return is to taxpayers, considering everything that's involved in that calculation. 

Let me see if I can unpack that for listeners a little bit: When we look at that return on investment, we have to consider the full scale of cost to taxpayers. That $740 billion includes all the tax credit payouts that are taking place over the next 10 years, whether or not they were motivated by the legislation itself. There was lots of activity that was going to happen anyway — states have fairly aggressive clean energy programs, renewable portfolio standards, or other mechanisms to incentivize that behavior. So a good chunk of this activity was going to happen regardless. Nonetheless, when we think about the cost to the taxpayers, we have to include credits that are going to all of those different projects, whether or not they were motivated by IRA. 

However, on the flip side, when we look at the benefits that are accruing from this program, we can only look at the benefits that come specifically from those projects that were motivated principally and primarily because of this legislation being in place. It's a huge pool of cost pulling from a huge population of projects, compared to benefits from just that set that were motivated by IRA. And even in that very strict and conservative view of what the cost benefit calculation or ratio looks like, we still see a massive return for those taxpayers.

Get our latest insights and favorite reads on the transferable tax credit market in your inbox.

MO: To bring it together, why do these benefits in clean energy matter, and how should we think about the connection between the clean energy sectors and broader economic impact?

JH: That's a big question. Could go a lot of different directions with this, but maybe let me just point out a couple of ideas here. First and foremost, these are foundational investments in the economy. At the end of the day, energy is a key input, a key raw material needed for so much of the economic activity across the country. In its absence, or if we don't have sufficient or efficient energy infrastructure to deliver it, it ultimately becomes a drag on the entire economy. So we can think about this as a down payment on ensuring that we do have a reliable, abundant, secure grid and energy economy in order to support all the other things that we want to do as a country, from both a security standpoint and from an economy standpoint. It's very foundational, making sure we've got the right building blocks for the rest of the economy to grow from. 

Second, we're at this moment where we really need the energy economy to accelerate its growth, whether you're talking about all the new load that we're seeing from data centers and artificial intelligence, requirements to transition to electric vehicles, to this desire to electrify so much of our economy, we need to make massive and aggressive investments today to ensure that all of that activity can actually take shape and that we're delivering the energy that the economy needs. 

I will say, on the flip side, one of the things that we need to think about as part of this whole process is the challenges that come with this massive transition that's taking place. In most parts of the country, it's a positive story. But there are some places where there's some geographic mismatches, and we actually see pockets where folks are missing out on some of the value that's taking shape here. We’ve got to think about ways to ensure that the benefits that we're seeing in this space are flowing to all parts of the economy. 

Let's just think about this — I'm from Wyoming. Huge coal state. A lot of people that I know and grew up with are dependent on a strong and thriving coal economy. We're seeing that slowly ebb away, and renewables are starting to come in and fill some of that need. But they're not going to completely one for one deliver new jobs that we saw in the coal industry. So that's a pocket of the country where we need to think about other programs to ensure that the economic benefits that we're seeing accrue from this energy transition period don't leave other folks behind. 

It's foundational in making sure we've got all the energy that we need for the economy to prosper, but we also need to think about those pockets where it is a challenge, and we need to think about other programs to make sure that everybody's along for the ride.

MO: I appreciate that nuance, and we'll get into the regional aspects a little later in the discussion. But now I want to shift gears a bit. As you mentioned when you were walking through the methodology of the report, there are several sectors that are explored within the report — power, transportation, manufacturing, buildings, hydrogen and sustainable aviation fuel — but I'd love to spend a few minutes on two sectors that are particularly relevant to our audience and our partnership with you all at ACP, specifically the power and manufacturing sectors. Can you spend a few minutes diving into the notable findings related to the power sector and the impact that tax credits are having there? 

JH: Power, at the end of the day, is one of the pillars of the legislation and where we see a huge swath of the impacts taking shape. So let me just run through some of the numbers so everybody has a sense of what we're talking about here. Within the power sector itself, between 2025 and 2035 we expect to see, motivated by the Inflation Reduction Act, $416 billion worth of capital investment. That will ultimately spur $650 billion of spending in the US economy, creating 2.3 million jobs over that 10-year period. Ultimately, that will add $300 billion to gross domestic product. So it'll grow the economy by $300 billion, and it will drive a $272 billion increase in household income. So those are the key high-level figures that come out of the report. 

But let me talk about some of the stuff that we're actually already seeing in this space. We do a lot of work tracking project advancements, primarily looking at wind, solar, and battery storage, but we pay attention to the other technologies, as well. And we're already seeing massive investment taking shape in this space. In 2024, we're looking at close to 50 gigawatts of wind, solar, and storage that were deployed in the year. We're still tallying final numbers, but we know that it's going to be a record year. Because of the legislation, we're seeing investments continue at a similar pace, or even quickening over years. At our last tally, we had something like $500 billion of capital investment that we had seen announced or proposed within the last two years. So just significant investments that are already starting to take shape, specifically in the power sector. 

The other bit that I'll note in the power sector — and I don't have some of the key numbers right on the tip of my tongue here — we're seeing IRA motivate a significant amount of fossil plus carbon capture and sequestration in this scenario. So 45Q is one of the tax credits in the program that helped to motivate the attachment of some type of carbon capture and sequestration (CCS) system onto either existing or new fossil or at least carbon-generating power facilities. And because of that credit and because of some of the dynamics of where the power sector is going, we see strong economic impacts from that investment in CCS and both the cleaner energy that it can deliver to the grid and the flexibility that comes along with having a fossil generation that is fairly clean, but also the economic benefits that come along with that — the job creation in that sector, the ability to maintain some of those fossil fuel jobs that already exist today. So it's not like the benefits within the power sector are only accruing to wind, solar, and storage and the renewable technologies. We're also seeing significant benefits across the fossil fuel fleet as well.

MO:As I mentioned, 45X, 48C the broader manufacturing sector — would love to spend a couple more minutes there, John, just to get your take on what are the high-level numbers that are highlighted in the study, and then also when it comes to the impact that the tax credits are having there.

JH: I'll do the same rundown here, so we've got the high-level numbers in front of us, and then I'll talk maybe a bit more specifics or some of the things we're actually seeing already take shape across the clean energy manufacturing space. If I were to give you my honest reaction to this, I think some of the manufacturing numbers are fairly conservative, and some of the real-time data that we're seeing in the world speaks to that intuition that I've got. So within the advanced manufacturing space, clean energy manufacturing space, we expect over $110 billion of capital investment between now and 2035. Ultimately that's going to result in nearly $800 billion of spending in the US economy. That will create 2.7 million manufacturing jobs across the country, and ultimately increase the size of the economy by $450 billion. So $450 billion contribution to gross domestic product, and along the way, it will add $182 billion in household income. 

Why do I think these numbers are somewhat conservative? Looking at the empirical data that we're collecting in the past two years, ACP is tracking over 161 new announced manufacturing facilities just in our sector of the energy economy. So that’s manufacturing facilities that are going to support wind, utility-scale solar, or stationary storage applications. It doesn't include investment in EV manufacturing activity or HVAC manufacturing activity or manufacturing activity to support electrolyzers or other parts of the energy economy. So just within our space, 161 facilities that have been announced in just the last couple of years. 

More importantly, you're starting to see a lot of the stars align toward a domestically oriented manufacturing plan of action. There's a lot of interest in ensuring that the US is a leader in many of these technologies, and we're seeing investments taking shape that are bringing much of the supply chain to the US. As you start to look at the secondary and tertiary effects of that supply chain migration, we're going to see even more benefits that aren't necessarily captured here, that are just a little bit further up within that supply chain and difficult to capture. But that's important, because that means additional parts of the country are going to be benefiting from these actions, that more manufacturing facilities that are coming, more job creation that's happening, more investment in these different parts of the economy that are taking shape. 

So, encouraging to see so much of the activity already taking shape, and I think importantly, we're not just seeing announcements. We're actually seeing projects start construction or come online. I think at last count, we were already over 40 of those manufacturing facilities that had started physical construction or were already online, operational, and actually producing components for the industry. So this is taking shape quite quickly. We're seeing these investments flow. We're seeing the activity come to fruition and a renaissance in our domestic manufacturing space.

MO: That’s a nice segue into the next question. There's a lot of detail in the report on the regional impacts of the tax credits. Can you speak to how that's playing out across the country? Which regions are seeing the biggest benefits from these tax credits, and how that might map to sectors?

JH: Long story short, there are net positive impacts to all parts of the country. The bill sees activity motivated in every state, and that activity is going to have a positive impact on those economies. 

That being said, we do see specific regions that tend to be bigger beneficiaries for the bill. To roughly put it, it ends up being the middle part of the country. There are probably a lot of different reasons for that. One of them is just the fact that many of the states along the coast already have fairly aggressive clean energy targets or programs, goals, objectives. The IRA helps to support and complement the efforts of those states, but it's not necessarily the motivating factor in a lot of that activity. And so with or without IRA, we would see advancement in the clean energy economy in those coastal parts of the country. On the flip side, in the interior of the country, those programs are quite a bit more limited. As a result, the IRA has a huge motivational effect in driving investments in clean energy technologies in that part of the country. So middle parts of the country, especially rural areas of the country, are seeing significant benefits from this bill. 

We also always like to look at this from a political standpoint, and what we're seeing is generally consistent with the historical record here as well, in that the majority of the benefits are accruing to parts of the country that are currently represented by a Republican member. So just to throw some data around that, for clean energy projects that are currently moving (so these are wind, solar and battery storage facilities), 81% of those facilities are currently being built in Republican-held congressional districts. On the manufacturing front, again, those 161-plus manufacturing facilities that we're tracking, over 60% of those facilities are in Republican-held districts. So we're interestingly seeing the vast majority of these benefits actually move to those redder parts of the country.

I mentioned rural areas as well, and I think it's important to hone in on that for just a second, because it is critical. Back up to some of those equity points that I brought up earlier, many of those rural parts of the country are areas that are struggling economically, haven't seen as much of the benefits from some of the recent advancements in the economy that the rest of the country has seen. At least on the clean power project side, 99% of those projects are in rural parts of the country. They're going a long way in helping support and advance those parts of the economy that, at least within the last 10 to 15 years or so, have been sort of neglected by other parts of the economy.

MO: I wanted to close with a question that we like to wrap up these sessions around, which is, what is one thing that people aren't talking about in today's current discourse that you wish that they were? This could be related to the study that we've spent the last few minutes discussing, or something more broadly from your work at ACP.

JH: I think a lot of people are talking about this, so I'll just preface it with that, but I think it's an important part of the discussion at the moment, and that is the criticality of building clean energy technologies, especially given the electricity demand that we're starting to see come together. Let me just put a little bit of context around that. Between now and 2030, if you look at a consensus view of the forecasts that are out there, we're going to need roughly a million new gigawatt hours of energy production to support a lot of the economic growth that we're expecting to see. So that's power to drive data centers and support AI and support that increasingly strong EV fleet, and just react to the strong economy that we're seeing in the country. At the end of the day, a million gigawatt hours is a 20% increase from where we are today. Today's grid needs just over 4 million gigawatt hours of power. It is a massive, monumental undertaking. Unfortunately, in the last week or so, we've started to see comments and a bit of a pivot away from renewable technologies as being a source of that new energy demand. 

The point that I really want to get across is how critical or important renewables are in ensuring that we're actually able to meet that demand. We've been doing some number crunching behind the scenes, just to get a sense of, “OK, if we stop building renewables today and we still tried to meet that one million gigawatt-hour mark by the end of the decade, and your only other real option is gas, How much more gas do you need to add to the system?” And the answer is, you need 190 gigawatts of additional combined cycle capacity to be added to the grid. We haven't built 190 gigawatts of gas. You'd have to take the cumulative installs all the way back to 2006 to get that amount of volume, and we're supposed to build that in six years to deliver the energy that's needed. 

It's not a point to put gas down. Gas is certainly part of the conversation and the solution. It's more to say that we really do need an all-of-the-above energy strategy here. One million gigawatt hours is a ton of new electricity to bring to the system. If you start eliminating technologies that are commercially available and ready to move forward, then you need to start having conversations about, what do we do with an unreliable grid, or what parts of the economy do we not want to see grow because we don't have the energy to support it? I know energy demand has been a big part of the conversation, but I think we also need to really consider what are the implications if we start taking options off the table to meet that demand?

MO: That's a fantastic reminder. John, I also wanted to highlight and conclude with, are there other initiatives that you're working on at ACP that you'd like for folks to check out or to be aware of? You all have so many insightful and helpful reports that we use at Crux through our partnership, so wanted to make a bit of space here at the end for additional work that you'd like folks to be aware of if they're curious to learn more.

JH: I appreciate that opportunity. Madison. We do have a ton of resources available, so it's always just worth perusing our website to see what's up there and available. But let me highlight just a couple of things. We do an annual report every year. This year, we're expecting to release that in mid-April, but it is a great resource just to understand not only what's happening in the clean energy space, but also what's happening across the entire electricity market in the US. So mark your calendar for mid-April, we'll be releasing that. We always do a presentation around it at our CLEANPOWER event in May. So those are good opportunities to capture that. 

We also do quarterly reports. These are great ways to just stay up to date on the latest and greatest happenings in the industry. We spend a ton of time, day in and day out, tracking what's happening in the clean power markets, understanding what's being built, who's building it, other market trend analyses that are included in that report. So make sure to check that out. 

And then we have a great data product called Cleanpower IQ, where literally all that information that we're collecting and validating with members of this industry is available to peruse. We're about to launch a newly templated design of that tool that allows you to explore all the information interactively and through a series of dashboards. So be on the lookout for that. Those are three great resources, but there's a ton of stuff on our website that I would advise people take a look at, as well.

MO: Thanks so much, John and I'll plus one on the Cleanpower IQ. We're very excited about that, as well. Thank you so much for taking the time today and really looking forward to continuing our partnership with you all at ACP.

JH: Thanks so much, Madisen.