Mar-2024

10 key takeaways: The material impact of IRA on decision-making

Nineteen months on, what impacts has the landmark Inflation Reduction Act of 2022 (IRA) had on the net zero transition investment landscape and supply-demand scenarios domestically and across the border in Canada?

Euro Petroleum

Article Summary

How do American producers view their intermediate-term competition against similar producers in other regions? And, how do Canada refiners and producers keep pace with US counterparts? We reflect on some of these questions from the discussions during the recent ESF North America advisory meeting

• The IRA, a year+ in – Without doubt, the incentives have created a supply stimulus, driving investment back into the US, spurring more production in the region, and insulating some of the foreign imports. Whilst across the value chain, biodiesel, SAF, and renewable diesel production projects have been boosted, in parallel strategically many are also contemplating feedstock businesses that will drive the healthiness of the North American market over the next few years.

• Impacts across the border – The IRA has significantly impacted Canada’s net zero transition investment landscape and shaken up supply-demand scenarios. At both provincial and federal levels, governments are moving to put in place the conditions that would allow for investment. Newfoundland has moved quickly to propel the development of green hydrogen and ammonia. Canada’s key chemical-producing province of Alberta has put investment support in place as have Ontario and Quebec. At a federal level, the government has proposed five new refundable investment tax credits (ITCs) designed to grow the country’s clean economy and allow Canada to remain competitive in attracting investment in clean energy projects.

• Carrots and sticks – Besides the carrots, there are also sticks in Canada with the national carbon price and other regulatory initiatives that have implied carbon pricing effects including the clean fuels standard, the clean energy regulation, and the recently announced methane reduction framework. Beyond those, there is an oil and gas emission cap that’s coming, and several other policy instruments that are being used in Canada to drive decarbonisation. While the USA’s IRA consists almost only of carrots, Canada’s stick approach has consequences for the global competitive position of Canadian low-carbon products where decarbonisation projects are effectively being paid for twice, once through the carbon obligation through OpEx on an ongoing basis and second by finding the cash to fund the project when it reaches FID. There are also uncertainties and impacts around the supply of feedstocks impacting the speed and ability of those in Canada to move and keep pace with US counterparts.

• Certainty and demand – While investment support is important, certainty and demand are critical. Canadian producers, as large final emitters are paying a carbon tax, whilst also expected to make new investments. Are customers prepared to pay a premium for a net zero product that’s competing in a highly commoditised market? Dow’s recently announced plans to build the world’s first net zero ethylene and derivatives complex in Fort Saskatchewan speaks to customer demand. When it comes to certainty, is the infrastructure in place to transport and store the CO₂, is there certainty around permitting? Whilst from a government perspective there’s certainly interest in decreasing emissions, these are some of the critical hurdles, especially for those competing globally to overcome.

• The chicken or the egg: which came first? Do you need the demand first before you can supply it, but can the demand be there without the supply? Incentives play a hugely important role in helping to get in front of this.

• What is that premium? Whilst there may be an increasing willingness to pay a premium for low-carbon products from customers, be it airlines, rail, or diesel customers, the question that remains is what is that premium and is there a transparent and fair allocation of risk versus economics across the value chain to drive that willingness? Today SAF isn’t justified without a premium from the customers to produce and the expectation is that this lag won’t be going away anytime in the short term. Another perspective is that whilst the customers lower carbon end product may be the same, a shiny new greenfield vs a brownfield retrofit is a factor impacting and influencing a customer’s willingness to pay a premium.

• The risks and appetite for step-out technologies – Specifically in the US where subsidies drive investment decisions and economics, the attention is shifting away from long-term ‘step-out’ technology development towards what can be built now and at a larger scale by tweaking existing mature technologies that also present better bankability for lenders’ green investment vs the risk perceptions of the new step-out technologies. More generally, while there is a tremendous amount of interest in supporting new technologies once the risks of the ‘first of a kind’ are seen, that interest very quickly disappears, presenting a huge challenge for the industry in bringing in anything that is ‘step-out’. On the positive, this allows for more time to keep developing those technologies to mature and commercialise.

• There is a large demand for capital dollars – Which in Canada is skewed towards reducing emissions in the short term. An escalating carbon price and no credits for R&D are incentivising an environment where every dollar is spent on reducing physical emissions as opposed to taking any of the technology bets seen in other environments like the US and Europe.

• Renewable margins and shifts – As the US phases out from the non-derived carbon intensity (CI) blenders tax credits to the CI-derived clean fuel production credit (CFPC), there are still questions around which feedstocks are going to get the credit and uncertainty around the shifting impacts and rebalanced feedstock positions and credit pools. For instance, will soybean oil biodiesel plants get any credit, and if so, how much? Do they face uneconomic operations, or will they be forced to shut down?

• Paying a premium – Whilst there is no shortage of project ideas or project potential to decarbonise, getting intelligence on what premium can be captured downstream to help pay for the projects and the customer’s willingness to pay a premium for low-carbon products is make or break in determining how aggressively we can move forward with any projects, regardless of who is taking the risk. Today’s high inflationary environment further exacerbates the challenge.