How are energy supply chains changing as electricity demand surges? A special episode from the ACORE Policy Forum in Washington

22:08And that uncertainty is also

22:11Dr. Sarah Kapnick:altering the cost of these types of companies, the cost of capital for the companies to be able to develop because of that uncertainty in some of these areas, particularly for the newer technologies. Yeah. So Peter, what do you think about some of these cutting edge new technologies? Iron air batteries, for instance, or other new battery chemistries, is that something you'd want to start using for your projects?

22:30Ed Crooks:I mean, it's definitely something that we talk about, but I would say we don't have a lot of near-term projects that have any of these technologies planned into the design, right? Just because of all the things you talked about. I mean, just cost, financeability, reliability. So I think there's probably a lot of promise there. But to your point, how long does it take to be a truly commercial technology? I don't know the answer. Getting back to your other question, I feel like we have this chicken or egg issue. You need to support domestic manufacturing long enough for it to be able to stand on its own.

23:07Ed Crooks:And if you don't do that, it just never works. And I feel like we sort of with IRA made a commitment to doing this, but we're kind of scaling that back now. So are we going to get there with some of these technologies? And if we don't get there and we don't make the commitment, should we be having the level of tariffs and duties and other things on the imported versions of these technologies if we're not going to make the commitment to doing domestically, because then you're just raising the cost, or you're just not going to do it at all. I think there's a lot of tension there.

23:47Dr. Sarah Kapnick:I'm also seeing this come up as people are trying to get energy onto the grid, as they're thinking about this, and they're thinking about what are the new technologies 5, 10, 20 years from now, and they're trying to think about in their design, because it's so hard to build the infrastructure where they are, they're starting to think, if I build this infrastructure for today, what might it look like 5, 10, 20 years from now? Or are there ways that I'll be able to retrofit in that future? And there aren't traditional ways of financing through that full retrofit and long-term time period. So they have to focus on the right now, what can I do now?

24:22Dr. Sarah Kapnick:But those conversations are starting as people watch what is there. But as you said, as you're making those plans, it's not in the today. It's the scientists and technologists like myself that are thinking about what's after and how does that all transition?

24:35Ed Crooks:Yeah, and designing optionality into projects is not free, right? I mean, and generally, you know, it's a competitive marketplace. So you need to develop the most cost-effective project in order to get a contract. So if you want to develop, if you want to incorporate the optionality into design, that may result in you not having a project at all.

25:00Dr. Sarah Kapnick:Right, and it's interesting. Sarah, going back to your point about the role for government here, we've had just today this big announcement, I don't know if you've seen from the Department of Energy, the largest ever loan commitment by a US federal government outside the financial crisis. I think it's$26 billion going to support investment in nuclear power, in upgrades of nuclear power plants, going to support new gas-fired plants, investments in grid, grid-enhancing technologies, new transmission, particularly benefiting Georgia and Alabama going to Southern Company. So we have that position where definitely on a bipartisan basis, both the current administration and previous Democratic administrations have seen a role for governments in financing energy infrastructure.

25:50Dr. Sarah Kapnick:Does that make you think then that that is going to be something which will continue to be available at some times for some technologies in the future? Oh, absolutely. It's going to continue on the energy side. And I've written about this in my reports on energy geopolitics is that part of this is right now in this age, we think that the future of innovation and the future of industry, not just the industrialization requires energy, but also all of the AI requires energy, and that the future of innovation comes from AI. And so if you have this expectation that you need to constantly feed that AI and build it out, make it stronger, be able to use it and apply it, you have to build out energy.

26:33Dr. Sarah Kapnick:The CEO of NVIDIA said this, I think, really well. It's a five-layer cake, and the very bottom of that cake that supports all of the AI build-out and use, that is energy. And so it's going to be consistent throughout as long as we all agree, and I don't see that changing anytime soon. that AI really will drive innovation and drive the future of the economy and future of economic dominance, that it is going to continue to receive this investment in AI broadly across that entire cake, but especially to building the fundamental infrastructure of it. And it isn't just because energy demand is increasing.

27:09Dr. Sarah Kapnick:It's also because we have parts of an aging grid, and that aging grid requires continuous investment to be able to continue to use it. And so the funding isn't just building out new and bringing new supply on. It's also actually reimagining the grid, rebuilding what was, but then also making it all work for the new technologies and new capabilities.

27:29Ed Crooks:For folks that are developing the power infrastructure that's going to allow all this to happen, yeah, maybe it's reasonable to say we will continue to see support. But can we plan around that support? Can we say what that's going to look like ahead of time so you can start developing projects that meet those needs and have a level of confidence that you will get the support from the government needed to make those projects real. I think that's one of the challenges in the current environment is these projects, even if we are trying to move as fast as we can, projects take time and we need to understand if there is going to be government support, what does that look like so we can plan our development with that in mind.

28:13Ed Crooks:And if not, that's a decision and we will plan accordingly. We will develop projects without that. But if it's on again, off again constantly, it's very hard to plan.

28:26Dr. Sarah Kapnick:And talking about things being on again, off again, the other thing we've had just in the past week, injecting a lot of volatility into economic policy in general, I guess, but it certainly has impacts on energy specifically, is the Supreme Court decision on the tariffs, the AIPA, the International Economic Emergency Powers Act. I think I'm getting that right. Basically, the legal basis that was used by the Trump administration to justify roughly half of the tariffs that they've announced over the past year or so was struck down by the Supreme Court, said that law cannot be used in that way. There are plenty of other laws that can be used to support tariffs, and the administration has announced some of them are going to be used just in the few days after that ruling.

29:20But still,

29:20Dr. Sarah Kapnick:that seems to be creating more uncertainty about the way things are going. Is that affecting you at all, Peter, when you think about your planning and costs in the supply chain and what tariffs you're going to have to pay on what bits of imported equipment? Is that something else that is kind of looming large in your calculations?

29:37Ed Crooks:I mean, it's definitely there, right? This is like relatively new news, right? And we're still digesting it and thinking about what it means past the 150 days that he's enacted, you know, the new tariff rates. But my expectation is that there will be some replacement tariffs for what have been struck down. Obviously, there are temporarily for the next 150 days. But even beyond that, I would expect there to be something. Some of these other tariff authorities, whether it's, you know, national security reasons or other reasons, I suspect they'll find some way to enact them. My concern would be that they, because of the types of authorities they are, that two things, and Sarah, you gave me one of these ideas, but two things.

30:20Ed Crooks:One of them is that they'll be more sector specific. So they could, and a sector that has historically been targeted, I would say, with tariffs has been renewables. And the second would be that because the authority in the process of implementing some of these tariffs is more robust, that they may be more enduring.

30:43Dr. Sarah Kapnick:Yeah, and from when we were discussing before this, what I saw serving in commerce for majority of my career was that once you start implementing these, particularly when you go through those long processes with all the technological reviews, with all the reviews of policies, it's a multi-month process, but it creates all the documentation that creates a lot of robustness around that tariff and their argument for it, which makes it difficult to have counter arguments later without a full reopening and review of it. that takes time. But then additionally, once a tariff is in place, it's very sticky to remove because everyone then has some certainty around how to operate and what the costs are going to be.

31:24Dr. Sarah Kapnick:And you start developing industries that are thinking about that in terms of the costs and then are trying to develop or start to develop. And so if you have a discussion around closing it, you then have all these groups that are saying, wait, I now had certainty and I'm doing something. now you're throwing a wrench in this again. It creates a lot of stickiness, I think, from it once they're in place. Yeah, no, that's a great point. Actually, I hadn't thought about that. But as you say, it's disruptive when you put tariffs on. It's also disruptive when you take them off. And so actually, maybe it may be the least worst option once they exist to leave them there, because as you say, at least then that stability allows people to plan.

32:01Dr. Sarah Kapnick:So just as a final thought, then, I want to put you both on the spot, if I can, and get you to give your thoughts on where we are possibly going to be 10 years from now. Do you think it's plausible that the United States will have a vibrant and healthy supply chain, a manufacturing industry producing key bits of equipment for the electrical industry in general and for renewables in particular and low carbon energy in particular? Is that something really which is a realistic objective?

32:37Ed Crooks:Peter, what do you think? I'm going to skirt this one a little bit. I would say on some of the more high-tech, more high-value components of the value chain, I could see that happening. I think on the more commoditized components, I think it will be challenging. Because I think you do have other parts of the world where you're going to have lower costs. and they have a history of manufacturing this stuff at a low cost. And it's not just the cost of the inputs, it's also the know-how. Is that something we're going to have the nerve to invest in through subsidies, through tariffs long enough to allow it to stand on its own, especially if it's more of a commoditized product?

33:22Ed Crooks:I'm skeptical of that. And I don't even know if that's the right answer either.

33:25Dr. Sarah Kapnick:In the sense of, you don't know if it's right. You mean - To bring everything domestically.

33:30Ed Crooks:Yeah, I don't, should, I mean, there's a whole other podcast I'm sure we could do on the value of international trade and we can almost leave that there. But I think on certain more high-tech components, I think we could see that. Yeah.

33:42Dr. Sarah Kapnick:But just to give us the 30-second version of that podcast then, I mean, what you would argue that there is a value in international trade and actually because of all this very well-known, all these very well-known ideas about comparative advantage. It's good for countries to specialize in what they do best. The global trading system has an enormous number of benefits. People, I think, often tend to focus on the downsides. There's a lot of positives to it as well. Is that what you mean?

34:12Ed Crooks:I mean, there are always things that you need to do to protect yourself from a national security standpoint, but I would say in general, I agree with that, yes. Sarah, what do you think?

34:22Dr. Sarah Kapnick:I think trade on certain areas where there's competitive advantage, I think there'll be a lot of care and thinking who those trading partners are in support of that. And even right now, we see that happening with the Ex-Im Bank, what's coming out of discussions of Ex-Im Bank and DFC about how they're trying to shore up critical supply chains in the funding that are coming from those. And so it's already giving us an indication of a realization there are certain things that will not happen domestically that require those partners and then may require financial support to be able to drive those going forward.

34:57Dr. Sarah Kapnick:And then technological optimists, Sarah, also thinks that with technological breakthroughs, we could scale certain industries, but they will look very different than what they have traditionally. And so those are in processing technologies. Those would be in steel production. they would be in potentially certain types of storage technologies that I see having had multi-year support could have the opportunity to scale over the next 10 years in the time horizon that you've given me that allows for me to actually have that technological optimization towards commercialization. Excellent as you say that's certainly an encouraging thought I'm glad we gave optimistic Sarah the last word in this one but we do have to leave it there unfortunately She's been fantastic talking to you both, though, Peter Toomey, Sarah Kaepernick.

35:44Dr. Sarah Kapnick:Thanks both very much indeed. Thank you. Thank you. Take care.

35:51Dr. Sarah Kapnick:Well, I'm joined now by Alice Lynn, who is a senior advisor on tax at the Natural Resources Defence Council, the environmental group. Hello, Alice. Welcome to the show. Thank you for having me. Yeah, thanks very much for joining us. Just before we get into the question of tax policy and the way it's affected renewable energy, tell us a little bit about your background. You've worked on this for a long time, right? You were at the Treasury and before that in Congress? Yes, that's right. I was most recently with the Treasury Department for the last stretch of the implementation of the Inflation Reduction Act, or Clean Energy Tax Credits, that we'll get into.

36:22Dr. Sarah Kapnick:But previous to that, I was in Congress and took part in writing that law when I specifically was with the House Ways and Means Committee, the Tax Writing Committee. Right. As you say, so Clean Energy Tax Credits is the big thing we want to talk about now. There's been a lot of change in those over the past year. in particular because of the passage of the one big beautiful bill, the OB3, as people seem to call it nowadays. Can you talk a bit about what effect that has had and how that has changed the tax environment for renewable energy? Yeah, absolutely. So OB3 passed last year, and I think it's certainly made a lot of changes to energy tax.

37:01Dr. Sarah Kapnick:It shortened the timeline for some credits, extended the timeline for others, and made new requirements that I think a lot of people are trying to deal with now that are meant to get at certain foreign entity influence and supply chain issues. Right. To break that down a bit by sector, so for wind and solar, basically the credits are going away. There's a sort of a transition period, right? But essentially by the end of this decade, they'll be completely gone. So wind and solar has to begin construction by July 4th of this year, which is one of the most early timelines for termination. The electric vehicle credits were also terminated very early, but there are a lot of other technologies, including batteries, nuclear, geothermal, clean fuels, a lot of manufacturing credits that are still in place for a lot of timeline that they were before.

37:53Dr. Sarah Kapnick:So as you say, a lot of those tax credits were left in place, but there are these new restrictions on them. In particular, the thing that seems to be a really big issue is this question of FIAC, foreign entities of concern, and the way that those rules restrict eligibility for tax credits. Can you explain a little bit about those and how they work? Yeah, so the prohibited foreign entity requirements or FIAC as some people call them are really a kind of new novel very complex set of rules that touch everything from ownership to debt issuances to contractual relationships to supply chain and so I think it takes a lot of these concepts that have been in other parts of the tax code to some example kind of puts them together in this like very novel way that I think taxpayers are trying to figure out how to comply with now, and Treasury is figuring out what guidance to issue on.

38:50Dr. Sarah Kapnick:Right, because I remember we talked to people at a previous ACOR event at the Grid Forum in Washington last year when OB3 had passed, but the guidance from the Treasury had not been issued on how they were going to apply this new law, and there was still, I think, a great deal of confusion then, a great deal of uncertainty. People didn't know exactly how it was going to work. We have now got some of that guidance, haven't we? Yes, we've gotten our first piece of guidance. So we have some information on the new supply chain requirements that will hopefully allow people to figure out how they can move forward deals in this kind of transition period before we see more guidance.

39:27Dr. Sarah Kapnick:But there are a lot of questions still unanswered, and people are pouring through that guidance now to see whether or not it provides the certainty they need. So the basic principle is it's trying to cut four countries in particular out of the clean energy supply chain, right? It's what, China and what are the other ones? And Russia, Iran and North Korea. Right, got it. And so, as you say, that guidance has been issued and people can look at it, people are studying it. What's your assessment of its impact? How do you think it's going to affect how the industry operates in the US? Well, I think the guidance is going to provide some answer to some people who have been trying to figure out these kind of basic definitional questions and how to apply some of the previous guidance and how it maps on to kind of this new question.

40:16Dr. Sarah Kapnick:But there are a lot of questions, even just on the supply chain requirements, that are left unanswered. And I think people are trying to figure out what documentation they need from their suppliers and what do they need to do in order to be compliant with these rules. Right. So to take an example, then, in the battery supply chain, I know that's one of the ones where these rules are particularly going to bite because China globally is absolutely dominant in battery supply chains right up from processing lithium right through to producing finished cells and batteries. so what are companies going to have to do in the U.S.

40:57Dr. Sarah Kapnick:if they want to avoid falling foul of these rules and claim tax credits for their battery projects which means that to do that they have to not fulfill the fiat rules which means they need to not have Chinese influence involvement in the supply chain. So these supply chain requirements apply to two types of credits the generation and storage credits and the manufacturing credits. For the manufacturing credits, you have to meet a certain percentage of the inputs into the product you're producing. So if you are looking at producing battery modules, you'll have to look at everything that you purchase and put into your battery module.

41:38Dr. Sarah Kapnick:And for those grid battery projects, that those projects will have to look at, in general, two steps of the supply chain. So, for example, your battery module and cell. So if a grid battery project is buying battery modules, they'll have to take into account the sourcing of not only the battery module, but the battery cell that goes into that module. Right, got it. But you're saying then there's what's still quite a lot of uncertainty about exactly what that means in terms of who you can buy your cells. from and what you have to know about the materials that went into that sale and so on. Exactly.

42:19Dr. Sarah Kapnick:For example, the one way that this regime is different than the prior domestic content rules is that the prior domestic content rules under the IRA were about where the product was produced. Here it is not about where the product is produced, it is who produced it. And tracking down who produced something can be a quite complicated endeavour. And because it gets into global ownership structures and just the sheer ability to know things about the business. Right, got it. So what's your sense of what effect this is all having on the industry then? If people are uncertain about exactly how this is all going to work, even after they've seen this treasury guidance, does that lead to people stopping making decisions, stopping making investment commitments because they just can't be sure what their eligibility for those tax credits is going to be?

43:15Dr. Sarah Kapnick:I mean, what are we seeing in the industry? I think that's the big question right now. I think people have a number of areas of uncertainty. This notice is trying to answer some of the questions that people have, but there are a lot of other questions to be seen. And I think people are currently developing market practices to try to figure out whether or not they can keep moving these investments forward. but it is a rapidly evolving environment. Right, so how do you think it is gonna play out then? Do you think we will ultimately get more guidance from the Treasury that will clarify all those remaining questions that people still have?

43:54Dr. Sarah Kapnick:We will certainly get more guidance. We expect there to be hopefully more comprehensive guidance later this year, but it is a very big project for Treasury to undertake, so I think people are trying to figure out what answers they can feel comfortable on prior to that. And in the meantime, do you think then that is putting a break on activity because people don't want to make commitments that they then find out are going to fall foul of these rules? I have certainly heard a lot of uncertainty. Just thinking back then to the IRA and everything that went with that, we have been through this period where there's been this rapid shift in policy, and the Biden administration and Congress during the Biden administration were very much committed to supporting low-carbon energy, wanted to incentivize that in a whole range of ways.

44:50Dr. Sarah Kapnick:Under the Trump administration and the present Congress, much less support for low-carbon energy, as we've been saying. Maybe half of the IRA tax credits by value have been cut, give or take, something roughly in that ballpark. And the credits that remain, we've been saying, face these restrictions, which are unclear on putting a break on activity, at least for the time being. Obviously, there will come a time when there'll be a different administration, be a different Congress. Future administrations and Congresses may want to try again to support renewable energy. What lessons do you think they will have learned from the IRA and what happened to that?

45:35Dr. Sarah Kapnick:Look, I think from a perspective of what worked on the ground, I think the IRA wanted to unleash a kind of wave of private investment into clean energy, into clean manufacturing. And I think all signs point to that worked. And so I think the first thing is that just understanding kind of what is the effect of the policy lever, that was pulled. then I think the question of what are the policy kind of purposes of the future and what can Congress legislate on, I think that right now there's a lot of focus on affordability and there's a lot of focus on electricity prices. So I think there's an evolving conversation about what is the role of clean energy in meeting the electricity demand needs of the nation.

46:24Dr. Sarah Kapnick:And something like these FIAT rules then and this whole strategy of trying to encourage domestic production within the United States. Do you think that's going to change, or is that always going to be a feature of any tax regime for energy in the future? There's been a lot of support for domestic manufacturing, and I think that focus is likely going to continue. I think one of the things that we actually lost in this bill was the domestic content bonus credit in solar and wind. Sorry, in this bill being in OB3? Yes, that's right. So the IRA had provided not only these tax credits for clean energy technology, including solar and wind, but by terminating those credits, you not only lost the tax credit for the deployment of the technology, but also the fact that a portion of that credit was rewarding people for using domestically produced components.

47:19Dr. Sarah Kapnick:Right. So you could think about it as a sort of carrot and stick approach. There were carrots, the carrots have been taken away and they've got the stick instead. Right. Right. And so you think, again, thinking about what a future Congress might do, reviving those kind of incentives and that support for domestic manufacturing, that might be a way to go. Certainly something that the members continue to care a lot about. Right. So that's one thing which is probably still going to be important for future Congress is supporting U.S. manufacturing. The other thing you mentioned is affordability. That's clearly a huge issue at the moment.

47:52Dr. Sarah Kapnick:It's very much on people's minds. I know it's something the White House cares about a lot at the moment. It's something a lot of politicians across the country are very much focused on. How do you think that might play out in terms of what Congress does and how future energy policy treats renewable energy? I think there is clearly a lot of focus on meeting the electricity demand of the nation, not due to new large loads, but also due to the prominence of electricity bills in the current environment. And so I think the question is, how do we get low-cost renewable electricity to be part of that solution?

48:33Dr. Sarah Kapnick:And how do we address those needs quickly, which renewable energy is poised to do? Right, and it's certainly going to be very interesting to keep an eye on that to see how policy evolves the next time Congress comes back to it, which I am certainly will. For now, though, Alice Lynn, thanks very much indeed. Great talking to you. Thank you. So that's all from this first day of the ACOR Policy Forum. Thanks again to Alice Lynn. Thanks to Dr. Sarah Kaepnick and to Patrick Toomey. Thanks to our producers, Dan Cottrell, Harry Weston-Cottrell and Toby Biggins-Gilchrist. And above all, as ever, many thanks to all of you for listening.

49:08Dr. Sarah Kapnick:We really do value your feedback, so please do keep that coming. You can leave a comment here or contact us on social media. And we'll be back tomorrow with all the latest news and views from the ACOR Policy Forum. Until then, goodbye.