21 Apr 2023 4 min read

Money, money, money: the Inflation Reduction Act

By Lushan Sun

In the first of this two-part blog series, we review the impact of the Inflation Reduction Act on US real assets and consider how European governments might respond.


The Inflation Reduction Act (IRA) was signed into law in August 2022 and provides an estimated $370 billion of funding for energy and climate investment over 10 years, although the actual sum could be much higher given the uncapped nature of the tax credits.

The IRA builds on the Build Back Better Act (BBBA), which was a significant expansion of prior legislation, and extends the duration of the tax credits in the BBBA, most of which will now run into the 2030s.

The selected tax credits in the IRA are as follows:


Location, location, location

The IRA offers several bonus credits, including:

  • A 10% bonus for clean electricity projects and manufacturing located in low-income communities or energy communities1
  • A 10% bonus for clean electricity facilities that meet the domestic content standard

The clean vehicle tax credit requires final assembly to take place in North America and has restrictions on the sources of minerals and components (“domestic content requirement”).

We believe the tax bonuses and domestic content requirement could have a material long-term impact on the demand and supply of real estate in the affected regions. The additional bonuses, which are accumulative up to as much as 60%, are a powerful incentive to increase investments in low-income and fossil-fuel-dependent regions.

Cheaper, faster, cleaner

The IRA substantially improves the economics of clean energy and clean tech, making it easier to deploy at pace and scale up.

Greater clarity on the longevity of tax credits also provides valuable certainty and predictability to developers and investors. We believe the result should be a lower cost of capital and more private investments.

Indeed, Bloomberg New Energy Finance estimates that, by 2030, the IRA will increase US solar capacity by 30% and wind capacity by 42%.


Some commentators believe that cost reduction will be greatest for carbon capture and storage (CCS), as well as green and blue hydrogen. This should accelerate the maturation of CCS and hydrogen technologies, as well as decarbonised heavy transport and industrial processes.

The expansion of tax credits in clean electricity to include energy storage for the first time should also help mitigate the intermittency issues (the sun doesn’t always shine, the wind doesn’t always blow) and improve the economics of renewables-plus-storage versus peak gas times.

Bigger pie, bigger slice?

Until now, the preferred approach at the US federal level to support renewables has been tax credits. To monetise these credits, developers currently partner with large financial institutions such as banks through a complicated structure called a tax equity partnership. This effectively allows the tax credits to be offset against the financial institutions’ tax liability.

Developers can raise additional third-party capital (such as private credit) against their equity interests in the tax equity partnership, but it tends to be relatively small compared with capital from the banks.

Under the tax equity partnership framework, we believe while the increase in tax credits could benefit the large banks with their large tax liabilities, they have the unintended consequence of crowding out other investors.

A new feature of the IRA is that developers can sell their tax credits for cash to any business with a tax liability, circumventing the need for a tax equity partnership. Direct pay is also available subject to a number of restrictions. Guidance on implementation is expected to be released later this year. In our view, this has potential to substantially widen the universe of eligible investors and enable developers to tap into a much bigger pool of capital.

Domestic policy, global impact

The magnitude and duration of the funding provided by the IRA will have a profound impact across US and global energy systems, industries and supply chains for years to come, in our view.

Accelerated deployment of clean energy and clean tech is expected to increase demand for private capital and provide more investable opportunities.

We believe the generous tax credits on offer are luring European companies to relocate production to the US. In our next blog, we consider how Europe might respond to the IRA and discuss potential investment implications.


1. The IRA sets out guidelines that define three types of areas qualified to receive the energy community bonus: 1) coal communities; 2) brownfields; and 3) areas that have either 0.17% or greater direct employment or 25% or greater local tax revenues related to the fossil fuel industry, with unemployment at or above the national average.

Lushan Sun

Private Credit Research Manager

Lushan joined LGIM in 2021 and is responsible for private credit research within our Real Assets division. Prior to LGIM, Lushan was a senior consultant at Mercer, providing advice to UK DB pension schemes on asset allocation, portfolio construction and manager selection. Lushan has a MSci from Imperial College in Chemistry and is a Fellow of the Institute and Faculty of Actuaries. Outside work she spends most of her time pursuing her passion for food, exercise and the latest foreign dramas on Netflix.

Lushan Sun