The IRA is the Largest Climate Investment in US History — Are Utilities Planning Accordingly?

More than a year after its passage, most utilities have ramped up clean energy deployment, but much more ambition is needed for the United States to achieve climate goals.

To limit global average temperature rise to 1.5°C above pre-industrial levels, the US grid needs to double in size while reducing emissions 80 percent by 2030. Many of the provisions in the Inflation Reduction Act (IRA) were designed to support this transition; electric utilities now have significant incentives and financial resources to deliver a just, equitable, and low-carbon electricity system. More than a year since the IRA passed, it’s time to check in: Are utilities taking full advantage of these incentives?

RMI’s Engage & Act Platform is designed to help investors evaluate this question, providing data and insights to assess whether electric utilities are using all available tools at their disposal to become “climate-aligned”. As one investigation in support of this platform, we reviewed 116 electric utility integrated resource plans (IRPs) to see if the IRA and other factors — such as interest rates, politics, interconnection queues, and more — have impacted expectations for: 1) electricity demand; 2) the resources that will be used to meet that demand; and 3) the net result on carbon emissions. Our projections show that IRPs have improved in general — though some utilities have actually regressed — but much more progress is needed to align utility investments with a safe, 1.5°C future.

Utilities are increasing their expectations of load growth and earning potential

In our transition to a low-carbon energy future, the buildings, transportation, and industrial sectors will require significant improvements in energy efficiency, as well as a transition from fossil fuels to electricity consumption. Higher electricity demand is attractive for regulated electric utility business models, especially when it can be met with clean energy; capital investments in assets like wind and solar earn a regulated rate of return while fossil fuel costs are often passed directly to customers with no investor return at all. PG&E recognized this alignment of shareholder interests with clean energy investments in its 2023 Q2 earnings presentation, and Xcel’s plans to develop renewables in Colorado also has a clear upside for investors.

Utilities appear to be increasingly aware of and planning for this imminent load growth opportunity in their IRPs. In January 2021, electricity demand anticipated by IRPs was expected to increase by 6.5 percent by 2035. When the IRA passed in August 2022, that figure had increased to 9.0 percent. More recently, in Oct 2023, that figure jumped up to 16.1 percent (Exhibit 1).

While IRPs do not yet reflect ambitions to double the size of the US grid, these increasing load expectations represent real progress in the energy transition. Some of this anticipated load growth is being driven by artificial intelligence and data centers, as well as clean energy manufacturing onshoring incentivized by the IRA and CHIPS and Science act. Further electrification of buildings, vehicles, and industry will help society meet its climate targets, and should provide exciting prospects for investors as electric utilities grow to meet increasing demand.

Exhibit 1: Projected electricity demand (load) from IRPs.

Utilities plan to meet growing electricity demand with primarily wind and solar

Exhibit 1 shows that US electric utilities are starting to plan for more electricity demand — for the benefit of customers and financial stakeholders. Exhibit 2 reveals how utilities are planning to meet that demand: primarily with new wind and solar power.

Since early 2021, planned wind and solar capacity across 116 utilities has more than doubled, increasing from 144 to 295 GW by 2035. This trend began before the IRA and has continued following its passage. Gas capacity additions through 2035 have also increased by 13 GW since the IRA passed, effectively canceling out the 9 GW of accelerated coal capacity retirements in the same time period. Additions to gas capacity are a cause for concern in the US’ ability to meet emissions targets, but it is encouraging that more than 80 percent of capacity additions are expected to come from zero-carbon energy sources, and wind and solar capacity is expected to exceed gas capacity before 2035.

This shift toward zero-carbon technologies looks promising in aggregate. Unfortunately, we also see examples of utilities that have delayed their planned construction of wind and solar in their recent resource plans. Evergy Kansas previously planned to build new solar capacity and retire Lawrence coal units 4 and 5 in 2024, but pushed back solar construction to 2026 and delayed that coal retirement to 2028. Dominion Virginia’s May 2023 IRP update included higher load than previously anticipated, primarily from data centers. It responded to that increased load with a plan to reduce wind and solar additions by 2 GW by 2035, build 1.5 GW of natural gas combustion turbines in that timeframe, and delay retirement of the coal Clover units 1 and 2 from 2025 to 2040. These example of regression have also been noticed by other IRP analyses, and illustrate potential for investor and other stakeholder engagement to support even more widespread clean energy deployment than is currently being planned.

Exhibit 2: Projected capacity by technology from IRPs.

The net effect: projected emissions are falling, but too slowly

Utilities are anticipating higher load growth, and plan to meet most of that additional load with wind and solar power. We observe modest acceleration of coal retirements, and small recent increases to planned gas capacity. What will the total impact of these changes be on emissions?

In January 2021, emissions from IRPs were projected to decrease by 46 percent by 2035, compared with 2005 levels. By Aug 2022 (when IRA passed), that figure was 52 percent. By October 2023, that figure was 54 percent.

Declining projected emissions are good for the climate, and it’s notable that we observe this trend at the same time as increasing load expectations. The electricity sector is simultaneously reducing its own emissions while increasing its role in supporting decarbonization of other sectors. That demonstrates progress, but there’s still a long way to go to fully align IRPs with a 1.5°C future. US electricity sector emissions must fall by 90 percent or more by 2035; far more than the ambition reflected in current IRPs. The increase in projected electric utility emissions reductions we have observed since the IRA, from 52 percent to 54 percent, needs to accelerate dramatically, with all-hands-on-deck support from stakeholders.

Exhibit 3: Projected emissions from IRPs.

This is only the beginning of the IRA’s impact on utility resource plans

Since the IRA’s passage in August 2022, 56 of the 116 utilities we explored completed updates to their IRPs. As more utilities file post-IRA plans and as utilities continue to update their assumptions to include IRA benefits, we expect to see even more advancement of the trends we’ve seen so far.

A few early examples demonstrate how IRA incentives have and will continue to appear in utility plans. There are a bevvy of reasons to expect even more ambition moving forward. The extension of the investment tax credit and production tax credit, and adders for location in energy communities and for use of domestic content, result in lower cost assumptions for zero-emissions energy sources to meet new and existing load. Further, changes in tax rules like transferability, direct pay, and tax normalization have finally made these incentives work for utilities and their shareholders. Combined with additional new financing options for fossil asset transitions (e.g., the Energy Infrastructure Reinvestment program), more utilities than ever before can find cost-effective ways to transition to clean energy while saving money for their customers and increasing utility earnings.

One of the most effective approaches to incorporating IRA incentives into plans is by ensuring that resource plans maintain the core qualities of being trusted, aligned, and comprehensive. For example:

• Trusted: IRPs that promote transparency allow regulators and stakeholders to see if and how IRA incentives are included in key data and assumptions.
• Aligned: IRPs that account for modern approaches to how resource adequacy and resilience are assessed will create opportunities for the broader set of low-carbon technologies that the IRA incentivizes to compete in resource selection.
• Comprehensive: IRPs that include distribution planning and consider distributed energy resources and demand-side value will better leverage the IRA incentives for customer-facing resources in a way that maximizes value to the grid, rather than straining the grid.

The progress we’re seeing in IRPs, amplified by IRA incentives, should result in resource plans that include higher load projections, build more wind and solar at an unprecedented scale, and ultimately lower total projected emissions. This will ensure maximum ratepayer savings and achieve the full potential of the carbon emissions reductions possible with the IRA. Investors and other stakeholders that engage with specific utilities should expect to see this progress in upcoming IRPs; if they don’t, they should ask questions and investigate whether the utility is taking full advantage of the opportunity presented to them in this critical stage of the energy transition.

Methodology

Historical data in this article comes from the RMI Utility Transition Hub. Generation and emissions for 1.5°C are based on RMI’s own decarbonization analysis. Projected capacity and total generation (load) is based on data collected manually from IRPs by EQ Research, combined with historical data. Generation by technology is calculated with assumed continuation of trends in capacity factor for each company and technology, and converted to emissions by using average US emissions factors by technology.

RMI’s Engage & Act Platform: Data and Insights for Real Climate Impact

RMI’s Engage & Act Platform provides data and insights for real climate impact. To learn how you can access and use this targeted resource to uncover recent trends and clean energy growth opportunities — and accelerate the pace of electric utility carbon emissions reductions —please visit the Engage & Act website.