Who would have predicted that after all the Inflation Reduction Act subsidies, the U.S. would not by now have topped the renewables construction peak, which was achieved under the Trump administration?
Although there have been many assertions that the act's tax incentives would accelerate renewables and make projects cheaper, that has not occurred. Instead, wind and solar are now much more expensive. As a result, while utility-scale solar construction has expanded, utility-scale wind construction has dropped significantly in the U.S. The year 2020 is still the high watermark for combined solar and wind construction.
There are several reasons why wind and solar renewables deployment rates have dropped. First, the equipment and construction are substantially more expensive. Wind turbine costs are up over 38 percent since 2021, and total construction costs for wind are up 30 percent from pre-pandemic levels.
Also, renewables developers have said that, after the passage of the Inflation Reduction Act, many equipment manufacturers simply increased their prices by the amount of the act’s incentive. So the Inflation Reduction Act actually increased inflation for renewables.
The second driver is the higher cost of capital, caused by significantly higher interest rates. Investment grade-rated debt financing rates went from approximately 3 percent to 6 percent, hurting project debt costs for renewables, and the cost of equity for projects went from around 8 percent to 11 percent, according to a June report from CIBC Capital Markets. This led to an almost doubling of the cost of the capital needed for construction projects.
After the construction inflation and capital cost increases, renewable power prices to consumers have materially increased as well, even after Inflation Reduction Act tax benefits. According to S&P Global, average onshore wind and solar new power sales prices roughly doubled for consumers, going from around $27 per megawatt hour in 2020 to around $55 in 2023.
As a result, while solar construction rates increased, wind construction rates have plummeted more than solar growth.
Annual new wind installations hit a high in 2020 at 16.1 gigawatts and subsequently fell each year, with only 6.4 gigawatts installed in 2023, a 58 percent drop and the lowest construction rate since 2014. In addition, while onshore wind turbines for the U.S. are mostly made in the U.S., Japan or the European Union, solar mostly comes from China. So the country increased its reliance on Chinese equipment and hurt American manufacturing.
The current administration tried to accelerate renewables construction by borrowing more money and giving it out to renewables projects. Instead, it has caused reduced construction, renewables inflation and increased capital costs, while also increasing the deficit.
Energy technology innovation, driving down costs leading to energy price deflation and letting the private sector provide low-cost capital has proven to be the best policy for all types of energy, including renewables.
As Milton Friedman said, “One of the great mistakes is to judge policies and programs by their intentions rather than their results.” This is an apt observation when it comes to current renewables policy and data.
Paul M. Dabbar was the undersecretary of Energy for Science from 2017 to 2021.
