Uncle Sam vs John Bull: the irresistible investor appeal of Biden’s IRA

The UK has made a U-turn on net zero in recent months, going from an unconditional pro-green position to a more oil-and-gas-friendly approach, highlighted by the British government's recent decision to issue hundreds of new licenses for fossil fuel drilling in the North Sea.

Green investors were appalled, and criticism has been growing across the board with dozens of corporate leaders fiercely opposing the approach Rishi Sunak and his government are taking. 

Added to that, the relatively high inflation, paired with mounting investment costs, make life increasingly difficult for investors in the UK renewable energy market.

Given these increasingly challenging market conditions, Net Zero Investor checked in with a number of industry insiders to see what they make of Britain's green investment space, and how it has evolved over the summer.

Turns out: UK investors are starting to shift away from Britain as they are increasingly flocking to the U.S., where a staunchly green president Joe Biden is pushing hard to implement stricter net zero policies to give ESG-friendly businesses a major boost via his much-applauded Inflation Reduction Act, a key climate policy for this U.S. presidency.

The U.S. has got the renewable energy bug and is using hundreds of billions of dollars in grants and tax breaks to unleash a torrent of entrepreneurial spirit and intellectual capital.

Three acts in particular – the forementioned Inflation Reduction Act as well as the Chips Act and the Bipartisan Infrastructure Law – look set to cement, in a low-carbon way, Biden’s name in history.

America's supersize climate change plans have impressed some investors across the UK.

Ciaran Mallon, a fund manager within the UK equities team at Invesco, thinks that "the results will be quite something to see in the years ahead."

"It is rare for a president to succeed in pushing through such dramatic legislation," Mallon said.

"Perhaps what has helped Biden has been the way he has focused spending on benefiting the U.S., creating jobs by reshoring manufacturing and reducing dependence on China and other nations. The beneficiaries of this money should be American companies and workers."

By rolling out the IRA and related legislation, Biden is first and foremost aiming to boost the production and rollout of clean energy and green technologies.

In fact, the new IRA is creating unprecedented investment opportunities in renewables for investors seeking to enter or expand into alternative energy sources and low-carbon tech and infrastructure as it may hand investors around $30 trillion in new opportunities, also stretching to wind and solar.

A recent BNEF report stressed that scaling up investments in wind and solar will be the most effective and cost-efficient way to decarbonise the world's largest economy, thereby creating billions in new investment opportunities.

“The IRA is a multibillion-dollar down-payment on decarbonization, [and] it will stimulate trillions in investment to reach net zero," explained Tara Narayanan, BNEF’s senior associate for US Power Markets.

“Carbon capture could be a solution to emissions from natural gas if the subsidies are extended rather than being phased out just when the technology starts to become competitive," she noted.

Narayanan added that tax credits and direct subsidies "will certainly help", pointing out that tax credits for electric vehicles and carbon capture may lower emissions by up to 9% by 2050.

UK investors looking at America

Over the last 12 months, some $271 billion were invested in clean energy projects utility in the US, according to recent data by the American Clean Power (ACP) association, an industry body for the renewable energy industry.

This surpasses the total spent on clean energy over the 7 years prior to the passage of the IRA.

The sharp increase in government spending has left its mark on US energy infrastructure. With more than 80 new energy facilities being built, the ACP predicts a ninefold increase in solar module production and a more than fifteenfold increase in grid-scale battery storage.

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Similarly, the EIA, the US Energy Information Administration, which publishes data on conventional and renewable energy, predicts that as a result of IRA funding, by 2050, wind and solar energy will account for more than half of all electricity generation in the US.

Therefore, it may come as "no surprise then" that this is generating a lot of interest among non-US investors as a host of UK and European companies stand to benefit if they act swiftly, said Mallon, singling out British firms like National Grid, Drax and Ashtead.

"We are going to need more robust networks for dealing with energy transition as we increasingly come to rely on electricity," he added.

One area worth singling out and often under-reported is biomass as investors in UK and European biomass firms may want to pay attention, Mallon continued.

Biomass energy is generated from wood and wood waste, biogas from landfill waste, sewage and industrial wastewater and animal waste.

"Bioiomass "has a part to play – here and in the US," he said firmly.

The U.S. is currently a key driver in this market's growth. By 2026, the global pellet market alone is forecast to exceed 62 million tonnes from a level of 49 million tonnes in 2022.

Thomas Meth, president and CEO of Enviva, one of the largest biomass companies in the world, singled out a recent study that confirmed wood fibre sourced using practices employed in the Southeast U.S. provided a renewable substitute for coal and natural gas.

He said that, particularly in the U.S., "businesses are under immense pressure to find alternative to coal which have the capability of producing high temperatures albeit with a smaller emissions footprint so there’s growing interest in this field across a variety of industries, from steel to lime to cement."

Zooming out to the wider renewables space, Mallon stressed that, overall, the investor sentiment is that "investors with exposure to North American markets could potentially benefit either directly or indirectly from the investment the US government is planning."

And maybe even closer to Britain too: "Added to this is the fact that Europe is now talking about creating similar initiatives."

UK's renewable approach

The fact the U.S. may benefit from British investors flocking across the pond is largely a direct result of outright less appealing investment conditions back in the UK as there is fierce criticism on the British Government that its new net zero approach is outright harming green investments.

Following a letter by dozens of business leaders across the UK, signed by the chiefs of more than 100 businesses, including Tesco, Amazon and IKEA, more corporate bosses are urging the government of Rishi Sunak to "to demonstrate a renewed focus and commitment” to honour Britain's climate goals.

If not, the UK risks leaving being “left behind” in terms of investment flows, they said.

In fact, many warned the British government's net zero approach is outright deterring clean energy investors from committing to projects in the UK.

Swedish industry giant Vattenfall cancelled a large offshore wind project off the coast of Norfolk only weeks ago.

The firm explained the project was no longer attractive to investors as input costs had skyrocketed by more than 40%.

The state-owned company explained that rising gas prices, high inflation and rapidly increasing costs had led to the rare decision to cancel the project altogether.

“It simply does not make sense to continue this project,” explained Anna Borg, Vattenfall’s chief executive.

“Higher inflation and capital costs are affecting the entire energy sector, but the current situation has made offshore wind and its supply chains particularly vulnerable.”

"This situation is putting significant pressure on all new offshore wind projects," Borg warned.

Vattenfall's decision sent shockwaves through the industry. 

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But it is not merely this policy and current market conditions that are a cause for concern.

"It is concerning to see the government defer any decision on further green subsidies until the autumn," said Rob Doepel, EY UK & Ireland's managing partner for sustainability.

"This will mark a further period of relative inactivity in this area while the US offers substantial incentives and the EU progresses its own plans," Doepel told Net Zero Investor.

"Losing access to green finance, leading businesses and sustainability expertise would be doubly costly for the UK, as they would be unavailable to support own growth while also strengthening our international competition."

Finally, Doepel stressed, internationally, UK investors should take their influence "more seriously".

"As key economic drivers, they need to step up and take their influence seriously. If they prioritise actionable and credible plans, others are bound to follow. especially when they realise the opportunities available."

He called the opportunities "extensive", singling out remaining ahead of competitors, establishing themselves as green leaders and innovators and building a positive reputation.

In fact, Doepel concluded that by progressing transition planning now, businesses can claim "a first-mover advantage" later.

"As the saying goes, forearmed is forewarned."

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