Decarbonization Strategy through Climate Derisking

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Shelley Welton of the University of Pennsylvania Carey Law School and Conor Harrison of the University of South Carolina critiqued the Inflation Reduction Act’s (IRA) approach to promoting renewable energy investment. They argue that the “derisking” strategy, which uses government incentives to increase private investment in clean energy, could result in utility ratepayers bearing the financial burden of failed projects. They based their analysis on the unsuccessful attempt to revive the U.S. nuclear energy industry in the early 2000s, noting that even with significant financial incentives, nuclear projects were largely unsuccessful and expensive, with costs often passed onto consumers.

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Failure of Nuclear Energy Projects Provides Insight on Renewable Energy Strategies

Academics suggest that examining failed nuclear initiatives can provide valuable insights for today’s efforts to advance renewable energy. They argue that these costly failures highlight potential flaws in the strategies being employed to promote renewable energy.

The ongoing climate crisis has led to wide-scale fears that unchecked global warming will lead to rising sea levels, frequent natural disasters and widespread uninhabitability. Many scientists believe that decarbonization is imperative in order to mitigate these potential outcomes.

The Inflation Reduction Act and Derisking Strategies

The U.S. Congress introduced the Inflation Reduction Act (IRA) in 2022, with the aim of encouraging investment in renewable energy. The IRA promotes the concept of “derisking,” a strategy that involves leveraging government incentives to make investment in clean energy more attractive by minimizing potential profit loss. This strategy has been referred to by some as a “carrots without sticks” approach to decarbonization. The IRA utilizes tax credits to incentivize clean energy industries and includes provisions aimed at enhancing the value of these credits in order to stimulate investment.

Examining Past Failures to Inform Future Strategies

In a recent article, Shelley Welton from the University of Pennsylvania Carey Law School and Conor Harrison of the University of South Carolina critically evaluated the IRA’s derisking strategy. They drew on past examples where this approach has failed, specifically the unsuccessful attempt to rejuvenate the U.S. nuclear energy industry in the early 2000s. They argued that using derisking strategies for clean energy projects may result in utility customers shouldering the financial burden of projects that provide little to no decarbonization benefits.

Derisking Strategies in the United States

Derisking strategies have a long history in the United States, dating back to the financial incentives provided for railroads in the 1880s, Welton and Harrison note. Over the last 50 years, the U.S. government has used risk mitigation tools to promote renewable energy, often with great success.

However, they point out a significant failure of a past climate derisking effort – the attempt to revive U.S. nuclear power in the early 21st century. They argue this failure provides crucial lessons for current regulators.

The Attempt to Revive Nuclear Energy

In 2000, rising energy prices, concerns about air pollution, and a recent accident-free record in nuclear generation prompted utilities to consider new investments. The subsequent lobbying efforts led to the passage of the Energy Policy Act of 2005. This act offered production tax credits, loan guarantees, and risk insurance to utilities willing to invest in new nuclear reactors. However, these incentives ultimately failed to attract the majority of U.S. energy firms.

The Consequences of Failed Nuclear Energy Projects

Welton and Harrison observed that only the Plant Vogtle in Georgia was completed under the incentives provided by the Energy Policy Act, albeit vastly over budget and behind schedule. Other states, such as South Carolina, Florida, and North Carolina, began nuclear projects but ultimately abandoned them, leaving utility customers to bear the costs of these failed initiatives.

Hidden Risks and Future Climate Investment

Based on these case studies, Welton and Harrison identify several hidden risks in derisking initiatives that could potentially hinder future climate investment. These include legal and permitting challenges that often delay energy projects, drastic changes in energy markets that alter the initial investment calculations, and political and institutional commitments that keep failing projects afloat.

They argue that poorly designed derisking strategies that do not address these hidden risks can result in clean energy projects that harm local communities and fail to achieve decarbonization. To manage these hidden risks, they suggest greater public oversight of derisking initiatives.

While derisking is a complex and uncertain method for promoting clean energy, it is the current strategy favored by Congress through the IRA. Welton and Harrison argue that it is now the responsibility of federal administrators to protect against misguided projects and to manage the transition to clean energy effectively.

By learning from the unsuccessful nuclear renaissance, they conclude, lawmakers and regulators can better manage the risks associated with derisking and ensure the success of future clean energy projects.

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