Foreign Concerns

This Week's Trend In Brief:

• According to new The Wall Street Journal analysis, in the year since passage of the Inflation Reduction Act (IRA), foreign companies have been “The Biggest Winners,” with nearly 60% of the $110 billion in spending spurred by the IRA coming from foreign entities.
   

• Among those taking advantage of the IRA’s incentives are major European firms including, “Volkswagen, BMW, Italian energy group Enel, and Norwegian battery group Freyr,” as well as a number of Asian companies primarily from South Korea, Japan, and China.
   

• While the China factor has gotten most of the attention, even European firms and those from other allied countries should expect heightened scrutiny and questions from U.S. policymakers who viewed the IRA as an opportunity to invest in domestic supply chains and protect against foreign control over green supply chains.
   

• Already, policymakers – particularly influential Sen. Joe Manchin (D-WV) – and outside interests are questioning the Biden Administration’s implementation of the law’s provisions regarding domestic material use and free trade agreements.
   

• As we have noted before, the IRA offers plenty of opportunity for firms seeking to develop projects in the U.S., but projects that include foreign partners or investments will add another layer of scrutiny that could hinder or delays those initiatives.

Digging Deeper:

One year since passage of the Inflation Reduction Act (IRA), a new analysis from The Wall Street Journal found “the biggest winners” were Asian and European companies representing the majority of investment taking advantage of the legislation’s incentives. WSJ found “Companies based overseas, largely from South Korea, Japan and China, are involved in projects accounting for more than 60%” of the $110 billion that has been spurred by the IRA. According to the Journal, “at least 10 of the projects representing nearly $8 billion in investments included in the Journal’s analysis involve companies either based in China or with substantial ties to China through their core operations or large investors.” Several major European firms are also taking advantage of the IRA’s incentives and investing in the U.S., including “Volkswagen, BMW, Italian energy group Enel, and Norwegian battery group Freyr, who have joined other firms in expanding existing plants or building new plants in the United States with the expectation of a growing demand for high quality green products from U.S. buyers.
 
Enticed by the IRA’s incentives, foreign firms are bringing the technology needed for green-energy supply chains, but scrutiny of these foreign investments has already begun, especially of projects tied to China. As the Center for Strategic and International Studies notes, the IRA was specifically designed to encourage “the purchase of U.S.-made green energy projects,” bring “advanced manufacturing back to the United States,” and promote competition with China. While foreign firms have the technology needed to develop a domestic supply chain for green tech, their investments are still coming under significant scrutiny, especially when these projects have ties to China.
 
Even U.S. firms partnering with foreign companies will find themselves under pressure. Among the projects with China ties are two multi-billion dollar battery projects proposed in Michigan, including “a $3.5 billion battery factory Ford Motor Co is setting up with the help of Chinese battery company Contemporary Amperex Technology Co or CATL.” Earlier this year, Virginia Governor Glenn Youngkin removed his state from consideration for the Ford/CATL project because it “contravened the intent and purpose of the Inflation Reduction Act incentives.” Senators Marco Rubio and Joe Manchin have also criticized Ford’s partnership with CATL, and two Congressional committees have launched investigations into the partnership.
 
More broadly, implementation of the IRA is also coming under significant scrutiny on Capitol Hill, particularly how EU countries are benefiting from tax credits. Beyond individual projects, policymakers on Capitol Hill are also scrutinizing the Biden Administration’s broader implementation of the IRA. For example, earlier this year the House Ways and Means Committee held a hearing in which members alleged “China is exploiting loopholes in the so-called ‘Inflation Reduction Act’ to make money off American taxpayers.” Senator Joe Manchin has also repeatedly expressed frustration with how the Administration interprets which countries meet the IRA’s tax credit requirements.
 
This scrutiny is already leading to Congressional action against European interests. Earlier this year, Republican Senators Tom Cotton, Marco Rubio, Bill Hagerty, and J.D. Vance introduced legislation to “prevent European countries from benefiting from critical mineral tax credits from the United States until they contribute an equal percent of GDP in support of the war in Ukraine.” The senators introduced their legislation because, “The European Union has aggressively protested the passage of the IRA and sought access to this tax credit,” and note the EU lacks a free trade agreement with the U.S. House Ways and Means Committee Republicans have also raised concerns about “legally dubious trade ‘frameworks’ negotiated by the Biden Administration.”
 
As we have noted before, while the IRA offers major opportunity for clean energy developers, taking advantage of the incentives to build projects will also increase firms’ exposure to potential scrutiny. Legislation like the IRA offers immense opportunity for project developers. Yet as we have noted before, “as policymakers and the public focus more and more on relations with China, there is growing risk for firms with exposure to China.” Beyond that geopolitical tension, however, even foreign firms from allied nations hoping to invest in the U.S. could draw ire from policymakers or other stakeholders. This opportunity and scrutiny means firms seeking to take advantage of federal incentives must ensure they fully understand the developing political landscape and how different policymakers, stakeholders, and other interests will respond to it. Those who do not will find themselves unprepared for the scrutiny and pressure that follows.

Trends in Energy is your weekly look at key trends affecting the energy industry, brought to you by the competitive intelligence experts at Delve. As the political and regulatory landscape continues to shift, reach out to learn how our insights can help you navigate these challenges.