Developments in US federal infrastructure policy and funding

April 2024  |  SPECIAL REPORT: INFRASTRUCTURE & PROJECT FINANCE

Financier Worldwide Magazine

April 2024 Issue

The Biden administration’s signature policy achievements relate directly to infrastructure. The Infrastructure Investment and Jobs Act of 2021 (IIJA), the Inflation Reduction Act of 2022 (IRA), and the CHIPS and Science Act of 2022 (CHIPS Act) are generational stimulus packages for the energy, transportation and semiconductor sectors. In response, investors have directed increasing capital flows, directly and indirectly, to infrastructure. Each infrastructure segment faces challenges and potentially conflicting policy goals, all against a backdrop of uncertainty ahead of US political elections in 2024.

Energy

US energy policy is firmly oriented toward decarbonisation through transition from oil & gas to electrification in all economic sectors and based on expanded use of renewable electric generation. The IIJA and IRA establish or expand grants, loans and tax credits to support that transition. Despite the political headwinds, oil & gas maintains its relevance to the US economy and geopolitical framework, as evidenced by record levels of domestic production, much of it directed to critical external markets.

Renewables. Solar and wind dominate new renewable installations in the US. Tax credits have supported these industries since their infancy and the IIJA and IRA vastly expand the potential value, availability and transferability of these credits, but not without challenges. New rules for the tax credits set significant requirements for domestic content and labour wages needed to unlock the maximum statutory benefits. Other rules and guidance have yet to be released, causing investor caution. Solar and wind are also dependent on import-dominated supply chains. The Biden administration has so far waived supplemental tariffs on certain solar module imports, highlighting a trade-off between support for new solar generation versus support for domestic solar manufacturing.

The next frontier in utility scale renewables is offshore wind. States and the federal government have used regulatory tools and tax credits as incentives and developers have invested billions in projects along the eastern seaboard. But inflation, higher interest rates and supply chain bottlenecks have thrown many of the new developments off budget and schedule, leading to cancelled offtake contracts, suspended joint ventures and investment write offs. Nonetheless, policy support and investment interest remain strong, and more regions, such as the Pacific coast and the Gulf of Mexico, are being explored and permitted for new projects.

Transmission. New transmission and interconnection infrastructure is critical to the energy transition and for expanded US manufacturing. New power generation, manufacturing processes, electric vehicles and computing power alike depend on reliable electric transmission and distribution. The IIJA provides funding for transmission, but some of the key challenges are regulatory in nature. Siting, permitting and cost allocation for transmission and interconnection are complicated and can take years to complete. Interconnection delays are a significant reason why developers abandon new projects. The Federal Energy Regulatory Commission (FERC) and regional independent system operators have led efforts to reform the process, but with limited success so far. There are impressive success stories, however, including Pattern Energy’s 550 mile, 525kV HVDC SunZia transmission project and related wind generation project, the largest clean energy infrastructure project in US history, which reached financial close in late 2023 and has commenced construction.

Storage. Energy storage, principally using batteries, is widely supported in the US. Storage supports decarbonisation and grid resiliency and is less complicated to permit and build. Battery storage adjacent to solar panels helps overcome the problems with intermittent solar generation. The IRA extended tax credit eligibility to storage technologies, and investors have responded. Non-hydro storage installations rose to 7.5GW in 2023, a 62 percent increase over the prior year. The IIJA and IRA further support development and commercialisation of long duration (i.e., more than eight hours) energy storage technologies.

Hydrogen. The US hydrogen industry is receiving substantial federal support from tax credits, grants and loans under the IIJA and IRA. Clean hydrogen could help lower greenhouse gas (GHG) emissions and may represent a future path for the oil & gas industries. For investors, tax credits are attractive. Still, guidance issued by the US Department of the Treasury and the Internal Revenue Service in December 2023 is very restrictive in terms of requiring that hydrogen production utilise, or be correlated with, new renewable electricity generation that is produced at the same time, and in the same geographic ‘congestion zone’, as the hydrogen production (referred to as the ‘three pillars’). Both industry and Congress are pressing to relax the standards.

The IIJA established a programme to establish and fund through grants seven regional clean hydrogen hubs, spread across the country, in partnership with large consortia populated by industry, government and academia. Each hub is intended to focus on developing a different colour type on the clean hydrogen rainbow – blue for hydrogen made using hydrocarbons but implementing carbon capture, turquoise for hydrogen made using pyrolysis, green for electrolysis powered by renewable energy and pink for electrolysis powered by nuclear energy.

Policy aside, market dynamics are the biggest threat to clean hydrogen. Clean hydrogen production costs are high and demand currently is low. Despite incentives, several hydrogen sponsors have shut down hydrogen production and distribution facilities, and the supply-demand mismatch is expected to persist for some time.

Nuclear. Nuclear power remains an important contributor to US electric supply, and as it features low emissions, there is renewed interest in maintaining and growing the industry. The IIJA and IRA establish new grants and tax credits to support the existing fleet of reactors and direct that at least one of the clean hydrogen hubs mentioned above demonstrate production of clean hydrogen using nuclear energy. There is also some support for small modular reactors and micro reactors, which have attracted private investment and may represent a future path for nuclear generation. Challenges to the US nuclear industry include its reliance on imported uranium to fuel nuclear generation facilities and the absence of a long-term storage solution for spent nuclear fuel and other radioactive waste.

Other decarbonisation projects. The IIJA and IRA include significant funding, principally through Department of Energy loan guarantees and grants, to support the conversion of fossil fuel-based energy facilities to facilities that use lower emitting technologies. As one example, the IIJA authorises up to $250bn of loan guarantees to install emissions reduction or carbon capture technologies at fossil fuel-based energy facilities or to convert such facilities to uses that support emissions reductions, including renewable generation and manufacturing of clean energy products and services.

Transportation

Automotive. The Biden administration has set ambitious goals to transition the automotive industry away from internal combustion engines to low or zero emission vehicles, principally electric vehicles (EVs) using battery technologies. The IIJA and IRA authorise unprecedented federal funding to support domestic supply chains to produce EVs, batteries and charging stations and to incentivise EV purchases. Establishing a vertically integrated EV manufacturing base in the US will require massive investment, regulatory accommodation and market approval. The US EV industry will also need to compete against EV imports from overseas manufacturers.

Ports. The federal government is encouraging investment in US ports to accommodate post-Panamax sized cargo ships, to improve resiliency against climate impacts, and to create the specialised onshore infrastructure needed to support the offshore wind industry. The IIJA authorises nearly $17bn for port investments, largely through a Port Investment Development Program that funds port and related freight rail projects. More recently, the Biden administration has signalled an intent to direct nearly $20bn of funding to re-establish domestic port crane manufacturing to replace existing Chinese-manufactured cranes.

Rail. The IIJA includes $102bn in rail funding, most of it directed to passenger rail investments. One of the most significant investments has been directed to a new rail tunnel between New Jersey and New York: the Hudson Tunnel Project. Federal support has also been directed to high-speed passenger rail projects between Los Angeles and Las Vegas, Dallas and Houston, and elsewhere.

Semiconductors. Strengthening domestic semiconductor production and supply chains is a centrepiece of the Biden administration’s industrial policy. The CHIPS Act, passed in 2022, will direct tens of billions of dollars in public and private investments, through grants, loans and tax credits, to enhance domestic semiconductor research, design, production and packaging capabilities. A federally supported agency, the National Semiconductor Technology Center has been established to support the design, prototyping and piloting of new semiconductor technologies. As with other sectors, such as EVs and renewable energy technologies, the federal government is leading efforts to develop domestic supply chains to produce memory and logic semiconductor chips across all technology generations.

Cyber security. US infrastructure systems are experiencing an increasing number of cyber attacks. The federal government recognises that cyber security is a critical element of infrastructure policy and is coordinating with states, localities and the private sector to respond to, and defend against, cyber security attacks and certain physical threats to infrastructure. The IIJA establishes several grant programmes, administered across multiple departments and agencies, to provide several billion dollars of funding to strengthen cyber security systems at the state, local and tribal levels.

Joshua B. Nickerson is counsel, Lance Brasher is a partner and Karen Abbott is a senior energy & infrastructure projects analyst at Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates. Mr Nickerson can be contacted on +1 (202) 371 7268 or by email: joshua.nickerson@skadden.com. Mr Brasher can be contacted on +1 (202) 371 7402 or by email: lance.brasher@skadden.com.

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Joshua B. Nickerson, Lance Brasher and Karen Abbott

Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates

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