The IRA Is Still Being Formed

An episode in America’s past contains important lessons for how we move forward in greening the economy.

By Sandeep Vaheesan

Tagged Biden AdministrationClimate ChangeHistory

The Inflation Reduction Act, popularly called the IRA, turned one on August 16. As a result of the law, the federal government may spend, over the next decade, nearly $1 trillion to support zero-carbon energy projects and efficiency and conservation investments. It will accelerate the pace of decarbonization in the United States, reducing domestic greenhouse gas emissions by up to 40 percent below 2005 levels by 2030.

Among progressives, the IRA’s political economic significance is being vigorously debated. Some commentators argue that the Biden Administration’s approach in the IRA and other signature programs represents a break with more than 40 years of neoliberal policy and politics, in which Wall Street and shareholder-run corporations made key economic decisions. Instead of instituting a cap-and-trade system or enacting carbon taxes and simply “getting the prices right,” as neoclassical economists prescribed, the federal government committed to using its spending power to spur the transition away from fossil fuels. Critically, the IRA extended investment and production tax credits, which were previously available only to for-profit entities, to community-controlled public and cooperative electric utilities. These utilities are governed by the customers they serve and their elected representatives and can develop zero-carbon energy projects in accordance with local needs and preferences, as opposed to the wants of absentee shareholders and other financial interests.

More skeptical voices, however, contend that the law represents more of the same: money for private corporations channeled through the tax code. While the law in principle opens the federal money spigot for publicly owned and cooperative utilities, critics argue that they are not well positioned to take advantage of these supports, whereas financial entities are accustomed to obtaining monetary benefits through the tax system. Consequently, they predict most of the money will flow to investor-owned utilities and corporate energy developers. In their view, the law is not a reassertion of public authority over the American energy system, but instead merely a wider opening of the public treasury to private corporations that principally answer to their shareholders and creditors.

So, what is the IRA? Is it a continuation of the neoliberal approach to decarbonization, or a progressive outline for the clean energy transition? The unsatisfactory yet hopeful answer is that it is too soon to say. Given that the law offers incentives instead of mandates, the people of the United States will decide in the coming years what the IRA will mean in practice. Will its incentives just be sweets for corporations aiming to reduce their carbon footprint, or will they also be a nutritious stimulus for building a green and democratic economy?

A century-old precedent offers hope that the IRA may prove to be a political economic project quite different from anything the government has undertaken since the late 1970s. In the Boulder Canyon Project Act of 1928, Congress authorized construction of the subsequently named Hoover Dam on the Colorado River, which would be the world’s largest dam and producer of hydroelectricity. But Congress did not decide who would build and operate the dam’s power plant and instead punted this key question to the interior secretary—meaning that, as with the IRA, fundamental details would be hashed out after the passage of the law. In the end, thanks to the earlier creation of community-owned utilities in southern California, most of the dam’s generation capacity was built and operated by public agencies. And the project laid the groundwork for the more radical power policies of the New Deal. Through organizing at the state and local level, the IRA could become a twenty-first century analog. It could be both a partial break with neoliberal ideology and a steppingstone toward something far grander.

After more than a year of expressing skepticism about President Joe Biden’s Build Back Better program, Democratic Senator Joe Manchin of West Virginia in July 2022 did an apparent about-face. He worked with Senate Majority Leader Chuck Schumer to write a substantially scaled-back version of what the President had called for on the campaign trail and following his inauguration. The program’s $433 billion in spending, including $369 billion over ten years in climate and clean energy investments, was only an eighth of the President’s original plan. Given Manchin’s consistent support for fossil fuel interests, the law featured major concessions to oil and gas companies. Ultimately, the IRA ended up smaller and more conservative than what the champions of Build Back Better had desired. And it certainly was a far cry from the breadth and depth of a Green New Deal.

Nonetheless, the law supports decarbonization in a big way. The federal government may ultimately spend nearly a trillion dollars to spur investment in zero-carbon energy and efficiency programs. Models of the energy system forecast that this investment will produce a substantial—though not sufficient—reduction in domestic greenhouse gas emissions over the next decade.

In recent times, the federal government has relied on the tax code to support investments in zero-carbon energy projects. It offered investment and production tax credits to firms that built and operated renewable energy projects. Typically, investors in solar farms received an investment tax credit equal to a specified percentage of upfront construction costs, while developers of wind energy got production tax credits that compensated them per unit of energy generated. The IRA extends these tax credits through at least 2032.

But unlike earlier policies, the IRA also provides an important boost to cooperative and public power. Cooperative utilities are owned and governed by their customers, while publicly owned utilities consist of municipal and other public agencies and are akin to the local water department. Collectively, these consumer-controlled power systems serve more than one in four customers in the United States, including the residents of Los Angeles, Seattle, and Austin and tens of millions of people in rural and exurban areas. These utilities are controlled by communities and their representatives, not by large shareholders scattered around the world.

Until the IRA, cooperative and publicly owned utilities, which are generally exempt from federal income tax, could not take advantage of the investment and production tax credits. Instead, when they wanted to develop clean energy projects, they entered into contractual partnerships with financial institutions that had large tax liabilities and wanted to reduce them by claiming the tax credits. These entities built wind and solar farms and sold the power to cooperative and publicly owned utilities under long-term power purchase agreements.

The IRA makes these tax credits available to cooperative and public utilities. Through a provision called “direct pay,” nonprofit utilities can obtain federal grants after they invest in zero-carbon power generation. Once they complete an eligible project, they will receive a substantial payment equal to the tax credit that for-profit entities receive.

Further, the IRA appropriates approximately $10 billion to the U.S. Department of Agriculture (USDA) to award to rural electric cooperatives for investments in zero-carbon power. The USDA has the discretion to award both grants and loans and can cover up to 25 percent of a project’s upfront cost through grant financing.

In total, this is no small amount. To be sure, Congress’s IRA money spigot will likely be used mainly by investor-owned utilities, corporate power developers, and other financialized entities. They have a long history of using production and investment tax credits. But a significant amount of money is now available to community-owned utilities too.

Because Congress relied on a “carrots over sticks” approach, the IRA was not cast in stone at the time of its passage. How much money will be spent and on whom depends on assorted factors such as the profitability of zero-carbon energy projects with federal support, changes to state clean and renewable energy mandates, and cooperative and public power’s appetite for trying a novel incentive program. So there’s a lot we don’t know. But a precedent from the 1920s offers hope that the IRA will ultimately be more progressive than some of its left-leaning critics contend.

A century ago, a major public policy question was how to provide affordable power service to everyone in the United States. Only a small minority of farmers had electric service: fewer than one in ten in 1923. And while most people in cities had electricity by the mid-1920s, expensive power, paired with costly appliances and an obsolete housing stock, meant that urban households typically had electric lights and a radio, not the suite of creature comforts we take for granted today.

Much like the way investor-owned utilities and holding companies such as Pacific Gas & Electric, Exelon, Southern Company, and NextEra Energy sit atop the power industry today, financial capital thoroughly dominated the sector back then. Men such as Samuel Insull and Sidney Z. Mitchell led utility empires, commonly called the “power trust” at the time. They controlled networks of electric utilities scattered around the country and wielded great economic and political power. Against them stood supporters of public control of power systems. Figures like Senator George Norris, Representative Fiorello La Guardia, Governor Franklin Roosevelt, and journalist and public advocate Judson King, along with countless working- and middle-class populists and progressives, fought for public provisioning of electricity at the federal, state, and local level.

One of the major power fights of the 1920s centered on the construction of a high dam at Boulder Canyon on the Lower Colorado River. While the need to prevent floods and store the volatile Colorado’s waters for domestic and agricultural uses was widely recognized by national and local politicians across the political spectrum, the power production potential of a large dam was a source of contention. It excited public power supporters and alarmed the private power industry and its allies. Private utilities owned dams and fossil fuel-fired plants and feared vigorous competition from a federal rival. To be sure, federal dam construction was not new. For decades, the government had been constructing dams for flood control, irrigation, and navigation purposes, but they generated only small amounts of electricity. The proposed dam on the Colorado was projected to produce 30 times more power than all existing federal dams combined. Its power potential was unprecedented. For private electric companies, the dam meant a major expansion of federal participation in power generation and serious competition to serve power markets in the Southwest. Private power fought for a modest, low dam, with little electric generation capacity, and for control of any power produced at the dam.

The idea for a dam at Boulder Canyon was first floated in Congress in the early 1920s. Its lead champions were Congressman Phil Swing and Senator Hiram Johnson, both from California. Due to resistance from private power interests, their first three bills died in Congress. But the fourth attempt succeeded. In late 1928, Congress passed the Boulder Canyon Project Act, and President Calvin Coolidge signed it into law.

Passing the bill required a major compromise between the public power and private power camps. Congress authorized spending more than $100 million on the giant dam but delegated the question of who would generate power to the secretary of the interior. Under the law, the secretary had substantial discretion. He could order the federal Bureau of Reclamation, the agency responsible for building and owning the dam, to construct and operate the dam’s powerhouse itself, to build the powerhouse and then lease it to non-federal utilities for operation, or to lease that section of the dam to a non-federal entity that would both build and operate the powerhouse. In the House, Swing faced criticism from progressives like Representative La Guardia for this weak public power provision, but Swing replied that compromise was the only way to successfully navigate the bill through the conservative Congress.

Another compromise involved the transmission question. Private power feared federal transmission of power even more than federal generation of power. If the government only generated electricity, private utilities would still be responsible for transmitting and selling the power—an arrangement they could tolerate. They won on this issue. Under the Boulder Canyon Project Act, the federal government could not build transmission lines from the remote dam to customers in southern California. (At the time, other states in the Colorado’s basin were thinly populated and unlikely to use the dam’s massive power output; Las Vegas, which is less than 50 miles by road from the dam, was then a small town in the desert.) Some entity would construct the lines to move the dam’s electricity to southern California, but it would not be the federal government.

With the inauguration of Herbert Hoover as President in March 1929, public power advocates anticipated the worst. They believed that the secretary of the interior would lease the powerhouse of the dam to private utilities. Hoover was a strident opponent of public power, and he appointed the conservative Ray Lyman Wilbur to serve as his interior secretary. (To please his boss, Wilbur christened the dam “Hoover Dam” at the groundbreaking. The New Dealers subsequently renamed it Boulder Dam, only for Congress to permanently change the name back to Hoover Dam in 1947.) Senator Norris, while supporting the construction of the dam and touting its flood prevention benefits for southern California and Arizona, feared the Hoover Administration would turn the massive power generation potential over to the power trust.

Despite Norris’s pessimism, the ultimate allocation of the dam’s power was a victory for the public power movement. As expected, Secretary Wilbur opted to lease the dam’s powerhouse instead of directing the Bureau of Reclamation to build and operate it. But that didn’t mean he transferred, or could transfer, the dam’s generation capacity to the power trust. Thanks to years of advocacy and contestation by community members, promoters of the city seeking to attract new investment and residents, and some businesses eager to obtain low-cost power, the city of Los Angeles had in 1902 set up a publicly owned utility, today called the Los Angeles Department of Water and Power. During the 1910s and ’20s, the utility built its own power distribution system and purchased the private Southern California Edison facilities serving the city. Further, Los Angeles and ten other municipalities in southern California had in 1928 created the Metropolitan Water District (MWD) to secure water for domestic use. The MWD wanted to obtain water from Lake Mead, the reservoir created by the Hoover Dam. Pumping water hundreds of miles from the Colorado River to southern California would require large amounts of electricity.

Rapidly growing southern California was the clear outlet for the dam’s power. Wilbur, despite his hostility toward public power, was hemmed in by the constellation of possible wholesale customers for electricity—most of which were public entities. As a result, Wilbur authorized the city of Los Angeles to generate more than 90 percent of the dam’s power for itself and other public customers, reserving the remainder for Southern California Edison. The conservative Hoover Administration set up a public-private partnership between the federal government, Los Angeles, and Southern California Edison, with the private utility serving as a junior partner. Los Angeles and Southern California Edison would construct transmission lines to ship power to their distribution systems.

The giant federal dam ultimately supplied southern California with abundant power. The generation, transmission, and distribution of low-cost electricity, principally by public agencies, helped accelerate the rapid growth of Los Angeles and surrounding areas and set the stage for it to become the nation’s second-largest metropolis.

The IRA has parallels to the Boulder Canyon Project Act. Neither bill fulfilled the wish list of progressives. The Boulder Canyon Project Act granted wide discretion to the incoming conservative Hoover Administration and did not permit the federal government to build transmission lines. Similarly, the IRA is not a muscular public power bill. Even though the law offers major financial support for cooperative and public power, a substantial portion of IRA dollars will likely go to investor-owned utilities and other financialized corporations and shore up their existing dominance.

Yet, the promising parallels are also evident. The Hoover Dam was a substantially bigger power project than anything the federal government had previously constructed; the IRA is a significantly bigger federal commitment to decarbonization than prior legislation.

Positive developments are already occurring at the state level. In May, the New York legislature passed, as part of a budget deal with Governor Kathy Hochul, the Build Public Renewables Act (BPRA). The BPRA authorizes the New York Power Authority (NYPA), which was created in 1931 during Franklin Roosevelt’s tenure as governor, to construct and operate large-scale renewable energy plants, such as wind farms, and requires NYPA to fully phase out reliance on fossil fuels by 2030. The law was the culmination of years of organizing and advocacy in the state by grassroots economic and climate justice groups and labor unions. The bill had been unsuccessful when previously introduced in 2021 and 2022. The legislature passed it on its third attempt, in part because the federal funds appropriated in the IRA would now support NYPA’s renewable energy investment program. Much like the allocation of Hoover Dam power to Los Angeles, the New York law represents successful local organizing and control paired with major federal support.

Whereas the Hoover Dam’s benefits were confined to one part of the country, New York’s BPRA is not destined to be a one-off. More state- and community-owned utilities could follow suit and construct their own renewable projects with federal support. Through the IRA, Congress committed substantial money to fostering federal-local clean energy partnerships: The Center for Public Enterprise, in a recent report, found that direct pay (the provision in the IRA that allows nonprofit utilities to receive federal grants) could make otherwise unattractive or break-even projects very enticing.

The possibilities are by no means confined to so-called blue states. Hundreds of rural electric cooperatives cover most of the nation’s geographic area and are especially concentrated in the Midwest and South. All customers in Nebraska, which has great wind energy potential, are served by cooperative or publicly owned utilities, making it the only all-public power state in the country. In South Carolina and Texas, state agencies play an important role in generating and transmitting electricity. In November, the residents of traditionally purple Maine will vote on whether to launch a public takeover of the two investor-owned utilities in the state. These utilities could use public money from the federal government to build new wind farms, solar fields, and battery storage facilities. Such partnerships offer the prospect of publicly controlled, low-cost, and zero-carbon power everywhere.

Like the Boulder Canyon Project Act, the substance of the IRA was not fixed at the time of congressional passage but will be made in the coming years through public activism, advocacy, and organizing. The enactment of the BPRA in New York shows that the IRA has opened new possibilities. The IRA could encourage BPRA-like laws in other states and promote publicly led clean energy development across the country. This could in turn lead to further-reaching federal action: The public power movement of the 1920s laid the foundation for the achievements of the New Deal. When he became President in March 1933, Franklin Roosevelt was not drawing on a blank slate of power policy. The Boulder Canyon Project Act had created the political foundation and space for the more ambitious and full-fledged public power projects of the 1930s, such as the Tennessee Valley Authority and the Bonneville and Grand Coulee Dams in the Pacific Northwest. Optimistically, the IRA will not be the federal government’s last word on climate change and energy, but the prelude to a more ambitious program like the Green New Deal in this decade.

Read more about Biden AdministrationClimate ChangeHistory

Sandeep Vaheesan is the legal director of the Open Markets Institute. He is the author of a forthcoming book entitled Democracy in Power: A History of Electrification in the United States, under contract with the University of Chicago Press, on the history and future of cooperative and public power in the United States.

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