The Inflation Reduction Act (”IRA”) is a landmark piece of legislation passed by the US Congress in August 2022, with $394B of new federal funding for climate provisions. This will put the country on track to meet 80% of its Paris Agreement obligations to reduce emissions.
The ultimate amount of IRA funding could be double what the federal government has announced to date. Credit Suisse has estimated that the IRA’s climate provisions could end up resulting in funding of as much as $800B, due to high demand for things such as clean electricity tax credits.
There are 16 initiatives in the IRA that we believe create high potential opportunities for climate fintech.
A note on methodology: We drew these 16 initiatives from Climate Tech VC’s list of the 76 climate-related initiatives contained in the IRA. We applied criteria such as “has at least $100M of funding” and “is not primarily funding for a government program” in order to reduce the list to 16.
These initiatives fall into the following categories:
We have put together a summary of where we see white space in the 16 climate finance initiatives, including some initial hypotheses on where there could be climate fintech plays. Below are two examples:
Home energy efficiency
Investing in home energy efficiency remains a significant financing challenge for homeowners. The average American home can require as much as $10,000 for insulation, while generating 10-15% annual savings on energy bills - one reason we have seen ventures such as Sealed enter the market to help financing on insulation and HVAC upgrades.
The IRA’s Residential Energy Efficiency Tax Credit could supplement venture financing in this area. The credit provides up to $1,200 annually for projects such as home energy audits and energy efficiency hot water boilers. Ventures can leverage these credits to bolster the value proposition of financing offerings. They can also focus on some of the non-financing provisions, such as wage and apprenticeship requirements required by the IRA - for example, through employee recruitment platforms, or verification and qualification of installers.
The IRA includes two provisions that mitigate the costs of purchasing a new or used EV for consumers. There are already players leveraging these tax credits to offer EV financing. One is Tenet, which has factored in the credits as well as other unique properties of EVs (such as lower fuel and maintenance costs) to build an underwriting model unique to EVs.
Similar innovation is occurring in EV charging. The 30C credit extends the 30% tax credit for alternative fuel refueling for non-urban and low-income households. There is a similar provision for commercial applications. These will aid the growth of firms such as Treehouse, which bundles the costs of charger installation into its EV loans. Another example is Amperage Capital, which finances EV charging installation for tenants of multifamily buildings.
We expect that provisions in the IRA for commercial fleet transitions to EVs as well as for battery production will also spur innovation amongst climate finance ventures.
We would love your ideas on what other opportunities the IRA might create for climate fintech within the US. We have included a summary of the 16 climate finance initiatives in the IRA here. We have included some initial quick thoughts on potential plays that could be made leveraging the IRA. However, we would love your thoughts and ideas:
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