Home Impact producer Cut Inflation Act Could Lead to Increased Inflation of Energy Services | Rigzone

Cut Inflation Act Could Lead to Increased Inflation of Energy Services | Rigzone


The US Inflation Reduction Act will cause energy services inflation to rise over the next 18 months as incentives for manufacturers struggle to keep up with the increased demand triggered by the bill, says Rystad Energy.

Rystad Energy research shows there will be a positive impact on national energy security and the United States’ position in the global low-carbon supply chain, but significant growth challenges are likely in the coming years. coming.

The bill will provide more than $100 billion to accelerate construction start dates for low-carbon developments, including solar, wind and battery storage. These measures will undoubtedly increase renewable energy installations and near-term demand for US manufacturing, given the focus on domestic production and sourcing.

However, the $60 billion planned for the expansion of manufacturing capacity will struggle to dampen existing inflation or even keep pace with expected growth.

The analytics firm said deflationary clouds have swirled over the U.S. energy industry recently, with the cost of goods and services falling across multiple disciplines. In June 2022, prices fell month over month for civil, mechanical and electrical goods and services, with steel leading the way. The extent to which this deflation will accelerate or stop depends mainly on the economic movements of the world’s biggest economic adversary of the United States, China.

Producer inflation in China is at its lowest in nearly 18 months as manufacturing capacity increases and coincides with a drop in global demand. The country’s short-term stimulus policies will have a significant impact on the outlook for global inflation. If China employs weak expansionary policies, module construction prices for new projects will begin to decline before the end of this year. On the other hand, high expansionary policies – which are now a viable option for policymakers due to recent domestic slowdowns caused by weakening global demand – would raise prices by another 10% this year and only start to fall. than in 2023.

“Cost inflation in the U.S. energy industry has hit operators, manufacturers, and suppliers hard – and the Inflation Reduction Act shows no signs of solving that problem in the near term. The fate of future inflation or deflation of the industry is firmly in the hands of the Chinese, and rightly so, as US policymakers try to build and strengthen a domestic supply chain and try to avoid such reliance on the future,” said Matthew Fitzsimmons, senior vice president with Rystad Energy.

In good news for the US onshore industry, China stocks are unlikely to have an impact on inflation, but they could still be exposed to further price increases. The balance between supply and demand for US shale reigns supreme and will continue to drive up project costs over the next year despite falling commodity prices. For example, increased activity has pushed spot land rig prices to double their 2016 values. Expected E&P activity through next year will push high average rates above $33,000 per day.

Impact of manufacturing in the United States

To spur domestic clean energy manufacturing in the United States, the bill encourages manufacturers with incentives on components needed for clean energy projects. These incentives will help increase the domestic supply of critical components in wind and solar infrastructure, encouraging developers to scale up production and increase clean energy capacity.

The bill’s wind and solar industry incentives reward manufacturers based on a facility’s overall power output rather than component quantity or size. These incentives bode well for reversing runaway inflation in offshore wind component prices by inducing US manufacturers to increase production.

Impact on the labor market

Elements of the Inflation Reduction Act are designed to stimulate the national energy labor market with wage requirements so developers can take advantage of tax credits. The number of oil and gas extraction workers in the United States has increased by 25% in the past 18 months, returning to levels before the Covid-19 pandemic. As a ripple effect, the number of unemployed Americans actively seeking jobs in the oil and gas sector is at its lowest since 2005. While previous wage bonuses saved the day and incentivized workers to contribute to the growth in domestic oil and gas production, the bill will pose new competitive challenges for recruitment in the oil and gas sector.

To receive tax credits for clean energy projects, developers must meet salary requirements set by the Secretary of Labor. Wage rates will be determined by averages based on region and job title to ensure workers also benefit from the legislation. Promoters who underpay workers will have to pay fines to make up for the violations or risk losing their tax benefits.

According to Rystad, these projects require learning thresholds to be met for developers to receive any tax benefits. For projects starting in 2022, 10% of all labor hours spent on construction, modification or repairs must be performed by qualified apprentices. This percentage increases to 12.5% ​​in 2023 and 15% in 2024. Certain functions, including supervisors, superintendents and administrative staff, are excluded from these rules, so in practice they only apply. to employees directly involved in the installation or maintenance of the facilities.

“Increasing the number of apprentices will likely lead to productivity declines for clean energy projects. More inexperienced workers will likely lead to more inefficiencies on job sites. However, investing in a healthy workforce through these requirements will increase long-term productivity and stabilize developer hourly wages as workers graduate from apprenticeship programs and develop the skills needed to lead. to successfully and sustain clean energy projects,” the company explained.

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