IRA Subsidies Distorted Capital Allocation and Created Shortages
The Inflation Reduction Act is an overlooked factor in the shortage of natural gas turbines
The energy market thrives on efficiency, not favoritism. Yet, when the government intervenes, it often disrupts the delicate balance of supply and demand, leading to capital misallocation and unintended consequences. The Inflation Reduction Act (IRA) exemplifies this phenomenon. By favoring renewable energy through subsidies and tax incentives, the IRA has diverted capital away from nonrenewable energy, distorting investment patterns and likely contributing to a national shortage of natural gas turbines.
Additionally, the IRA’s subsidies have laid the groundwork for the Environmental Protection Agency’s (EPA) regulatory overreach, enabling the agency to justify new emissions standards based on commercially unproven technologies. The EPA’s proposed power plant rule, often referred to as "CPP 2.0," relies on IRA-backed subsidies to mandate costly carbon capture and low-GHG hydrogen technologies. By artificially lowering the perceived costs of compliance, these subsidies have empowered the EPA to impose regulations that further discourage natural gas expansion and reinforce the market distortions created by the IRA itself.
While the rapid expansion of data centers and emerging AI infrastructure explains the surge in demand for reliable power generation, it doesn’t explain the decline in natural gas capacity additions, which have occurred since 2022.
A market economy operates on a profit-and-loss system, guiding entrepreneurs toward the most efficient investments that align with consumer needs. When unimpeded, price signals reflect the true scarcity of resources and direct capital accordingly. However, when the state intervenes by subsidizing one sector over another, it distorts these signals, leading to inefficient resource allocation.
The IRA’s subsidies for wind and solar energy have artificially boosted investment in these sectors, not because they are inherently more efficient, but because government incentives have made them comparatively more attractive. This has had a twofold effect: First, it has discouraged investment in natural gas infrastructure by making it less financially viable in a tax environment skewed toward renewables. Second, it has created an artificial boom in renewables that may not be sustainable without continued government support.
The impact of these distortions is evident in the data. Although gas-powered energy generation is projected to grow in the coming years, new gas-fired power generation has nearly halved between 2022 and 2024 (see figure 1 below).
Observing planned net energy capacity additions, we see that planned increases in natural gas capacity declined sharply after the disbursement of IRA subsidies in January 2023 (see figure 2 below). In fact, net capacity additions turned negative for most of 2023 and 2024 following the disbursement of green energy subsidies, as the planned retirement of natural gas production outpaced planned expansions.
Energy Investment After the IRA: Analysis of Planned Capacity Changes
Applying a linear regression to EIA data, we can observe the impact of IRA subsidies on planned net capacity for natural gas and renewable energy. Using a binary post-IRA indicator (0 for pre-IRA, 1 for post-IRA) as the independent variable, the results revealed a significant decline in planned natural gas capacity, with an average reduction of 7,182 MW after the IRA subsidies took effect in January 2023 (p < 0.001). The model's R-squared value of 0.797 suggests that nearly 80 percent of the variation in planned capacity is explained by the policy change, suggesting that the IRA had a meaningful impact on natural gas investment.
Conversely, planned renewable capacity experienced a significant increase of 9,684 MW post-IRA (p < 0.001), with an R-squared value of 0.762, indicating that over 76 percent of the variation in renewable investment is linked to the policy shift. These findings suggest that IRA subsidies have substantially influenced energy investment decisions, accelerating investment in renewable energy while discouraging natural gas expansion. Figure 3 below shows the trend in planned natural gas investment both pre-and-post-disbursement of IRA subsidies.
Using a Markov Switching model to identify structural shifts in natural gas investments, the red-shaded region shown in figure 4 above reveals a distinct change in natural gas investment. This shift aligns with the starting period of IRA green subsidy disbursements, suggesting a regime change in investment behavior.
Multiple Breakpoint Analysis
A multiple breakpoint analysis using SARIMA residuals and the Augmented Dickey-Fuller (ADF) test identified highly significant structural breaks in both natural gas and renewable capacity. The results revealed an exceptionally strong statistical signal for natural gas capacity (p = 1.74e-18) and renewable capacity (p = 0.00024), confirming substantial shifts in investment patterns. Notably, these breakpoints closely corresponded with August 2022, when the IRA was signed into law, and January 2023, when subsidies were disbursed.
These findings suggest that the disbursement of IRA green energy subsidies likely influenced energy investment decisions. The alignment of structural breaks with key IRA milestones suggests that investors responded quickly to both the policy announcement and the subsequent financial incentives. These results demonstrate that government subsidies and policy changes play a critical role in shaping market behavior, diverting capital toward renewables while disrupting planned natural gas expansion.
The Consequences of Government-Directed Investment
One of the most visible consequences of this capital misallocation is the shortage of natural gas turbines. However, as the market responds to the reality that renewables alone cannot meet the growing electricity demand, the suppressed investment in natural gas has led to an insufficient supply of turbines, causing delays and cost increases in the energy sector.
This is a textbook example of the knowledge problem that plagues government-directed investment. Policymakers, in their effort to accelerate the transition to renewable energy, lack the necessary information to efficiently allocate resources across an economy as complex as the energy sector. The belief that government subsidies can drive an optimal energy transition overlooks the dynamic, decentralized decision-making process that occurs in a free market.
A market-based approach to energy would allow renewables, natural gas, and other sources to compete on a level playing field, without the artificial distortions introduced by government incentives. If renewables were truly the superior energy source, they would attract investment without requiring large-scale subsidies. Instead, the IRA has created an energy landscape where short-term political calculations have overridden the development of a long-term energy infrastructure.
The natural gas turbine shortage is merely one of many symptoms of a broader problem: when the state intervenes in the market, it sets off a chain reaction of unintended consequences that ripple across industries. Just as past government interventions have resulted in price distortions, resource shortages, and misallocated capital, so have the IRA’s energy policies produced inefficiencies that undermine the very goals they set out to achieve.
If policymakers are truly committed to an efficient and sustainable energy future, they must recognize the limits of central planning and allow the market to function freely. Only through open competition and decentralized decision-making can the most effective energy solutions emerge and the distortions caused by subsidy-driven investment be corrected.