In April, Vice President Kamala Harris visited Qcells, a solar panel factory in Dalton, Georgia. announce an early triumph of the Inflation Reduction Act: Summit Ridge Energy, one of the nation’s largest developers of community solar projects, would buy 2.5 million U.S.-made solar panels.
The subsidies under the new law matched the price of imported panels, allowing companies to fight climate change and support American manufacturing in one fell swoop.
A month later, the Treasury Department issued guidance that would functionally require solar cells — not just panels — to be made in the United States to ensure Summit Ridge gets its 10 percent tax credit on facilities that use them. Qcells won’t be able to produce the cells until the end of 2024, so Summit Ridge is trying to find cheaper components for projects currently in the pipeline.
“At this point, there’s not a single solar manufacturer that’s fully qualified to do this, which makes it difficult and actually starts to chill investment,” said Leslie Elder, Summit Ridge’s vice president of policy and regulatory affairs. “Now we have to reevaluate based on what the pencil can do.
On paper, the Inflation Reduction Act is transformative for electricity generation in the United States.
The law offers tax credits that could cover up to 70 percent of the cost of a renewable energy project if it checks several boxes designed to support American workers and communities. A new analysis finds that these incentives more than offset the additional costs of using domestic goods and paying prevailing wages.
But guidance from the Biden administration — foreshadowing formal rules — has raised concerns among energy companies that some of the credits may be difficult, if not impossible, to use, at least in the near term. The resulting frustration is characteristic of the current phase of climate action: an eye-straining haze of technical rulemaking that reflects the tension between urgency and ensuring that the benefits of the energy transition are widely shared.
Wally Adeyemo, the Deputy Minister of Finance, expressed his belief that in combination the rules would achieve this balance.
“We are very clear about the strategic objectives and we are already seeing their impact in terms of the economy,” Mr Adeyemo said. “It’s not about one rule. It’s about the ecosystem of rules that have been created under the IRA that put us in a position to go from being a country that has under-invested in the clean energy transition to being at the front of the pack.”
Analysis, supervised by professors at Princeton and Dartmouth with experience modeling the impacts of climate policy, finds that an incentive aimed at American manufacturers makes domestic solar panels more than 30 percent cheaper to produce than to import them. Incentives required of clean energy developers who meet labor standards and use domestic content could reduce the total cost of utility-scale solar power generation by 68 percent and onshore wind power by 77 percent.
The study was funded by the BlueGreen Alliance, a partnership of unions and environmental groups. The organization has pushed for elements of the Biden administration’s climate agenda that support domestic manufacturing, especially in places affected by globalization, automation and fossil fuel depletion.
“Until now, the moral and the business case have not always aligned,” said Ben Beachy, the organization’s vice president of industrial policy. “The IRA changes that by offering developers an airtight business case for supporting high-paying jobs and a stronger, fairer U.S. manufacturing base.”
The impact of the climate bill is already apparent, with 47 new battery, solar panel and wind turbine plants announced since its passage. according to American Clean Power, a trade association. Additional analyses, including a paper Economists and engineers from the Electric Power Research Institute, the Federal Reserve Bank of Minneapolis and the University of California at Berkeley found that the law would support more low-emissions projects eligible for unlimited tax credits than expected, potentially costing governments substantially more than before estimates.
But the BlueGreen Alliance study shows considerable uncertainty about the impact of rising material costs as demand for domestically sourced aluminum, steel and concrete grows, and does not take into account the profits manufacturers could make before more competition enters the market. It also projects that 1.6 million more jobs will be available in wind and solar by 2035 than if the IRA had not passed — more than three times the current employment base — but does not model whether the labor supply will increase.
“I think some of their key results are highly optimistic and that they probably underestimate some of the economy-wide costs associated with this scale of clean energy deployment,” said Daniel Raimi, a fellow at the Resources for the Future think tank, which reviewed the analysis.
At the same time, clean-energy companies are digesting the administration’s guidance on how the tax credits will be allocated, seeing some as broken ways that could slow deployment.
Get a bonus of up to 20 percent for developers who locate projects in low-income communities (which is separate from the 10 percent bonus for locating in areas struggling with the transition away from fossil fuels). The Ministry of Finance, which wants to ensure that credits lead to projects that would not otherwise arise, only grants them to projects that have not yet been completed. Solar system installers would have to sell the system and then wait to see if they get credit before starting work.
“I think we’re going to lose some development in low-income communities this year because of the way the credits were structured,” said Sean Gallagher, vice president of policy for the Solar Industry Association. “Either the developer absorbs the difference, or they have to go back to the customer to renegotiate the price, or the project doesn’t happen.”
An even more pressing problem is an additional 10 percent for using domestically produced components.
The manufacturers are concerned that although they actually require the solar cells to be made in the United States to qualify for the credit, the Treasury Department has not required their base component — a wafer, a thin slice of silicon that conducts energy — to be manufactured domestically. This could allow Chinese factories to continue to dominate key parts of the supply chain.
“The prices they end up getting from developers are undercut because the Chinese wafer makers can roll backsaid Mike Carr, executive director of the Solar Manufacturers Coalition for America.
Developers are upset because getting the credit will in most cases require a complex calculation of the cost of each component to reach the 40 percent US-made content threshold, and manufacturers are reluctant to release sensitive pricing information. Many also expected a more gradual phase-in, which would allow some of the current U.S. factories to qualify for the credit, while planning for stricter requirements.
Brett Bouchy is the CEO of Freedom Forever, a residential solar installation company that did more than $1 billion in business last year. He planned to build a $100 million, 1,000-person solar module and cell manufacturing plant in Arizona to supply his own operations. After the guidelines came out, he put those plans on hold – he couldn’t be sure his panels would qualify for home content credit except Manufacturers have 7 cents per watt available.
“We can’t provide that,” Mr. Bouchy said. “It’s not a benefit because that 7 cents will eat up with increased labor costs in the US. Why would you invest $100 million if you really can’t get a return?
Those who support the administration’s approach stress that bonus tax credits are just that: bonuses, not requirements to offset the costs of going the extra mile. Developers already receive a 30 percent base incentive – and at least 10 years of security – for paying prevailing wages and employing apprentices, which most don’t find too difficult.
Todd Tucker, director of industrial policy and trade at the Roosevelt Institute, said high standards are necessary to assure investors that new American factories will have enough orders to stay in business.
“Once you start to indicate that you’re going to allow some flexibility, that inherently dampens the market signal,” he said.
The Treasury Department is still commenting on the rules for all loans, and industry trade associations are racing to change them. Still, most companies argue that the Inflation Act is a powerful force for decarbonization overall, and that companies have a strong incentive to seek every credit it allows.
“It’s amazing how mind-set it is when people start throwing away dollars like that,” said Sheldon Kimber, chief executive of clean energy developer Intersect Power. “They’re asking us to do a difficult thing, but there’s a lot of money in it for us.”