Manufacturing vs. deployment: The clean energy tax-credit conundrum

Canary Media thanks KORE Power for its support of our special series on clean energy manufacturing.

Tax credits are the mechanism driving the nascent U.S. clean energy manufacturing boom. The Inflation Reduction Act has unleashed hundreds of billions of dollars in tax credits for companies that make solar panels, wind turbines, batteries and other key technologies in the U.S., as well as for companies that mine, process, recycle and put together the constituent components of these vital building blocks for a decarbonized U.S. economy.

The flood of investment in this domestic cleantech renaissance is startling and unprecedented, as we cover in our special series, with multibillion-dollar projects being announced on almost a weekly basis. Over $70 billion in clean-technology manufacturing investment was announced between the law’s passage and the end of May, Canary Media found. Some analysts project that the flow of federal tax credits for making and deploying clean energy in the U.S. could exceed $1 trillion through 2040.

But beneath the surface, disagreements are simmering about how the federal government should write the rules that will determine which projects are eligible for tax credits and which are not. One big dispute: What should count as ​“made in America” for a key tax credit that rewards the use of domestic material in renewable energy projects?

The underlying tension is that the Biden administration wants to do two challenging things simultaneously. One, it wants to quickly deploy a massive amount of clean energy technologies. Two, it wants to quickly build up the domestic industries that are manufacturing those clean energy technologies.

The Inflation Reduction Act includes a host of federal tax credits, grant programs and loan guarantees to boost capital investment to help U.S. manufacturers compete on the international stage. The keystone of these supply-side incentives — or incentives aimed at boosting domestic production capacity — is the 45X production tax credit, which is available to producers of solar, battery, inverter, wind and input materials. These tax credits were designed to make U.S.-made products cost-competitive with foreign products — and in the case of solar and batteries, specifically Chinese products. The Treasury Department is gradually releasing rules for how these and other IRA tax credits will be implemented.

But some companies investing in making solar and battery technologies in the U.S. fear that these supply-side tax credits aren’t enough on their own. And they warn that proposed federal guidance on a key IRA policy meant to encourage U.S. companies and consumers to buy U.S.-made products — a 10 percent boost or ​“adder” to the tax credits for deploying clean energy and batteries for projects that use domestic content — may be too weak to prevent Chinese competition from flooding the market with underpriced products.

Conversely, companies deploying the technologies, such as clean-energy project developers, say that the new domestic-content rules from Treasury risk choking off the supply of affordable products needed to enable rapid clean-energy growth. They point out that it will take years to develop the U.S. supply of key segments of the solar and battery supply chains, and argue that it may do more harm than good to penalize domestically made end products like solar panels and batteries that can’t currently be built without foreign-made materials or components.

Trying to find the balance between these competing priorities is where things get complicated. ​“You need both of these to work,” said Mike Carr, who helped develop the solar-manufacturing production-tax-credit legislation that eventually became the Inflation Reduction Act’s 45X tax-credit program. He’s a former Obama-era deputy assistant secretary at the Department of Energy and former senior counsel for the Senate Energy and Natural Resources Committee.

Now, as executive director of the Solar Energy Manufacturers for America Coalition, he’s worried that Treasury’s rules may be leaning too far in the direction of placating companies that want looser ​“Made in America” standards to increase the number of products eligible for domestic-content tax credits. Carr believes this approach could irreparably harm a U.S. solar manufacturing supply chain still in its infancy.

Carr points out that the value of the 45X tax credits begins to phase down in 2030; the program terminates at the end of 2032. That gives U.S. manufacturers limited runway to get up to speed and gain a foothold against foreign competition that’s already invested hundreds of billions of dollars in production capacity.

“With solar and batteries, you have to recognize that China has a multi-decade and multi-hundreds of billions of dollars of investment head start,” Carr said.

Is the supply-side boost enough? 

To be clear, the 45X tax credits supporting U.S.-based manufacturers are already driving a historic wave of investment from companies trying to propel solar, wind and battery manufacturing in the U.S.

“It’s been a huge accelerant,” said Scott Moskowitz, head of market strategy and public affairs for Qcells, the South Korea–based solar manufacturer that’s investing $2.5 billion in U.S. factories, including the country’s first plant that will turn raw polysilicon into finished solar cells. U.S. solar manufacturing investment since the Inflation Reduction Act’s passage has dramatically outpaced investment over the previous decade, he said.

Just how valuable these tax credits can be is laid out in the latest earnings report from First Solar, one of the few U.S.-based solar-panel companies with significant existing domestic manufacturing capacity as well as plans to invest $1.2 billion in expanding it. As part of its first-quarter 2023 earnings report in April, First Solar revealed that it expects to earn from $660 million to $710 million in 45X tax credits — nearly 90 percent of its forecasted operating income for the entire year.

Similarly generous 45X tax credits for the production of solar inverters and for batteries and their constituent materials have spurred huge levels of investment in those sectors as well.

It’s obvious that the 45X tax credits are already working to bring new manufacturing capacity to the U.S. But it’s less clear how the 10 percent tax-credit adder for clean energy projects using U.S.-made equipment and materials will influence the growth of the solar and battery industries.

Daniel Wolf, policy manager at the American Council on Renewable Energy, is optimistic. ​“I do think the 45X really will work in tandem with the 10 percent domestic-content adder. I think that’s how the people who wrote the IRA envisioned it as well — the domestic-content provision creating demand and 45X creating supply.”

The question of whether domestic-content rules will be effective in spurring production of the raw materials and components that make up solar panels and batteries is causing a schism among certain sectors of the U.S. clean technology industry. It’s come to a head with the Treasury Department’s issuance of guidance last month on how the domestic-content credits for clean-energy and energy-storage projects built in the U.S. will work.

Solar project developers can tap a 30 percent investment tax credit available for clean energy projects, and they’re eager to add the extra 10 percent bonus for using domestically produced equipment on top. That adder is an important piece of the domestic-manufacturing incentive structure, according to Carr of the Solar Energy Manufacturers for America Coalition. ​“You want as many years of 45X as you can get, but it’s not the sustaining proposition. Once [a manufacturing facility is] built here, there needs to be an incentive to keep those jobs here.”

So the fine print in the rules about what makes a product eligible to qualify as ​“domestic content” is vitally important. According to Carr’s group, last month’s Treasury guidance falls short on that front.

To win the tax credit, the guidance requires 40 percent of manufactured products and components, measured in terms of cost, to be made in the U.S. For the solar sector, it also defines the eligible categories of manufactured products as the inverters and tracking systems used in utility-scale solar projects and, importantly, solar modules, or the completed panels that are deployed in the field.

But significant parts of a final assembled solar module — including the silicon wafers used to manufacture the solar cells that make up roughly 30 percent of the cost of completed modules — could theoretically come from overseas.

The U.S. currently cannot manufacture enough solar cells to match skyrocketing domestic demand. Nor can it make enough of the silicon ingots and wafers that are the constituent ingredients of solar cells. It will take years for companies like Qcells and others investing in these ​“upstream” solar supply chains to bring production up to the volumes needed.

Enel North America is also in the midst of lining up domestic supply for its newly announced solar cell and module factory in Oklahoma, said Giovanni Bertolino, head of Enel’s 3Sun USA solar manufacturing affiliate. The company is ​“negotiating terms right now” with U.S.-based polysilicon producers and ​“other parties developing initiatives to produce ingots and wafers” to line up domestic supplies for its plans to make 3 gigawatts of modules per year when it opens next year and eventually expand to 6 gigawatts.

“In China, you have access to a full ecosystem of suppliers and vendors and partners and workforce,” Bertolino said. ​“Here in the United States, we have to start that at all stages of the supply chain. It’s a massive investment, and a very complex one.”

Looser requirements on which parts of the solar supply chain must come from domestic sources may undercut U.S. investment in those sectors, Carr warned. ​“Polysilicon, ingot and wafer are the most capital-intensive parts of this chain,” he said. ​“Every company is very scared of building these very capital-intensive projects. Everyone knows what China will do — they’re going to cut prices and try to undermine these investments.”

Carr suggested that the Treasury Department should consider a ​“phase-in structure” for more stringent domestic-content requirements, ​“so by 2026, when we expect widespread cell and potentially wafer availability, we’ll have guidelines” that reward project developers and installers for using U.S.-made precursor products. ​“There’s a lot of opportunity to change their path forward on this.”

U.S. battery industry companies are also eager for domestic-content rules that bolster their particular role in the supply chain. 

Today, more than three-quarters of lithium-ion battery cathodes and their precursor materials come from China, while U.S. cathode production makes up less than 1 percent of the world’s total capacity. ​“That represents a major national-security concern and supply-chain concern,” said Mary Cronin, senior vice president of government affairs at 6K, a U.S.-based company with technology aimed at reducing the cost and environmental impact of turning raw minerals into battery-ready cathode materials.

6K has a $50 million DOE grant to build its first full-scale production facility and prospective partnerships with U.S. battery manufacturers including Michigan-based Our Next Energy to bolster its goals of becoming a primary source of cathode materials for U.S. battery production.

“We have a lot of fundraising to back us up. But the investments from the government are really critical,” she said. ​“You see the amount of investment that China’s government has made into its battery industry. We can never compete with that level of investment.” That means policies need to offer strong support to U.S.-made battery materials to overcome China’s current advantages.

“If we can’t build it up now, we’ll probably never be able to compete on cost,” she said.

Matching supply to solar demand 

But from the perspective of trade organizations such as the American Council on Renewable Energy, the American Clean Power Association and the Solar Energy Industries Association, which represent companies that deploy solar systems as well as those that make them, last month’s domestic-content guidance has already created confusion and is potentially limiting companies’ options for securing domestically produced products.

“It’s fair to say that the Treasury Department has set out a fairly restrictive path to claiming this bonus credit in the short term,” Abigail Ross Hopper, president and CEO of SEIA, said during a May webinar. Challenges include complex rules on which parts of the capital and labor costs may be included in the final tally of non-domestically-produced components of products made in the U.S., she said, including rules that may require suppliers to provide more details about the cost breakdown of materials and labor than they would want to.

“Are suppliers going to readily provide only direct materials costs, or only direct labor costs, to project developers?” asked Ben Norris, SEIA’s senior director of regulatory affairs. He suggested that suppliers won’t be willing to break out those costs since they’re closely held competitive trade secrets.

Ross Hopper noted that Treasury’s guidance is ​“intended to send an unambiguous signal to industry that we must continue to onshore the solar supply chain as soon as possible,” and her organization supports that goal.

But until the U.S. production capacity of solar cells and their constituent materials catches up to U.S. panel production capacity, developers will have a hard time meeting the guidance’s 40 percent target, said Justin Baca, SEIA’s vice president of markets and research.

Raghu Belur, Enphase’s co-founder and chief products officer, noted that domestic inverter manufacturers face their own difficulties in sourcing key components such as semiconductors from domestic sources. ​“We want to move a substantial portion of our supply chain here as well,” he said. ​“But we can’t do it on Day One.”

Instead, inverter makers like Enphase will rely on semiconductor manufacturers such as Taiwan’s TSMC to invest in U.S. production capacity to supply that domestic content, he said. Last year’s passage of the CHIPS and Science Act, aimed at spurring domestic semiconductor production, is already driving significant investments in that capacity, he said.

​“There will be a period over which we want to see effort by the industry to move components onshore as well,” he said. ​“We’re OK with that, as long as there’s a decent runway over the next two to three years.”

Similar challenges face companies seeking to maximize the domestically produced content of batteries in order to meet domestic-content requirements. Jay Turner, professor of environmental studies at Wellesley College and author of Charged, a book on the history of batteries, has tracked nearly 331 gigawatt-hours of new battery production capacity announced for the U.S. since the Inflation Reduction Act became law. He forecasts that annual manufacturing capacity will approach 1,000 gigawatt-hours by 2030.

“We’ve seen just how nimble the manufacturers are,” Turner said. ​“But that’s not matched further upstream,” in terms of U.S. capacity for mining lithium, graphite, nickel and other key battery inputs and processing them into battery-ready materials and components.

“Those are few and far between,” he said. ​“It’s clear that if we’re going to see compliance with the IRA tax-credit provisions for critical minerals, much of those are going to come from free-trade partners, not from the U.S.”

Read a related story about how Inflation Reduction Act tax credits are helping to ramp up EV manufacturing in the U.S.

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