Climate law may revolutionize US cleantech manufacturing. Here’s how

Editor’s note, August 16: This story was originally published on August 11, 2022. It has been updated to note President Biden’s signing of the bill.

The $369 billion in climate and energy funding in the Inflation Reduction Act isn’t just the biggest-ever U.S. investment in combatting climate change. It also promises to deliver for the first time a comprehensive U.S. clean energy industrial policy — a plan to transform the country from a laggard to a leader in making the technologies vital to combating climate change.

So say experts involved in crafting the core features of roughly $60 billion in tax credits and lending authority that the act will direct to turbo-charging U.S. clean energy industries.

And unlike the limited clean energy manufacturing grants and investment tax credits of the Obama-era recovery package of 2009 — the last major federal effort to jump-start a domestic clean energy industry — the Inflation Reduction Act’s core clean manufacturing program is designed to last a decade, scale up as companies increase production volume and efficiency, and support development across the clean energy supply chain.

That core program is called the 45X Advanced Manufacturing Production Credit, after the section of the tax code it will alter. According to the congressional Joint Committee on Taxation, it will direct roughly $30 billion over the next 10 years to support the production of components of solar panels, wind turbines, inverters and batteries for electric vehicles and the power grid, as well as to promote mining and refining the critical minerals that go into these products. (The other half of the clean energy manufacturing money consists of $10 billion in new investment tax credits and $20 billion in loans for clean vehicle manufacturing — more on those provisions in the last section below.)

But the total amount of 45X tax credits flowing to companies could well exceed that $30 billion estimate, according to Mike Carr, a partner at consultancy Boundary Stone. He worked with Democratic senators to craft the Solar Energy Manufacturing for America (SEMA) Act, which was largely incorporated into the Inflation Reduction Act and also became the model for the 45X program.

“We’re starting to see [companies] go back to scale up their projected investment by 50 percent or more” based on the tax benefits they expect to see from the 45X program, he said in an interview. ​“People are going to tap out their investment reserves and try to go as big as possible.”

A production tax credit designed to compete with China

The reason manufacturers might be inspired to go big is that the 45X production tax credit, or PTC in tax lingo, doesn’t provide a limited tax incentive based on how much a company invests in facilities to make or refine the products in question. That’s how previous clean manufacturing investment tax credits, like the Obama-era 48C program, were set up.

Instead, the credits in 45X are based on how much equipment or material is produced, Carr explained — a structure that allows federal support to grow with production.

Solar modules and cells will respectively receive 7 cents and 4 cents per watt of generation capacity, for example, while crystalline silicon wafers and solar-grade polysilicon will receive their own incentives based on volume of production.

Similar structures will offer per-watt incentives for wind turbines and their components and per-kilowatt-hour incentives for battery cells and modules. Other key products, like the specialized ships that install offshore wind turbines or the critical minerals needed for batteries, solar panels and electric-vehicle drivetrains, will earn credits for 10 percent of the costs of producing them.

That makes 45X ​“a policy that incentivizes not only building the facility, but building it at a globally competitive scale,” Carr said.

This design grew out of Carr’s prior experience at the Department of Energy during the Obama administration and his previous eight years as senior counsel for the Senate Energy and Natural Resources Committee, where his ​“beat was the edges of industrial policy,” he said.

About two years ago, Boundary Stone started working with South Korea–based Qcells and Michigan-based Hemlock Semiconductor, two companies targeting growth in the solar sector. They wanted ​“to build everything they could in the United States,” he said. The challenge was ​“China’s very real and explicit desire to dominate the entire supply chain.”

China has spent more than a decade orchestrating government policies that have driven an estimated $50 billion in solar manufacturing investment, erected trade barriers against non-Chinese suppliers, and secured its dominance across most of the global solar supply chain. Would-be U.S. silicon competitors like Hemlock have found themselves locked out of that market, while solar PV manufacturers like Qcells have struggled to justify investments in U.S. production in light of China’s monolithic position.

During the Obama administration, Hemlock and many other U.S. solar manufacturers tapped 48C tax credits to build facilities, Carr noted. But ​“they’d all been sort of undersized compared to what China was doing and lacked the means of support” beyond getting the facilities built, he said. All have since been idled or shut down.

SEMA’s tax credits for each unit of production were designed specifically to make up the difference between domestic production costs and competing costs from China, he said. If manufacturers could have per-unit credits ​“for at least five to eight years, they knew they could pay off that investment.”

That’s a radical departure from prior U.S. solar industry policy, Abigail Ross Hopper, president and CEO of the Solar Energy Industries Association, said in a Tuesday press conference about the Inflation Reduction Act. ​“The production tax credit — the ongoing support for producing solar products — is what really differentiates it from other efforts we’ve seen at other points in our history.”

Designing a solar manufacturing policy from the ground up 

Scott Moskowitz, head of market strategy and public affairs for Qcells, highlighted some of the 45X tax-credit features that could help bolster his company’s U.S. investments.

First, ​“it’s trying to incentivize companies to do multiple parts of the supply chain,” he said. Separate tax credits for polysilicon, ingots, wafers, cells and panels can add up to significant support for a robust solar manufacturing sector, whether the credits are used by companies seeking to vertically integrate their production or by one domestic manufacturer selling to another up the supply chain.

Qcells is already investing more than $170 million to double its solar-panel manufacturing capacity at its plant in Dalton, Georgia. Its parent company has also invested $160 million in REC Silicon’s now-idled Washington state polysilicon production facility, with the intent to ​“get it back up and running by next year,” Moskowitz said. In the longer run, ​“we intend to make an investment across the entire solar supply chain,” he said — a goal shared by only a handful of companies investing in North American solar production.

Moskowitz also pointed to the structural elements of the 45X credit that encourage innovation and efficiency. Credits are tied to productive capacity of the panels and cells produced rather than their cost, which encourages companies to strive to make higher-efficiency panels and removes the incentive to boost prices to increase credits.

Carr noted that 45X has two key incentives for rapid growth. The first is an expiration date — the full tax credits are available through the end of 2029 and then drop by 25 percent per year to zero over the next three years. That encourages companies to scale quickly to maximize the value of the credits they can get before they are gone.

The second is a provision that makes 45X tax credits available as direct payments from the federal government for the first five years they’re claimed so that companies can receive their full value even if it exceeds the amount of federal taxes they owe. That relieves companies of the burden of setting up tax-credit monetization structures to recover the full value of those credits and turns the credits into ​“a lifeline that pushes all the incentive to building big and building fast,” he said.

From solar to wind, batteries and other clean energy industries

As Democrats in Congress negotiated their climate and energy legislative policy over the past year, the concepts laid out in SEMA ​“started looking like the right approach for a bunch of other things,” Carr said. ​“It didn’t take long for the House to add wind technologies” to the 45X list.

“Next, we started talking about what to do about battery manufacturing,” he said. Senator Joe Manchin, the West Virginia Democrat whose flip from opposing to supporting the party’s climate agenda made the Inflation Reduction Act possible, ​“focused everyone’s attention on that, with his belief that China would be dominant in the battery supply chain.”

The battery tax credits in the act could be a significant boost to U.S. companies trying to compete with China, Princeton professor and energy-modeling expert Jesse Jenkins said during a podcast last week hosted by Canary Media Editor-at-Large David Roberts. The credits will amount to about 30 percent of the cost of battery cells and complete batteries, as well as 10 percent of the value of the electrode active material and the critical minerals that go into batteries, such as lithium and cobalt, he said.

Much like solar panels, batteries have a complex supply chain, said Lachlan Carey, senior associate at nonprofit climate think tank RMI. ​“A critical minerals producer faces a very different industry and cost structure than does the battery pack assembler. There need to be relatively targeted incentive structures for those different phases.” (Canary Media is an independent affiliate of RMI.)

RMI’s U.S. program worked alongside DOE, Benchmark Mineral Intelligence, BloombergNEF and academic partners to provide Senate Democrats with analysis that underpinned production-tax-credit structures to address these differences.

One key goal of providing tax credits along the battery supply chain is to encourage ​“vertical integration and geographic clustering,” Carey said. Co-location of companies playing different roles in battery production reduces transportation and logistics costs, he said. It also allows companies to share ideas and coordinate production more easily than if they’re across the world from each other.

Carr noted that this ​“innovation” effect has spurred support for the 45X policy from U.S. companies that aren’t directly reliant on China. U.S. solar manufacturer First Solar, for instance, makes thin-film solar panels that don’t use silicon, he said — but it does want to support a vibrant solar technology sector.

“When you have a single state that’s completely dominating the field…they control price and flatten out the curve of learning,” he said. ​“They also don’t have to be very receptive to new technologies.”

Nathan Iyer, a senior associate with RMI’s U.S. program, added that the tax-credit values for individual technologies and components were designed to make them competitive with ​“how much these things cost to produce in China versus the U.S., considering that they have huge economies of scale and huge subsidies. That eliminates China’s cost advantage overnight.”

Lindsay Gorrill, CEO of U.S.-based lithium-ion cell manufacturer Kore Power, agreed that the Inflation Reduction Act’s tax credits — $35 per kilowatt-hour of battery cell and an additional $10 per kilowatt-hour for completed battery packs or modules — could be a ​“significant” boost to domestically produced batteries. Kore now manufactures in China, but it’s in the midst of lining up financing to build a factory in Arizona that will produce up to 12 gigawatt-hours of battery cells per year.

“The key is to drive the supply chain,” Gorrill said. ​“If you have cell and battery production in or near the United States, that will drive down cost.” While Kore expects its U.S.-made battery cells to be cost-competitive with cells from major Asian manufacturers, ​“we’re ahead of them if you start to add in” the benefits of being able to tap into a broader domestic supply chain.

Which industries will get the biggest boost?

Once the Inflation Reduction Act is signed into law, it’s still uncertain how and when its manufacturing incentive structures will be put into full effect — and what impact they will have on U.S. clean energy manufacturing competitiveness.

On the first point, the Internal Revenue Service will need time to develop rules and guidance for how the 45X tax credits work. But those rules should be far more straightforward to implement than the investment tax credits that require DOE or another agency to pick recipients of a limited amount of money from a large pool of applicants, Carr noted.

In the longer run, China’s dominance of the solar industry will remain an obstacle to U.S. competition, Carey said. ​“The transportation cost of shipping solar panels to the U.S. is very low, and the economies of scale that China has built in the supply chain may overwhelm the benefits” from the bill’s domestic solar supports, he said.

Other industries may be better positioned to thrive under the Inflation Reduction Act. ​“I think you could see a really significant increase in wind power manufacturing, because of the transportation costs involved,” he said. Wind turbines and towers are much heavier than solar panels, and the tens of gigawatts of offshore wind being planned for U.S. coastlines will need the support of specialized ships and port facilities, he noted.

Batteries are another industry well positioned for dramatic growth, Carey said. U.S. automakers and battery manufacturers are planning more than $20 billion in North American lithium-ion battery production facilities in an effort to close China’s commanding lead in global battery market share.

The demand for domestically produced batteries and battery materials will only grow under the Inflation Reduction Act’s EV tax-credit provisions, he noted. For EVs to be eligible for credits of up to $7,500, their batteries must contain a certain portion of components and critical minerals from the U.S. or nations that have free trade agreements with the U.S.

While automakers are concerned that this may bar many vehicles from being eligible during the first few years of the tax credits, it could also provide a boost to U.S. minerals and battery production, Jenkins noted.

Other components of a clean energy industrial policy

Both Carey and Iyer emphasized that the 45X tax credits aren’t the only manufacturing incentives in the Inflation Reduction Act. It will also make $10 billion available in investment tax credits for a wide range of industries; companies could apply for them in lieu of production tax credits. Of that, $4 billion is reserved for investments in ​“energy communities” facing unemployment and economic hardship from the loss of fossil-fuel-related industries, Iyer said.

The act will also authorize tens of billions of dollars in new lending from the DOE’s Loan Programs Office, including $20 billion in loans to build new clean-vehicle manufacturing facilities, Iyer said. Loans from this DOE office during the Obama administration have been credited for proving the financial viability of U.S. utility-scale wind and solar projects and EV manufacturing, and a resurgence of the loan office under the Biden administration has led to billions more being proposed for EV battery manufacturing, battery materials processing and low-carbon hydrogen production.

Other legislation will play an important role too, Carey said. Last year’s infrastructure bill is directing tens of billions of dollars into EV charging, transmission grids and hubs for hydrogen and carbon capture, among other important investments. And the CHIPS and Science Act signed into law by President Biden this week, alongside its $76 billion in subsidies and tax credits to boost domestic semiconductor production, also contains tens of billions of dollars to fund technology research and development, including R&D on advanced batteries, he said.

“Really, I think of all of this as industrial policy — and I think that’s the best framework we have for understanding what Congress and this administration are trying to do,” Carey said.

In large part, the industrial-policy push is intended to compete with one country: China. The 45X tax credits, in particular, were designed for this purpose. They align with the Biden administration’s broader efforts to secure U.S. supplies of products seen as vital to national security, including lithium-ion batteries and critical minerals, sectors now dominated by China.

The U.S. has ongoing solar trade disputes with China and has accused the country of human rights abuses and using forced labor in industries including solar production. But even leaving aside these and the many other tensions between the U.S. and China, there are good reasons for the U.S. to expand its internal capacity for meeting its clean energy needs, Carr said.

“Just the sheer volume of panels and batteries and wind turbines and everything else that has to be generated can’t just come from China,” he said. ​“China could take all its existing capacity and use it themselves to meet their climate targets.”

“There was a certain fatalism that had taken hold around a lot of these technologies, that China will always beat us to the punch,” Carr said. ​“Frankly, if we can change people’s minds a little around that, then that will be a huge accomplishment in and of itself.”