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The Inflation Reduction Act could revive solar manufacturing in the US

The largest climate investment in U.S. history marks the dawn of an actual domestic industrial policy for solar power and other clean energy technologies.

An employee performs quality control on the assembly floor at the Qcells solar panel manufacturing facility in Georgia. (Dustin Chambers for The Washington Post via Getty Images)
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Editor’s note, August 12: This story was originally published on August 5, 2022, and has been updated to reflect passage of the bill by Congress.

Now that the Democrats’ major climate and tax bill has been passed, the United States might actually end up with an effective industrial policy for the clean energy and electrification sectors. 

The Inflation Reduction Act is a clean-power policy behemoth that will lower energy prices, benefit consumers with more clean energy choices, and provide a path to cut U.S. carbon emissions 40 percent below 2005 levels by 2030. It includes $369 billion in support for clean energy and a stable climate, including provisions to promote EVs, heat pumps, energy storage, nuclear power, environmental justice and more. 

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Notably, the bill will give domestic manufacturers generous incentives to build renewable energy hardware in the U.S., with the intent of reclaiming manufacturing dominance from China and generating millions of domestic jobs.

Here’s a rundown of the potential impacts on the U.S. solar industry.

Trying tax-credit carrots instead of tariff sticks to spur manufacturing

For more than a decade, tariffs imposed on Chinese-made solar equipment failed to jumpstart a domestic U.S. solar manufacturing industry, despite the protectionist leanings of the Obama, Trump and Biden administrations. In fact, the U.S. watched its solar production expertise migrate to Japan, then Germany and ultimately to China over the last two decades because trade tariffs simply don’t work.

The U.S. currently has approximately 11 gigawatts of photovoltaic module production capacity, according to consultancy Wood Mackenzie, out of a global capacity approaching 500 gigawatts as of 2021. China is home to 70 to 98 percent of the world’s production capacity for the silicon-based materials and components in PV panels, according to S&P Global. China has invested more than $50 billion in solar PV manufacturing capacity since 2011, the International Energy Agency recently reported.

That Chinese investment has been built on more than a decade of active government policy that has offered low-cost finance and targeted incentives for every portion of the solar supply chain. The Inflation Reduction Act will employ a similar carrots-instead-of-sticks approach to spur the creation of a vibrant solar manufacturing sector in the U.S.

The core of the law’s domestic manufacturing tax policy is built on the provisions in the Solar Energy Manufacturing for America Act, introduced by U.S. Senator Jon Ossoff of Georgia (D) in June of last year. 

Particularly important are the tax credits for domestic production of solar cells, modules and components. Manufacturers will be eligible for a generous credit of 11 to 18 cents per watt for a solar module manufactured in a U.S.-based vertically integrated plant. Subsidies will apply across the solar value chain of polysilicon feedstock, thin-film or crystalline PV cells, wafers and modules, and will cover about half the cost of a solar module — a significant subsidy that will make U.S. manufacturing much more competitive. 

The tens of billions of dollars devoted to long-term, sweeping industrial policy in the bill could result in tens of gigawatts of solar panel production being returned to American shores. As Harry Godfrey, managing director at the Advanced Energy Economy trade group, told Canary Media in late July, the solar manufacturing credits, along with similar provisions for domestic production of wind turbines, batteries, electric vehicles and other clean energy technologies, represent​“a new era for American manufacturing.” 

Offering larger and longer-lasting solar tax credits

Although the U.S. has lost major ground on solar manufacturing over the last two decades, it has installed more than 100 gigawatts of solar power, driven by subsidies in the tax code — specifically the solar Investment Tax Credit (ITC).

The new law includes a 10-year extension of the ITC. Without it, the existing tax-credit policy passed by Congress in late 2020 would have put the solar ITC, which now stands at 26 percent of the cost of installed equipment, on a declining path from 2022 to 2025. Now, under the new law, credits will stay steady at 30 percent for a decade, then step down to 26 percent in 2033 and 22 percent in 2034. This will provide much more certainty and a far longer time horizon than the solar industry has ever gotten from the tax code.

Solar projects will also be allowed for the first time to access the production tax credit (PTC), which is based on the power produced by a project over 10 years — different from the ITC, which allows project investors to claim a one-time tax credit based on a project’s value. As Canary Media’s Jeff St. John recently explained,​“This could offer solar projects a potentially more lucrative tax credit value, since the cost of solar projects is declining compared to the value of the electricity they will produce over time.”

The bill will also provide​“bonus amounts of ITC or PTC for meeting additional requirements,” as a note from Pillsbury Law explains — for example, using domestically produced steel and iron, investing in low-income or tribal communities, and paying prevailing wages and participating in union apprenticeship programs. 

Another tax-credit add-on aims to help communities transition from producing fossil fuels to producing renewable energy. Clean energy developers can get additional ITC or PTC value if they locate projects in areas that have had a significant number of workers in the coal, oil and gas sectors since 1999, or been home to a coal mine or coal-fired power plant that was shut down. 

The bonus credits can be stacked,” the lawyers at Pillsbury write,​“so a project that meets several of the additional requirements could qualify for upwards of a 50% ITC or more.”

Making it easier for solar developers to benefit from tax credits

In a perfect world, the renewable energy industry would not be entirely dependent on the tax code. We’re not living in that world, but the Inflation Reduction Act at least makes some moves to free renewables from the confines of traditional tax equity structures. 

Under our current tax regime, developers of solar and wind projects can only access the ITC and PTC if they’re sufficiently successful to owe enough taxes for the credits to be applied to — or else they have to resort to complex dealings with big banks or other financial players to access the tax credits, in the process giving up a significant amount of the value. In an important departure from that system, the new law allows developers to sell their tax credits to unrelated third parties for cash. 

As Pillsbury points out,​“The scarcity of tax equity is an ongoing issue for many developers, so the ability to sell credits in a frictionless fashion could help expand the pool of available counterparties and limit the need to deploy more complex tax equity structures.”

Eric Wesoff is the editorial director at Canary Media.