Senator Joe Manchin has agreed to work with Democratic Senate colleagues to quickly pass a climate and health bill that could direct nearly $370 billion over 10 years toward clean energy, electric vehicles, pollution reduction and energy security — potentially the largest-ever single federal investment in fighting climate change. 

Wednesday’s surprise release of the Inflation Reduction Act of 2022 from Manchin and Senate Majority Leader Chuck Schumer represents a striking turnaround for Democrats’ prospects of passing major energy legislation before the midterm elections in November. Manchin’s continued opposition to climate spending in a budget reconciliation bill that requires all 50 Senate Democrats’ support to pass has stymied progress on this key Biden administration goal, with the latest setback coming only two weeks ago.

The new bill falls short of the $555 billion in climate spending in the Build Back Better legislation that was scuttled by Manchin last year, as well as the provisions of the bill passed by House Democrats earlier this year. But it does direct tens of billions of dollars toward extending tax credits to the deployment and manufacturing of a long list of technologies, including wind and solar power, batteries, nuclear power, hydrogen production, electric vehicles, heat pumps and emissions-reduction systems.

“This bill really represents a tremendous step toward smart investments and forward-looking industrial policy that can make the United States the arsenal of clean energy technology,” said Harry Godfrey, managing director at trade group Advanced Energy Economy. The bill targets both short-term relief from the ballooning fossil fuel costs driving inflation and long-term investments in industrial capacity, he said. 

Some environmental groups expressed anger on Wednesday over major concessions included in the bill that presumably cater to Manchin’s interest in promoting fossil fuels. The Center for Biological Diversity called out provisions that would require oil and gas leases along with solar and wind development on federal lands and ocean waters as a ​“slap in the face to the communities trying to protect themselves from filthy fossil fuels.” 

But many more environmental and clean energy industry groups cheered the bill as a major breakthrough on federal climate action that many feared was out of reach. A summary of the bill released Wednesday said it would lead to a roughly 40 percent reduction in nationwide carbon emissions by 2030 — four-fifths of the country’s Paris Agreement commitment to halve emissions by decade’s end.

“To limit the worst impacts of climate change, we must make rapid progress in transitioning to clean energy and transportation this decade,” Johanna Chao Kreilick, president of the Union of Concerned Scientists, said in a Thursday statement. ​“With communities reeling from extreme heat, record drought and wildfires right now, this announcement is more than welcome news. It’s a relief.” 

In a statement on Wednesday, President Biden said the bill ​“addresses the problems of today — high health care costs and overall inflation — as well as investments in our energy security for the future,” and he urged lawmakers to pass it ​“as soon as possible.” The bill still needs to secure the support of Democrats in the House of Representatives, the approval of the Senate parliamentarian under reconciliation rules, and the continued commitment from Manchin himself, in order to pass. 

The legislative text released Wednesday is subject to change as it moves through the Senate and House, but here’s a breakdown of its existing provisions, both those carried over from previous Democratic proposals and those that break new ground in federal support for clean energy. 

Clean energy deployment and manufacturing 

U.S. clean energy groups have been clamoring for Congress to extend federal tax credits for solar and wind power industries, as well as to expand tax credits for technologies such as energy storage, carbon capture and storage, and low-carbon and carbon-free hydrogen production. The Inflation Reduction Act of 2022 appears to deliver on these hopes. 

One of the biggest boosts for wind and solar power would come via a 10-year extension of the Production Tax Credit (PTC) and Investment Tax Credit (ITC) programs that have been a linchpin for the country’s solar and wind power growth to date. That’s a major change from existing tax credit policy passed by Congress in late 2020, which set the ITC for solar projects on a declining path from 2022 to 2025 and allowed the PTC for wind projects to expire by the end of 2021. 

Projects that use domestically produced steel and iron could receive an enhanced credit, as would those that invest in low-income or tribal communities. Projects would also be required to adhere to prevailing wage and union apprenticeship regulations or face penalties. 

U.S. solar and wind deployments have been shrinking over the past year as rising costs for equipment, supply-chain disruptions and uncertainty over the future of federal policy have weighed on the industry. In that light, the new bill’s provisions are an ​“11^th-hour reprieve for climate action and clean energy jobs,” said Heather Zichal, CEO of the American Clean Power Association trade group, in a Wednesday statement.

Under the bill’s provisions, solar projects would be allowed for the first time to access the PTC, which pays tax credits based on the power produced over 10 years, as opposed to the ITC, which allows project investors to claim a one-time tax credit of 30 percent of a project’s value. 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 also gives the energy storage industry something it’s been seeking for years now: access to the ITC for stand-alone energy storage investments, ranging from battery projects to thermal energy storage systems. To date, only batteries being directly charged by solar installations have been eligible for the ITC, limiting federal tax policy support for a technology that’s seen as central to integrating variable wind and solar power into the grid. 

Energy storage isn’t the only technology gaining new access to federal tax credits. The bill would also extend the ITC to technologies including microgrid controllers that orchestrate on-site generators and batteries to provide power during grid outages and linear generators that can run on low- or zero-carbon fuels. 

Nuclear power would become eligible for the PTC, potentially offering a lifeline to financially struggling nuclear power plants across the country. So would some classes of hydrogen production, providing support for a source of carbon-free fuel that’s seen as critical to decarbonizing industry and heavy transportation. 

Technically speaking, the bill calls for these traditional tax-credit structures to be extended through the end of 2024. At that point, the credits would be transformed into a technology-neutral ​“clean electricity credit” structure that would tie credit values to the rate of reduction of carbon emissions from the U.S. electricity sector.

While this shift to a technology-neutral credit is complicated, AEE’s Godfrey highlighted its value in supporting a range of carbon-reduction technologies that are still on their way to commercial viability. ​“It’s going to take a lot of technologies to move us toward a reliable, affordable swift transformation to a carbon-free economy,” he said. 

Beyond tax credits for deploying clean energy technologies, the bill would also support investments in manufacturing them domestically. These include production tax credits for manufacturing of solar panels, wind turbines, electric vehicles, batteries and facilities that process the minerals needed to make them. These credits could drive about $30 billion in new investment, along with $10 billion in investment tax credits for such facilities. 

The value of tax credits relies on investors being able to offset tax liabilities. Economic downturns can reduce the appetite for tax offsets, a factor that’s driven clean energy industry groups to ask Congress to allow some existing tax credits to be converted to ​“direct pay,” or payments from the U.S. Treasury Department. 

The Inflation Reduction Act does call for some nonprofit and government entities to access direct payments in lieu of tax credits since these entities aren’t subject to taxation in the same way that for-profit companies are. But it doesn’t extend direct pay to the private sector, Durgesh Chopra, managing director and head of power and utilities research at Evercore ISI, said in a Thursday presentation. 

The bill also doesn’t offer tax credits for transmission grid investments, Chopra noted. Utilities and clean energy groups have called for a transmission ITC as a way to boost the buildout of a U.S. power grid that experts agree isn’t growing quickly enough to support the rapid growth of clean energy needed to reach the Biden administration’s goal of a net-zero electricity sector by 2035. The absence of that credit in the new bill is ​“a tailwind for transmission investment,” Chopra said. 

But AEE’s Godfrey pointed out that the manufacturing tax credits in the bill are structured to allow the companies investing in new factories to receive the value of those credits via direct-pay methods. That will allow manufacturers to ​“realize the full value” of those credits in a more streamlined way than if they were required to set up the structures for monetizing tax credits that have been developed by the wind and solar industries over the past two decades, he said. 

Electric vehicles and building decarbonization 

The Biden administration has set a goal for electric and plug-in hybrid vehicles to make up half of all cars sold by 2030. Extending federal tax credits for customers buying EVs and for companies building them in the U.S. is seen as a critical part of reaching that goal, as is boosting demand for EVs from federal agencies like the General Services Administration and the U.S. Postal Service. 

The Inflation Reduction Act delivers on such policies. On the manufacturing front, on top of the previously mentioned tax credits available to EV and battery production, the bill directs up to $20 billion in loans to build new clean-vehicle manufacturing facilities. It also directs $9 billion toward federal procurement of U.S.-made clean energy technologies, including $3 billion to boost the Postal Service’s zero-emissions vehicle purchasing plans. 

As for consumer tax credits, the bill would extend an existing $7,500 tax credit for new EV purchases, which is lower than the $12,500 per vehicle credit proposed in earlier legislation. But it would lift the existing cap that limits tax credits for individual automakers’ vehicles once that automaker has sold more than 200,000 EVs — a cap that Tesla and GM have already reached, and Ford and other automakers expect to reach soon. 

Federal tax credits remain important for reducing the upfront cost of EVs for middle- and lower-income consumers. That can help more people buy vehicles that have significantly lower long-term costs to fuel and maintain than internal combustion engine models.

The bill would also introduce a first-of-its-kind $4,000 tax credit for the purchase of used EVs, with new rules that allow higher-priced vehicles to be eligible for the credit but also limit the credits to buyers who earn $75,000 or less in annual income. These rules could ​“really provide relief to folks who need it most,” AEE’s Godfrey said. ​“Gas bills are totally killing their budget.” 

The building-decarbonization provisions in the bill could also help reduce Americans’ exposure to high heating bills, Senator Martin Heinrich said in a Thursday statement. Those provisions include $9 billion in consumer home energy rebate programs, with a focus on low-income consumers, that will fund electric home appliances such as heat pumps and help pay for energy efficiency retrofits. 

“If we are truly serious about driving down the inflation that’s hurting families in my home state of New Mexico, in places like West Virginia,” Senator Manchin’s home state, ​“and across the country, we have to focus on the primary driver of inflation, and that is the soaring price of fossil fuel,” Heinrich said during a Tuesday press conference hosted by the pro-electrification group Rewiring America. ​“Investing in clean energy and electrification will create substantial savings for American families on their household heating bills and their transportation costs.” 

President Biden’s invocation of the Cold War–era Defense Production Act last month would get a boost of funding from a provision in the bill that would direct $500 million toward investments in manufacturing of products that fall under that authorization. Those include critical-minerals processing and the manufacturing of heat pumps, all-electric heating and cooling systems that are seen as a vital tool in decarbonizing building heating. 

Environmental justice and emissions reduction 

Many of the Inflation Reduction Act’s provisions target low-income and disadvantaged communities in new ways, from the enhancement of tax credits for clean energy investments to energy efficiency assistance for low-income homeowners and renters. A host of funding streams is dedicated specifically to aiding communities historically burdened by pollution. 

One of the largest of these is a $27 billion ​“Greenhouse Gas Reduction Fund” available through 2024, said Russell Mendell, an associate with the U.S. program of nonprofit think tank RMI. (Canary Media is an independent affiliate of RMI.) The fund is essentially a federal clean energy accelerator, or in more common parlance, a federal green bank, similar to but much larger in scope than the 21 state- and local-level green banks created over the past decade.

This entity would be able to offer grants, loans and other assistance on its own or to existing state and local green banks for a range of emissions-reduction investment, ranging from rooftop solar installations and home energy efficiency retrofits to clean transportation and industrial decarbonization. Of the funding, $8 billion would be reserved for low-income and disadvantaged communities. 

Mendell highlighted other specific environmental justice provisions of the bill, including $3 billion for environmental and climate justice block grants for community-led projects, $3 billion in neighborhood access and equity grants, and $3 billion to reduce air pollution at ports, many of which are located in or near lower-income communities. Another $20 billion would be targeted at reducing emissions in agricultural operations, and rules to limit methane emissions from oil and gas wells and pipelines could not only reduce a major source of global warming emissions but also ease the burden faced by communities facing the health impacts of that pollution.

“I think it’s an excellent bill for climate justice,” Mendell said.

The relatively young energy-storage industry will get a proper seat at the clean energy policy table if the Democrats’ latest climate bill becomes law.

The U.S. conducts federal clean energy policy through tax credits, for better or worse. Wind and solar won dedicated tax credits years ago and rode them to the top of the charts, becoming the two largest sources of new power plant capacity in 2021. But the technologies to store that renewable electricity have had to scrape by without their own tax credit. The best that storage plants could do was piggyback on solar projects in order to get a tax credit.

That’s not so bad for residential installations, where the primary reason for installing a battery is to store rooftop solar production. But massive utility-scale battery plants can do a lot of good in locations where solar installations are impossible or inadvisable, like densely packed population centers or strategically situated substations. Building more storage capacity makes the grid better at absorbing large amounts of renewable generation. 

If the Inflation Reduction Act passes, then energy-storage projects will be able to benefit from federal support without needing to be located at the exact same spot as a solar farm. The bill as currently drafted includes a standalone investment tax credit (ITC) specifically for energy-storage projects, which would support all sorts of storage technologies. 

“This is going to create a much fairer situation on the grid and really increase the speed at which we can deploy storage nationwide,” U.S. Senator Martin Heinrich (D-New Mexico) told Canary Media this week. ​“You’re going to see [storage] fill a lot of gaps where, because of this ITC, it ends up popping to the top of the solution set.”

Heinrich first introduced a standalone storage tax credit in 2016, to fill a critical gap in grid decarbonization efforts. As more renewables hit the grid, storage becomes more valuable for smoothing the ups and downs of clean energy production. But storage only gets built when developers believe they can make money from it, or when utilities determine it will cost-effectively meet their needs for the grid. Because of both the cost of deploying new technology and the power industry’s deeply rooted sense of caution, the storage buildout has lagged the renewables boom.

It didn’t have to take this long. Advocates have been pushing for this kind of standalone tax credit ​“since storage was a science project,” said Katherine Hamilton, chair at clean energy policy shop 38 North Solutions. Hamilton has worked on this issue long enough to remember Oregon Senator Ron Wyden (D) proposing a storage credit back in 2009. 

Still, even without a dedicated tax incentive, the scrappy storage industry pushed its way onto the power grid, and now is ​“one of the fastest growing segments in the clean energy sector,” said Heather Zichal, CEO of industry group American Clean Power. The ITC stands to accelerate deployments even further. As Zichal told Canary Media last year, the standalone tax credit for storage has been one of her group’s top legislative priorities. 

The storage analysts at research firm Wood Mackenzie believe that, without the tax credits in the current bill or the earlier Build Back Better legislation, the U.S. would install 100 gigawatts of grid-scale storage in the 10 years starting with 2022. (For comparison, the U.S. Energy Information Administration projected in January that the U.S. would install 5.1 GW of utility-scale batteries this year.) 

If the new climate deal becomes law, that 10-year outlook increases to a base case of 122 GW, said Dan Shreve, global head of energy storage at consultancy Wood Mackenzie. If conditions break even more favorably for the storage industry, deployments could approach the bullish case of 135 GW. 

“If you look at where we were about to go two weeks ago, it’s a completely different animal,” Shreve said.

Tax credit tied to labor standards and community benefits

The proposed storage ITC would chop 30 percent off the cost of a storage project. But to qualify, projects would need to meet labor standards for prevailing wages and apprenticeship. That’s an important protection for the energy workforce as it stares down historic shifts in how electricity is produced.

A storage project could claim another 10 percent credit if it hits a threshold for domestically produced materials, and yet another 10 percent if it is located in a community that historically produced energy (and presumably will be affected by the energy transition), such as a community facing the closure of a coal-fired power plant. 

“There’s the potential to really stack benefits on the incentive side,” Heinrich said. 

Exactly how storage developers would be able to make use of those adders remains to be seen. 

What is clear is that this policy would not be just for lithium-ion batteries, which have been the near-exclusive choice for grid storage technology in recent years. The ITC would be open to anything that stores energy, Hamilton noted, including older forms like pumped hydro, and new and emerging technologies for cost-effectively storing and discharging power over many hours. 

“You’ll get a lot more scale on some of those other long-duration technologies because of this,” Hamilton said.

The ITC would also cover thermal storage, a well-established technology that reduces energy needs for heating and cooling at crucial hours.

Prior to this legislation, renewable tax credits have followed a boom-and-bust cycle: They spurred installations for a few years, then were supposed to sunset, at which point the industry rallied its lobbying forces to win an extension for a few more years. The IRA would establish decade-long tax credits for storage and the other forms of clean energy — a kind of certainty the industry has never had from the tax code.

“This bill sends the market signals: Energy storage is here to stay, and feel free to invest, because these aren’t going away for 10 years,” Hamilton said.

Storage projects on the edge would become profitable

The modern energy-storage industry became viable over the last decade as lithium-ion battery costs came down and revenue-making opportunities started to appear. But the battery price tag still deters grid battery construction outside a few geographic enclaves. That’s where the storage ITC can help, by reducing the capital cost of projects significantly.

That could get private developers off the fence in competitive markets. That’s where the storage boom started — with privately developed projects delivering the lightning-fast service known as frequency regulation in the mid-Atlantic PJM market. But that market quickly got saturated. Since then, large-scale batteries have tended to get built when they have utility contracts to guarantee some revenue. A few pioneering firms have gone it alone, building merchant storage plants in California and Texas, and developing them in New England. But they’re the outliers.

If investment costs for a power plant suddenly dropped 30 percent, potentially up to 50 percent, that would make it much easier for a project to pay itself off. Merchant markets are still risky, and few companies have a track record of making money with merchant storage, but the ITC would shift the risk/​reward calculus in the right direction.

The other, much larger category of big batteries is utility-led. This includes projects built and owned by utilities, and projects built by independent developers to fulfill a utility contract. These projects have taken off in places where decarbonization policy pushes developers toward battery storage for new firm capacity — California and Hawaii, for instance. In other states, like Arizona and Colorado, utilities found the combination of solar and storage beat out other options on price.

In places where storage already pencils out, the ITC would mean federal taxpayers are buying down the cost of storage for local ratepayers. The project that was already a good deal would become a better deal. In the many parts of the country where utilities have yet to build battery storage at meaningful scale, the technology would become that much more competitive against other options. 

“Because it’ll drive down cost and drive up scale, [the IRA] will make storage much more part of how planning is done from the utilities and [independent system operators],” Hamilton said. ​“It will open up states that did not have [storage] targets but can really use the services storage provides.”

And buyers who have been waiting to seal the deal until the long-simmering tax credits were finalized could finally move ahead.

“We’ve had utilities tell us that, ​‘We will not buy storage until the ITC passes,’” one storage developer told Canary Media.

For those concerned about decarbonization, the thing to watch is whether a storage ITC would mean that battery plants (charged from the grid, but benefiting from cheap renewable production) could beat out gas-burning plants for the role of peak power delivery. 

Gas power-plant technology is not getting radically cheaper. And the fuel itself has gotten more expensive recently, with U.S. gas futures hitting their highest prices since 2008 this summer. 

If the standalone storage tax credit passes, battery projects ​“are immediately put in a much better position in terms of your delivered cost of electricity versus a gas peaker,” Shreve said. 

Donnel Baird, CEO of BlocPower, thinks the climate bill unveiled by Senate Democrats last week could transform the country’s home efficiency and electrification markets. It could certainly boost the bottom line for his company and help the primarily low-income and disadvantaged communities it serves. 

Baird estimated that the Inflation Reduction Act’s tens of billions of dollars in federal rebates, tax incentives, grants and lending capacity for electric appliances, heat pumps, rooftop solar, home batteries, efficiency retrofits and other building improvements could cut 5 to 40 percent of the per-home cost of the efficiency and electrification projects BlocPower is doing around the country. 

That ​“means there are millions and millions of buildings where you couldn’t make the economic argument, where now you can,” he told Canary Media, ​“particularly low-income buildings where the financial payback did not pencil out before.” 

The result would be many more homes and apartments with lower energy bills, reduced health risks from burning fossil fuels indoors, higher property values for owners, and appliances that can interact with a grid increasingly powered by renewable energy, he said. 

And, of course, it would be a vital part of combating the climate crisis. The direct use of fossil fuels in buildings accounts for about 13 percent of total U.S. greenhouse gas emissions. 

The U.S. can’t meet its decarbonization goals ​“unless we electrify the 1 billion machines across our 121 million households across the country,” Ari Matusiak, CEO of pro-electrification nonprofit group Rewiring America, said at a Wednesday press conference. His organization designed one of the key electrification rebate provisions of the bill. ​“Transforming the market so that we rewire America’s households is a big task,” and one that ​“needs to be catalyzed” by federal legislation. 

But when it comes to turning the bill’s efficiency funding into that market transformation, ​“the devil’s in the details,” Baird said. ​“Can we pull it off in the real world?” 

That challenge includes straightforward issues of timing and complexity. How long would it take federal and state agencies to devise the rules to give out rebates and grants? Would those rules allow households and contractors to get the money relatively quickly, or would they be complicated by red tape? 

Then there are structural questions. Could heat-pump manufacturers and efficiency contractors meet the demand expected to arise in response to a big jolt of federal funding? How would programs avoid a boom-bust cycle of big spending that eventually ends and leaves businesses facing shortfalls and layoffs? 

These are the questions that climate activists and efficiency and electrification professionals will be asking in the months to come if the Inflation Reduction Act passes Congress, said Panama Bartholomy, executive director of the Building Decarbonization Coalition.

“They took like 10 years of climate-activist angst and put it all into one bill,” he said. ​“It’s a Christmas tree of stuff.” But ​“it’s another thing to get the money out the door.” 

Andy Frank, president and founder of New York–based home-efficiency and electrification provider Sealed, agreed that a successful implementation of the bill’s provisions ​“could spark a lot of market dynamics” that would lower the cost and improve the quality of homeowners’ clean energy investments. ​“That creates a positive feedback loop.” But the federal and state agencies involved will ​“need to design the program rules and programs in a way that’s healthy and sustainable for the market,” he said. 

This admonition applies to the three main buckets of efficiency and electrification support in the Inflation Reduction Act — tax credits, rebate programs, and new lending authority that could be used to transform the home energy market. 

1. Tax credits to promote efficient, electric homes 

The most immediate impact would come in the form of tax credits, Frank said. That’s because most of them would be available to homeowners next year, and some of them could apply to investments made in 2022.

For homeowners, the most important is an expansion of the Energy-Efficient Home Improvement credit, known as 25C after its section in the tax code. It would allow households a tax deduction of up to 30 percent of the cost of energy-saving home upgrades, ranging from insulation and new doors and windows, to heat pumps that use electricity to heat and cool homes far more efficiently than fossil-fueled furnaces and water heaters, to upgrades of electrical panels to serve those new electric loads. 

Most of these credits would be capped at $1,200 per household per year, or $600 per measure such as insulation or more efficient windows. But heat pumps — devices that can both heat and cool homes by tapping temperature differentials between indoor and outdoor air or underground thermal sinks — would be eligible for the 30 percent credit for up to $2,000 of their value. 

The Residential Clean Energy credit, or 25D, would allow homeowners to deduct up to 30 percent of the cost of fancier home electrification projects. Those include rooftop solar, which is currently eligible for a 26 percent tax credit but under this bill would be eligible for 30 percent. And for the first time residential battery systems would be eligible for a tax credit, whether or not they’re connected to rooftop solar. 

These home-efficiency and clean-energy tax credits would have a 10-year lifespan, Matusiak noted. So as heat pumps and other technologies get cheaper over time, the relative portion of their costs covered by the credits would increase, he said — you would still get up to $2,000 off a heat pump even as the cost of that heat pump declines. 

A 10-year lifespan also provides more certainty for contractors and manufacturers that may want to bundle the value of these credits into how they price their products and services. Whether contractors do that could well ​“make or break these programs,” Bartholemy said, since homeowners usually follow contractors’ advice on what equipment to install — particularly when replacing a broken-down furnace or water heater. 

While rooftop solar installers have had decades to build business models around federal tax credits, ​“it is very new for the home electrification community,” he said. ​“It’s going to be contractors going to customers and saying, ​‘Here’s how we’re going to bundle all these incentives and tax credits’ — and state ones as well,” such as the heat-pump incentives available in California, Maine, New York and Washington state.

Canary Media’s chart of the week translates crucial data about the clean energy transition into a visual format.

American voters are overwhelmingly supportive of the Inflation Reduction Act, according to a new poll conducted by Data for Progress and Climate Power. You wouldn’t know it from the name, but the bill contains a huge amount of spending for climate protection and clean energy — $369 billion over 10 years. If it passes, it will be by far the biggest and most important climate bill in U.S. history. 

If the Democrats’ major climate and tax bill becomes law, 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 would 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 would offer $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. 

Notably, the bill would 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 would 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 bill’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 would 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 would apply across the solar value chain of polysilicon feedstock, thin-film or crystalline PV cells, wafers and modules, and would cover about half the cost of a solar module — a significant subsidy that would 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 last week, 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 legislation includes a 10-year extension of the ITC. Without the bill, the existing tax-credit policy passed by Congress in late 2020 would put the solar ITC, which now stands at 26 percent of the cost of installed equipment, on a declining path from 2022 to 2025. With the bill, credits would stay steady at 30 percent for a decade, then step down to 26 percent in 2033 and 22 percent in 2034. This would provide much more certainty and a far longer time horizon than the solar industry has ever gotten from the tax code.

Solar projects would 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 would 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 could 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 would at least make 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 bill would allow 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.”