| President Joe Biden, left, visits a Flex Ltd. factory in Columbia, SC, on July 6. The facility recently began shipping Enphase Energy Inc. solar microinverters with help from the Inflation Reduction Act. Source: Enphase Energy Inc. |
As the first anniversary of its signing approaches, the Inflation Reduction Act has already spawned a massive effort to reestablish clean energy manufacturing in the US even as the federal government is still working to finish rules for accessing the climate law's voluminous tax credits.
|
Companies have announced plans to build or expand 83 clean energy manufacturing facilities since President Joe Biden signed the Inflation Reduction Act (IRA) on Aug. 16, 2022, according to data compiled by by the American Clean Power Association (ACP). Those announcements do not include facilities devoted to electric vehicle batteries and components, meaning total new investments disclosed in the past year are even higher.
"It's already clear that we're seeing, as a result of the IRA, really a renaissance in American manufacturing," American Council on Renewable Energy President and CEO Gregory Wetstone said. "I don't think in my career I have ever seen a law have greater impact on economic development in this country."
The IRA offers tax credits for a range of clean energy resources that will not expire for at least 10 years, part of the Biden administration's efforts to decarbonize the power sector and broader economy. The law also created and extended incentives to produce in the US solar panels, wind turbines and other linchpins of the clean energy transition.
Of the new or expanded manufacturing plants announced since the IRA's signing, more than 50 are for solar component production, John Hensley, the ACP's vice president of research and analytics, said. Among them, Hanwha Solutions Corp. subsidiary Hanwha Qcells announced in January that it will invest more than $2.5 billion to expand its solar manufacturing capacity in Georgia.
Companies are also ramping up investment in the more established US wind energy manufacturing base and in battery storage technology. In March, South Korea-headquartered LG Energy Solution Ltd. said it would break ground later this year on a $5.5 billion lithium-ion battery production complex in Arizona that it billed as North America's "single largest investment ever" in a stand-alone battery factory.
"These are numbers that are pretty hard to comprehend," Hensley said.
IRA manufacturing credits
The IRA includes two manufacturing-specific incentives: the 45X production tax credit (PTC) and the 48C investment tax credit (ITC). Project finance attorneys and energy tax professionals both told S&P Global Commodity Insights that demand for the programs is enormous as the US prioritizes building domestic supply chains to facilitate the renewable energy transition.
"Initially we had a lot of critical minerals and battery projects. However, we're seeing more projects come in around solar and wind components," Paul Naumoff, a partner and principal leading in the global sustainability tax services division at Ernst and Young (EY), said about the PTC.
Both incentives make a significant difference in whether clean energy manufacturing projects are financially viable.
The ITC, which is jointly administered by the IRS and the US Energy Department, requires project developers to apply for the one-time payments. Holland & Knight LLP tax attorney Amish Shah said there is still "more interest than some law firms can even handle."
"I don't think it's just icing on the cake," Shah explained. "The costs of manufacturing in the US are high enough that they really need both the incentives provided by the bipartisan infrastructure bill [enacted in 2021] and some of the tax credits available under the IRA."
While the 48C program extends existing tax credits, in contrast to the brand-new PTC, EY's Naumoff noted it also includes a new category of investment in equipment designed to reduce overall greenhouse gas emissions at a particular facility by at least 20% that help improve project economics.
"Companies are saying, 'This is something I might consider doing, but the cost differential has historically not made sense,'" Naumoff stated.
While the IRS has issued guidance pertaining to the application process for the ITC, Kirkland & Ellis LLP attorney Sam Kamyans said clients looking to use the PTC are still waiting for some technology-specific clarifications.
Solar panels, cells and wind turbines are "clearly articulated" in the statute, Kamyans said. But for emerging technologies like fuel cells, he said hydrogen is being used in such a way that it "is not immediately clear to financing parties or sponsors that they do qualify for 45X."
"We think the better view is that the way that statute is crafted enables that qualification, but that type of investment won't move forward without IRS guidance," Kamyans said.
Another obstacle is that the industry is still figuring out the best way to monetize the PTC, which qualifies for cash payments, also known as direct pay.
"Whether the tenor of that cash payment is enough to sufficiently amortize the debt is a constant modeling exercise that banks and sponsors are working through," Kamyans said.
Additionally, partnerships including both tax-exempt and taxpaying entities do not qualify for direct pay.
"The direct pay guidance ... is a little more restrictive around joint ventures and partnerships than we had initially hoped and most of these projects are going to be run through those," Greg Matlock, EY's Americas energy transition and renewable energy leader, said.
One particular disadvantage of the PTC is that it starts to phase out in 2030.
"It's a gamble for developers to spend many billions of dollars building plants and then finding out that the credits don't get extended or maybe the IRA gets rolled back in some ways," Latham & Watkins LLP attorney Eli Katz said.
Any components produced after 2032 will not qualify for the tax credit, putting pressure on the timeline for developing robust domestic manufacturing.
Even three years down the road, a "wholesale shift" to the US is unlikely, according to Katz.
"The first stages of this are going to be people building manufacturing plants that kind of do the last step in the manufacturing process in the US, whether it's batteries or solar modules, and then over time it's possible that if the technology is brought here ... you get more of the supply chain into the US," Katz said.
Manufacturers are also awaiting more clarity from Treasury on the IRA's labor provisions, domestic content requirements and rules for qualifying hydrogen production facilities.
Developers can receive a 10% bonus credit for clean energy projects built using certain percentages of American-made materials. But industry groups have sought changes to Treasury's guidance around the domestic content rules, saying they could be tough to satisfy.
Another hurdle is how the government decides what clean hydrogen projects qualify for IRA credits.
The hydrogen guidance is "probably the biggest single outstanding area" on IRA tax policy implementation, the American Council on Renewable Energy's Wetstone said.
Other challenges ahead
Beyond tax code complexities, US companies are weighing other factors in their quest to expand the domestic clean energy supply chain.
The IRA will create more than 9 million jobs over the next decade, or an average of nearly 1 million annually, according to an analysis commissioned by the labor and environmental advocacy group the BlueGreen Alliance and conducted by the Political Economy Research Institute at the University of Massachusetts.
But an aging labor pool and preexisting worker shortages in some parts of the country mean "we're probably going to have some workforce challenges," BlueGreen Alliance Executive Director Jason Walsh said.
Unlike some previous climate bills, the IRA "does not invest in our public workforce systems or ... technical education system to make sure the labor supply is there," Walsh said. Overcoming those challenges will require "much more targeted strategies, and we're going to need public funding to support them."
Competition from other clean energy developers is another risk.
China has long been a leader in clean energy supply chains and has a history of stepping up government support for the sector in response to US incentives for domestic manufacturing, stressed Nick Iacovella, senior vice president of public affairs at the Coalition for a Prosperous America, which advocates for US manufacturing.
In the first six months of 2023, Iacovella noted, Chinese manufacturers have announced 514.5 GW of investments in China and Southeast Asia across the solar supply chain. Those investments cover planned new capacity in ingots, wafers, cells and modules.
Unless the US is vigilant in enforcing trade laws to avoid China dumping products on the global market, "you're just shooting yourself in the foot at the same time as you're trying to run," Iacovella said.
Perhaps more fundamentally, energy and manufacturing project developers face an often lengthy and onerous permitting process that agencies and lawmakers have struggled to improve. If those bottlenecks do not ease, the US could have a tough time realizing the IRA's full potential benefits, experts say.
"The things that keep me up at night are ... things like permitting and availability of transmission," the ACP's Hensley said. "If we can't permit those projects quick enough ... and keep up with the increasingly higher penetration of renewable energy, that's where I think you're going to start running into more problems."
S&P Global Commodity Insights produces content for distribution on S&P Capital IQ Pro.