Energy Tax Credits, Meant to Help U.S. Suppliers, May Be Hard to Get

In April, Vice President Kamala Harris visited Qcells, a solar panel manufacturing facility in Dalton, Ga., to announce an early triumph of the Inflation Reduction Act: Summit Ridge Energy, one of the nation’s largest developers of community solar projects, would purchase 2.5 million U.S.-made solar panels.

Subsidies under the new law brought the price in line with that of imported panels, allowing the companies to fight climate change and promote American manufacturing in one fell swoop.

A month later, the Treasury Department issued guidance that functionally would require the solar cells — not just the panels — to be made in the United States for Summit Ridge to have confidence that it will get its 10 percent tax credit on installations that use them. Qcells won’t be able to produce cells until late 2024, sending Summit Ridge scrambling to find cheaper components for projects currently in its pipeline.

“There’s not a single solar manufacturer who fully qualifies for this at this moment in time, which makes it difficult and is actually starting to cool investment,” said Leslie Elder, Summit Ridge’s vice president of political and regulatory affairs. “Now we have to re-evaluate based on what can pencil.”

On paper, the Inflation Reduction Act is transformative for electricity generation in the United States.

The law offers tax credits that could cover up to 70 percent of a renewable energy project’s cost if it checks several boxes meant to support American workers and communities. A new analysis finds that those incentives more than offset the additional expense associated with using domestically produced goods and paying prevailing wages.

But guidance rolling out from the Biden administration — presaging formal rules — has raised alarm among energy companies that some of the credits might be difficult if not impossible to use, at least in the near term. The resulting frustration is emblematic of the current stage of climate action: an eye-straining haze of technical rule-making that reflects a tension between urgency and ensuring that the benefits of the energy transition are widely shared.

Wally Adeyemo, the deputy secretary of the Treasury, expressed confidence that in combination, the rules would strike that balance.

“We have a great deal of clarity about the strategic objectives, and we’re already seeing the impact of that in terms of the economy,” Mr. Adeyemo said. “It isn’t about any one rule. It’s about an ecosystem of rules that have been created under the I.R.A. that put us in a position to go from a country that had underinvested in the clean energy transition to being at the head of the pack.”

The analysis, overseen by professors at Princeton and Dartmouth experienced in modeling climate policy’s effects, finds that the incentive aimed at U.S. manufacturers makes domestic solar panels more than 30 percent less costly to produce than imports. With incentives claimed by clean energy developers that meet labor standards and use domestic content, the total cost of generating utility-scale solar electricity could be lowered by 68 percent, and onshore wind energy by 77 percent.

The study was funded by the BlueGreen Alliance, a partnership of unions and environmental groups. The organization has championed elements of the Biden administration’s climate agenda that support domestic manufacturing, particularly in places hurt by globalization, automation and the decline of fossil fuels.

“Until now, the moral case and the business case did not always align,” said Ben Beachy, the organization’s vice president for industrial policy. “The I.R.A. changes that by offering developers an airtight business case for supporting high-paying jobs and a stronger and fairer U.S. manufacturing base.”

The impact of the climate law is already evident, with announcements of 47 new plants to make batteries, solar panels and wind turbines since it was passed, according to American Clean Power, a trade association. Other analyses, including a paper by economists and engineers at the Electric Power Research Institute, the Federal Reserve Bank of Minneapolis and the University of California, Berkeley, found that the law would encourage more low-emissions projects eligible for uncapped tax credits than anticipated, potentially making the costs to the government substantially higher than earlier estimates.

But the BlueGreen Alliance’s study shows significant uncertainty about the impact of rising material costs as demand for domestically sourced aluminum, steel and concrete increases, and doesn’t account for profits manufacturers might command before more competition enters the market. It also projects four million more jobs will be available in wind and solar energy by 2035 than if the I.R.A. hadn’t passed — more than eight times the current employment base — but does not model whether labor supply will measure up.

“I find some of their key results to be highly optimistic, and that they likely underestimate some of the economywide costs associated with this scale of clean energy deployment,” said Daniel Raimi, a fellow at the think tank Resources for the Future who reviewed the analysis.

At the same time, clean energy companies are digesting the administration’s guidance on how the tax credits will be allocated, and finding some unworkable in ways that may slow deployment.

Take the bonus of up to 20 percent for developers that locate projects in low-income communities (which is separate from a bonus of 10 percent for locating in areas struggling with the transition away from fossil fuels). The Treasury Department, wanting to ensure that credits give rise to projects that wouldn’t otherwise happen, will award them only to projects not yet completed. Solar installers would have to sell the system and then wait to see if they got the credit before starting work.

“I think we will lose some development in low-income communities this year because of the way that credit has been constructed,” said Sean Gallagher, a vice president for policy at the Solar Energy Industries Association. “Either the developer is going to absorb that difference, or they’ll have to go back to the customer to renegotiate the price, or the project’s not going to happen.”

An even thornier issue is the extra 10 percent for using domestically manufactured components.

Manufacturers are concerned that while effectively requiring solar cells to be made in the United States to qualify for the credit, the Treasury Department did not require their foundational component — the wafer, a thin slice of silicon that conducts energy — to be domestically produced. That could allow Chinese factories to continue to dominate a key part of the supply chain.

“The prices they’re ultimately getting from the developers are undermined because the Chinese wafer manufacturers can crash the prices,” said Mike Carr, the executive director of the Solar Energy Manufacturers for America Coalition.

Developers are upset because receiving the credit will, in most cases, require a complex calculation of the cost of each component to reach the threshold of 40 percent U.S.-produced content, and manufacturers are loath to disclose sensitive pricing information. Many also expected a more gradual phase-in process that would allow some of the current U.S. factory output to qualify for the credit, while planning for more stringent requirements.

Brett Bouchy is the chief executive of Freedom Forever, a residential solar installation company that did more than $1 billion in business last year. He had planned to build a solar module and cell manufacturing plant in Arizona, which would cost $100 million and employ 1,000 people, to supply his own operations. After the guidance came out, he halted those plans — he couldn’t be confident his panels would qualify for the domestic content credit on top of the 7 cents per watt available to manufacturers.

“We cannot make it work,” Mr. Bouchy said. “There is no benefit, because that 7 cents is eaten up with increased U.S. labor costs. Why would you invest $100 million when you really can’t get a return?”

Those who support the administration’s approach emphasize that the bonus tax credits are just that: bonuses, not requirements, to offset costs associated with going the extra mile. Developers already get a 30 percent base incentive — and at least 10 years of certainty — for paying prevailing wages and employing apprentices, which most don’t consider very difficult.

Todd Tucker, the director of industrial policy and trade at the Roosevelt Institute, said high standards were necessary to make investors confident that new U.S. factories would have enough orders to stay in business.

“Once you start indicating that you’re going to allow some flexibility, that, by definition, softens the market signal,” he said.

The Treasury Department is still taking comments on the rules for all of the credits, and industry trade associations are vying to change them. Even so, most companies say that the Inflation Reduction Act overall is a powerful force for decarbonization, and that companies have a strong incentive to seek every credit it allows.

“It’s amazing how focusing this is for the mind, when people start throwing these kinds of dollars around,” said Sheldon Kimber, the chief executive of Intersect Power, a clean energy developer. “We’re being asked to do a hard thing, but there’s a lot of money in it for us.”