On August 7, 2022, the US Senate approved a Bill titled the Inflation Reduction Act (IRA) 2022 after a series of discussions and debates between the Democrats and Republicans. The most interesting aspect of the bill was its focus on clean energy incentives. The bill was also hailed as a crucial piece of climate legislation in the history of the United States. Today, the IRA  has catalysed the rush to manufacture close to 50 GW of solar equipment capacity in the US by 2030 or earlier. Though slanted towards modules to earn the incentives earlier, the push does go all the way back to polysilicon manufacturing too, much like what we have seen in India with its PLI scheme.

Boosting Solar Manufacturing

The IRA established two types of credit for manufacturers. The first one is a 30 per cent investment tax credit for eligible investment costs in facilities and equipment. The other one is manufacturing production credit for certain components based on the volume of products manufactured. The manufacturer has the option to only choose one of the two; that is, a manufacturer cannot claim the investment credit and then claim the production credit for a product from the same factory.

Different credits for different products were declared. The new Section 45x tax credits provide incentives for many different steps along the solar and energy storage value chains

The incentives are geared for mass production factories in the next 5 years. However, the timelines vary for various products. For instance, module factories can go from the start of construction to fully ramp in roughly 18 months. On the contrary, the ingot and wafer factories may take 3.5 years and Greenfield polysilicon plants can mass produce in not less than 4.5 years. That explains the rush, or the manufacturers risk missing out a period of incentives.

Further, the mismatch between the announced cell and module capacities would mean that the module makers in the US will remain dependent on imported cells to meet the requirement.

Other Provisions of the IRA

The Bill contains several measures to encourage the adoption of solar energy in various ways.

Investment Tax Credit

As per the Act, the personal income tax credit for the installation of solar energy property has been extended and raised to 30 per cent with the step-down beginning in 2033 when it drops to 26 per cent. The standalone energy storage also became eligible for this credit for batteries with at least 3 kilowatt-hours (kWh) of capacity. This will ensure strong demand from the residential sector.

Third-party-owned (TPO) residential systems are financed and receive the ITC via the business tax code. The Investment Tax Credit for Clean Energy Property has been extended until 2032 at a rate of 30%. Starting in 2022, instead of a lifetime limit, there will be an annual limit of $1,200 for most clean energy properties. However, certain items like heat pumps, heat pump water heaters, biomass stoves, and biomass boilers will have a higher aggregate limit of $2,000. The credit also applies if you improve or replace certain electrical components like panelboards, sub-panelboards, branch circuits, or feeders with a capacity of at least 200 amps to enable the installation or use of other eligible clean energy properties.

Rebates

The IRA provisioned $4.3 billion to State Energy Offices to establish rebates for a variety of home energy upgrades under the Home Owner Managing Energy Savings (HOMES) rebate program.

Rebates for home energy retrofits up to the lesser $8,000 per home or 80 per cent of the project cost if the project saves at least 35 per cent. Lesser amounts are available if projects save less than 35 per cent. Multi-family rebates are also supported with different rebate amounts. Caps can increase for low- and moderate-income families with the approval of the Secretary.

High-Efficiency Electric Home Rebate Program

The IRA provided $4.275 billion in grants to State Energy Offices and $224 million to Indian Tribes to establish rebate programs for home electrification. Thai comprises of rebates up to $4,000 for electric load service centre upgrades (i.e. main panel upgrades) and up to $2,500 for electric wiring. These provisions are capped at 50 per cent of qualifying costs for households making between 80 per cent and 150 per cent of the area median income.

Incentives for Utility-Scale

The business investment tax credit is extended and lifted to 30 per cent for projects to start construction before the end of 2024 and the credit becomes available to stand-alone storage. Solar also becomes eligible for the production tax credit which is currently at $0.026/kWh for 2022 and rises with inflation. After 2024, the credit will transition to a tech-neutral structure.

Further, The IRA allows projects to select either the ITC or PTC. Both credits offer additional benefits if certain criteria are met, such as meeting domestic content requirements, being located in energy communities, or receiving allocated credits for qualifying low-income property. The base credits and additional benefits are listed in the tables below. Only the ITC is available for stand-alone storage projects. Moreover, both the ITC and PTC credits can now be transferred.

 

Conclusion- Designed to ensure that domestically produced solar equipment can compete with imports, after adjusting for the incentives, the IRA seeks to ensure a level of energy security when it comes to renewable energy, much like what India is attempting, or Europe for that matter. But with the US no longer enjoying any technical lead, and firms likely to face much more stricter norms on environmental impact etc, don’t be surprised if the US also acts to add some non-tariff barriers to module imports in particular by 2027, to support its brand new solar manufacturers. Resistance is likely to be lower than expected, thanks to many foreign players rushing in to make in the US too.

The IRA led investmnts, as they take shape, will kickstart not just solar demand in the US further, but could also possibly make the US self sufficient to an extent in modules by 2027-28.