The Inflation Reduction Act of 2022 Revives U.S. Solar Industry
On Tuesday August 16th, President Biden signed the Inflation Reduction Act of 2022 (IRA) into law, making its mark as the most cutting-edge clean energy investment in our nation’s history, surpassing the Budget Control Act of 2011. Along with other provisions that provide relief for the fossil fuels industry, taxes and high costs for prescription drugs, the bill will invest more than $300 billion to combat climate change and boost U.S. energy production that would encourage our entire economy to cut carbon emissions. Sparking American energy independence more broadly, the law will have a major impact on making solar products and electric vehicles more affordable for homeowners across the nation. Using these policies, more homeowners will have access to lower prices for electricity and gas, along with investments into forestland owners, and disadvantaged urban and rural communities to ensure that every American are able to better adapt and share the benefits of a rapid transition to a clean economy.
It would provide lower energy prices, benefit customers with more clean energy choices, and create a pathway to cut carbon emissions by 40% below 2005 levels by 2030. With energy and climate investments bearing most of the legislation’s price tag, what does it all mean for both the commercial and residential solar sectors, and how does it affect the average homeowner?
With the Inflation Reduction Act of 2022 having been signed into law, here is a breakdown of what the bill provides for our nation’s reviving solar landscape:
What Is in the Bill Regarding Solar and Clean Energy?
To encourage the nation to join in this sweeping effort, the federal government will invest approximately $386 billion into energy security and climate production, including $161 billion into clean electricity tax credits, $37 billion in individual clean energy incentives, another $37 billion in clean manufacturing tax credits, and much more. Once fully in effect, the bill would slightly cut net taxes by around $2 billion per year, with expansive energy and climate tax credits roughly matching the size of the new tax increase. With new and extended tax credits incentivizing solar and other sources of renewable energy, both private firms and publicly-owned utilities could get tax subsidies for the production of renewable energy, and for manufacturing specific parts that are essential to renewable projects, such as solar panels and battery backup. Over the next ten years, one major goal of issuing these tax credits and subsidies is to make new green energy production cheaper for utilities to build than fossil fuels are. Also included are the $500 million allocated from the Defense Production Act for the installation of heat pumps and critical minerals processing, and another $2 billion for national labs to speed up breakthrough energy research.
The bill will also provide new or extended tax credits to help improve clean energy generation, electrification, green technology retrofits for homes and buildings, greater use of clean fuels, environmental conservation and a wider adoption of electric vehicles – with $60 billion being designated across the full supply chain of clean energy and transportation technologies. In fact, the legislation will include up to $80 billion in rebates for electric vehicle (EV) owners across the U.S., with $2 billion in grants to modernize existing auto manufacturing companies to produce clean vehicles and create jobs that stay in the communities that need them most. These rebates include a $7,500 tax credit for new electric vehicle owners that would be applied at the point of sale – this also applies to vehicles whose manufacturers are no longer eligible for existing EV credits, such as General Motors and Tesla. There would also be a new $4,000 tax credit applied to those who buy used EVs. Thankfully, tens of millions of people in the U.S. are eligible for these credits, particularly for couples who make less than $300,000 and individuals who make less than $150,000 per year annually.
By investing in every sector of the economy, this bill will reduce emissions from electricity production, transportation, industrial manufacturing, buildings, and agriculture. While using these incentives to help lower costs for American consumers, the federal government aims to push the U.S. as a world leader in clean energy transformation and lead the charge in decarbonizing the electric grid and help millions generate their own power and contribute to our gradually recovering economy.
How Does This Bill Affect the Solar Industry?
In hindsight, the Inflation Reduction Act of 2022 provides robust benefits for the solar industry, including reviving solar manufacturing in the U.S. Since 2011, China has been home to between 70% – 90% of the world’s production capacity for silicon-based materials and components for photovoltaic solar panels (PV) – investing over $50 billion into their efforts. As our federal government invests $60 billion into onshore clean energy manufacturing, the bill will give domestic companies generous incentives to build renewable energy hardware, with the intent of restoring manufacturing dominance over China and creating millions of American jobs. Tax credits would be applied for domestic production of solar cells, components and modules, allowing manufacturers to be eligible for credits of 11 – 18 cents per watt for a solar module produced in the U.S. Subsidies would also be applied across the solar value chain, and would cover nearly half the cost of a solar module, making U.S. production more competitive on a global scale. With the Ossoff Manufacturing Credits also being added to the bill, solar modules made in the U.S. will include:
- Solar Cells – 4 cents per direct current watt of capacity
- Solar wagers – $12 per square meter
- Solar grade polysilicon – $3 per kilogram
- Polymeric back sheet – 40 cents per square meter
- Solar modules – 7 cents per direct current watt of capacity
For inverters the credit would be applied per watt of alternating current:
- Central inverter – 0.25 cents
- Utility inverter – 1.5 cents
- Commercial inverters – 2 cents
- Residential inverters – 6.5 cents
- Microinverters – 11 cents
Torque tubes for racking will receive 87 cents per kilogram, while structural fasteners will get $2.28 per kilogram.
Despite the U.S. losing considerable ground on solar manufacturing over the last two decades, the billions of dollars being invested in long-term, extensive policy in this bill would result in tens of gigawatts in solar panel creation would come back to American soil. The legislation will also include a 10-year, $10 billion extension of the Investment Tax Credit (ITC), which would restore and overly declining benefit between 2022 and 2025. Thanks to the bill, credits would stay at 30% until 2032, then decrease to 26% in 2033 and 22% in 2034. In addition, non-residential solar projects will also be allowed to access the Production Tax Credit (PTC), which allows solar investors to claim a one-time tax credit based on the project’s value and the power it produces over a 10-year period. By stacking tax credit add-ons and meeting additional requirements, including an extra 10% for manufacturing solar products using domestically produced steel and iron, along with project sitings that are located in former “energy communities” (known as a “Brownfield” site) at an additional 10%, certain solar projects are eligible to qualify for bonuses from the ITC and PTC upwards of 50% for facilities that are placed in service after December 31st, 2022.
To qualify for the 10% manufacturing credit add-on, certain domestic content requirements must be met. To satisfy these requirements:
- Facility components must be 100% made of any steel or iron produced in the U.S.
- 40% of manufactured products that are facility components were produced in the U.S.
In order to qualify for the 10% project siting credit add-on, the facility must be located in:
- A “Brownfield” site, metropolitan or non-metropolitan area that:
- Has, or had any time during the period beginning in 2010, 0.17% or more direct unemployment or 25% or more local tax revenues related to extraction, processing, transport, or storage of coal, oil or natural gas.
- It has an unemployment rate above the national average for the previous year.
- An area that has a census tract, or a census tract that is adjoined to, where a coal mine has closed after 1999 or a coal-fired electric generating unit was withdrawn after 2009.
The bill lists some exceptions to these requirements. Items that are not of satisfactory quality, or are not produced in sufficient quantities, may be imported. Items that would increase project costs by greater than 25% may be sourced outside the U.S. as well.
For projects that have a maximum net output of less than 1 megawatt (MW) or above, there are employment requirements for laborers and mechanics to be paid prevailing wages, and must be part of an electrical apprenticeship program in order to receive the additional 24% in tax credits on top of the default of 6%, which will be applied to projects starting in 2023. Additionally, there are requirements for the ratio of apprentices to journeyworkers, which are specified by the Department of Labor or the applicable state apprenticeship agency. Contractors or subcontractors who employ more than 4 individuals performing construction, alteration, or repair work must employ at least one qualified apprentice to perform such work. Violations will result in fines to the Secretary of Labor of $5,000 for each laborer or mechanic who is underpaid. If the underpayment is found to be intentional, the fine doubles to $10,000 per laborer or mechanic.
In order to satisfy the apprenticeship requirement, qualified apprentices must perform the following percentages of labor hours at their respective qualified facility:
- If construction begins before January 1st, 2023, apprentices will perform 10% of total labor hours for construction, alteration, or repair work.
- If construction begins during 2023, apprentices will perform 12.5% of total labor hours for construction, alteration, or repair work.
- If construction begins before January 1st, 2024, apprentices will perform 15% of total labor hours for construction, alteration, or repair work.
The apprenticeship requirements can be satisfied if the facility complies based on specific standards laid out by this legislation. If the facility fails to comply, they will be penalized and required to pay $50 multiplied by the total labor hours not in compliance with said requirements. If the designated apprenticeship requirements are purposely disregarded or ignored, the penalty will increase.
Thanks to the Clean Energy Production and Investment Credits, if a solar power project meets the prevailing wage requirements, then it will receive a tax credit of 2.6 cents/kWh for the first 10 years of a project’s life – mirroring incentives from both the ITC and PTC. If a project does not meet prevailing wage standards, it will earn only 0.3 cents/kWh before adjustment for inflation. Going forward, the production credit will start at 40% and increase by 5% each year as it is adjusted for inflation, where it will remain at 55% for solar projects whose construction begins in 2027 or later as domestic content requirements are satisfied. However, the credit amounts for each will be phased out based on when facilities begin construction on a project after the “applicable year”, meaning:
- Later in the calendar year, in which annual greenhouse gas emissions from electricity production are reduced by 75% from 2022 levels.
- A solar project begins construction in 2023.
Not only can solar system manufacturers benefit from federal tax credits and incentives, American homeowners are qualified to receive substantial benefits for investing in solar power and switching from the electrical grid to generate their own energy from home.
What Does This Bill Mean for Homeowners?
As solar energy is quickly gaining popularity throughout the nation, Arizona homeowners are able to save thousands on their utility bills without relying on the electrical grid, and even boost existing tax credits by installing a solar panel system on their roofs. With a combined $9 billion in consumer energy rebate programs, along with $1 billion in grants, the bill provides a wide range of incentives to relieve the increasing costs of energy, including more affordable options to buy clean electric vehicles, rooftop solar panels electric appliances and home energy efficiency. For homeowners interested in going solar, or having a solar project scheduled or completed in 2022, you are eligible for the Investment Tax Credit (ITC) set at 30%, helping cover the costs of installing your solar panel system and extending the program until December 31st, 2034. Over the next 10 years, these tax credits will help consumers make their homes more energy efficient and operate on clean energy.
Homeowners are also eligible for the ITC if a standalone battery system was installed in your home with a capacity of at least 3 kilowatt-hours (kWh). If your battery system was installed before the bill went into effect and has less than 3 kWh of capacity, it may be modified to reach the storage requirement needed to qualify for the 30% ITC. On top of these benefits, customer subsidies include an additional $840 for electric induction cooktops and up to $9,100 for improvements to electrical panels, wiring and insulation. With these subsidies claimed by the customer, you could save an average of $1,840 per year on energy bills. Although the average cost of installing a rooftop solar system is near $20,000, this upfront cost will be paid back over time in energy bill savings, as well as adding value to your home.
By gaining a new energy independence by generating power at home, you also have the flexibility to sell your excess energy back to the grid, giving homeowners a valuable return on investment while saving more in the long run.
The Main Takeaway
With the rewards of this new law vastly outweigh the risks, it will help to put the United States back in the spotlight as the authority in renewable energy. Through providing favorable tax credits to manufacturers, commercial and residential solar power, and investing in communities aiming to find their identities in the energy transition, they make up the backbone of the bill’s priorities and help bolster and American economy that is returning to dominance. As a measure that is supported by many environmental and climate activists, the benefits that come with this legislation may be too good to pass up – reshaping the U.S. energy sector, reversing climate change and preparing for the future of energy consumption and management through advancements in solar technology.