New US solar tax credit rules will do little to break dependence on China, experts warn

Clean energy analysts have warned that new US rules designed to speed up the reshoring of clean energy supply chains will do little in the near term to break its dependence on imports from China.

The Treasury Department on Friday issued new guidance that would allow US-based solar developers to secure the tax credits offered by the Inflation Reduction Act only if they manufactured their cells domestically.

However, because the United States has very little manufacturing capacity for solar cells, the requirement would mean virtually none of the existing developers would be able to capitalize on the subsidy, analysts said.

“Directly and indirectly, the United States will rely on supply from China,” said Pol Lezcano, senior associate at BloombergNEF. “This guidance may encourage more cell production in the US, but the majority of cells used in US solar projects will continue to come from . . . factories in Southeast Asia, most of which are owned by Chinese companies.”

While the guidance prevents companies using imported cells from qualifying for full credit, it does allow them to continue importing some solar panel components from overseas, including wafers and polysilicon, while still being granted full credit.

The IRA, the cornerstone of the Biden administration’s effort to tackle climate change and reindustrialize the US economy and build clean energy, is offering a 30% tax credit to developers, with an additional 10% bonus. % for companies using domestic materials.

To qualify for the bonus, onshore wind farms, solar projects and battery storage units must use 100 percent U.S. steel and iron, while 40 percent of manufactured parts, measured by cost, must be produced locally. This increases to 55% for projects where construction begins after 2026.

While the companies are able to count solar panel components in the bulk of their U.S.-manufactured projects, analysts said the projects were unlikely to get the full tax credit without sourcing their cells in the U.S. United.

Sean Moran, a partner at law firm Vinson & Elkins, said: ‘Given how much of the cost of the form is associated with the cell, if you don’t meet that it will be very difficult to meet 40%. But Moran added that the guidance was “reasonable and consistent with the legislation.”

Though few projects qualify for the full bonus, one solar company said the restrictions weren’t far-reaching enough.

“Having US-made cells is a total win,” said a large US-based solar producer, but added that “to really make a dent in supply chain diversification issues, we really need nationals go down to the wafer.

The push for US-made products comes as Washington seeks to counter China’s dominance of global clean-tech supply chains. China produces nearly all of the world’s wafers, 85 percent of cells and three-quarters of all modules, according to the International Energy Agency. The country is also the world’s leading producer of polysilicon, a key raw material for solar modules.

Ron Wyden, the Democratic chairman of the Senate Finance Committee, said the new guidance “didn’t go far enough” toward rebuilding the US solar manufacturing industry.

The United States currently produces 8.9 GW of solar modules, enough to meet just half of 2022 demand and far below China’s 600 GW production capacity, according to Wood Mackenzie.

Panels from Cambodia, Malaysia, Thailand and Vietnam accounted for 75 percent of all solar energy capacity imported into the United States in 2022, according to Rystad Energy.

The pace of solar installations in the United States slowed last year for the first time since 2018 due to supply chain constraints and Washington’s trade restrictions on solar-related imports.

The United States added 20.2 GW of solar capacity in 2022, a 16 percent drop from a year earlier, according to a report by Wood Mackenzie and the Solar Energy Industries Association.

Aaron Halimi, founder of Renewable Properties, a small-scale solar developer, called the guidance a “step back” for U.S. ambitions of a ground-based solar supply chain. He said the company’s plans to source half of its solar panels nationwide this year were now “up in the air.”

Halimi added that while he’d like to qualify for the tax credit, “we may be better served by purchasing panels elsewhere.” It supplies panels from Southeast Asia, India and Europe.