Clean energy analysts have warned that new U.S. rules aimed at speeding up the reshoring of clean energy supply chains will do little to break their reliance on imports from China in the short term.
The U.S. Treasury Department issued new guidelines on Friday that will only allow U.S. solar developers to receive tax credits under the Lower Inflation Act when they produce batteries domestically.
However, with very little solar cell production capacity in the U.S., the requirement means almost all existing developers are unable to take advantage of the subsidy, analysts said.
“The U.S. will be directly and indirectly dependent on China for supplies,” said Pol Lezcano, senior associate at Bloomberg New Energy Finance. “The guidance may encourage more cell manufacturing to take place in the US, but the bulk of the 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 guidelines prevent companies using imported cells from receiving full credits, it does allow them to continue importing some solar panel components, including silicon wafers and polysilicon, from overseas while still receiving full credits.
The IRA, a cornerstone of the Biden administration’s attempt to reindustrialize the U.S. economy and build clean energy manufacturing capacity, offers developers a 30% tax credit and an additional 10% incentive for companies using domestically produced materials.
To qualify for the bonus, onshore wind farms, solar projects and battery storage units must use 100 percent U.S. steel, while 40 percent of manufactured components, by cost, must be made locally. This increases to 55% for projects starting construction after 2026.
While companies can count solar panel components toward the overall U.S.-made portion of their projects, analysts say projects are unlikely to achieve the full tax credit without sourcing cells in the U.S.
Sean Moran, a partner at law firm Vinson & Elkins, said: “Given how much of the module cost is related to the battery, if you don’t meet it, it will be very difficult to meet the 40% requirement.” But Moran added that the guidance “reasonable and consistent with legislation”.
While few projects are eligible for the full bonus, one solar company said the restrictions were not far-reaching enough.
“Making cells in the U.S. is an overall win,” said a large U.S. solar manufacturer, but added that “in order to really address supply chain diversification, we really need domestic production down to the wafer.”
The push for American-made products comes as Washington seeks to counter China’s dominance of the global cleantech supply chain. According to the International Energy Agency, China produces nearly all of the world’s silicon wafers, 85 percent of its batteries and three-quarters of its modules. The country is also the world’s key producer of polysilicon, a key raw material for solar modules.
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Ron Wyden, the Democratic chairman of the Senate Finance Committee, said the new guidance “doesn’t go far enough” to rebuild the U.S. solar manufacturing industry.
According to Wood Mackenzie, the United States currently produces 8.9GW of solar modules, which is only half of demand in 2022 and far below China’s 600GW capacity.
Panels from Cambodia, Malaysia, Thailand and Vietnam will account for 75% of all solar capacity imported by the US by 2022, according to Rystad Energy.
The pace of U.S. solar installations slowed last year for the first time since 2018 due to supply chain constraints and Washington’s trade restrictions on solar-related imports.
The US added 20.2GW of installed solar capacity in 2022, a 16% drop from the previous year, according to a report by Wood Mackenzie and the Solar Energy Industries Association.
Aaron Halimi, founder of small utility solar developer Renewable Properties, called the guidelines a “step backwards” for the ambitions of the US onshore solar supply chain. Halimi said the company’s plan to source half of its solar panels domestically this year is now “up in the air.”
He added that while he would like to qualify for the tax credit, “we might be better off buying panels elsewhere,” said Halimi, who sources panels from Southeast Asia, India and Europe.