The Inflation Reduction Act (IRA) is groundbreaking legislation that will accelerate renewable energy development and create thousands of jobs in the United States. But first, we need clarification on the programs and benefits that result from the new law, how companies can qualify for them and what the timelines will be. Further, to meet the Biden administration’s timetable and states’ renewable portfolio standard requirements, we need it quickly.
We need to move from forming and storming to norming and performing. Quickly.
by Lars Moller
The Inflation Reduction Act (IRA) is a massive boon for companies engaged in renewable energy development, manufacturing, construction and deployment in the United States.
The law represents a renaissance for the U.S. supply chain, and it’s a game-changer for the entire industry. In addition to being a catalyst for billions of dollars in investment into the clean energy transition, it also will create tens and thousands of direct jobs direct and hundreds of thousands of indirect jobs in the U.S. economy.
As beneficial and remarkable as the IRA is, there remains a lot of collaborative work to do to make it function the way it should and help achieve the goals for which it was intended. It needs to be done quickly or we risk failing to meet the administration’s net-zero emissions goals and multiple states’ renewable portfolio standards (RPS), a.k.a. renewable energy standards (RES).
The USA needs to settle on the who, what, where and how much soon or risk losing momentum from the IRA’s passage and missing opportunities for U.S. companies and citizens. As we’ve been forming and storming, the clock’s been ticking.
Drip, Drip, Drip
During the CLEANPOWER 2023 Conference & Exhibition in New Orleans in May, Ventoco consultants spoke with nearly 100 people who are engaged across the renewable energy supply chain, including representatives of some of the world’s largest and most influential renewable component and equipment OEMs. In most cases, when we asked for their interpretations of the IRA – about the nuts and bolts of qualifying for tax credits and other incentives, application processes and requirements – they couldn’t answer with confidence or different people gave conflicting answers.
As we’ve contacted experts within federal agencies responsible for IRA implementation, we’ve learned they do not seem to have a clear or comprehensive understanding, either, or have not yet decided or communicated how the law will be implemented, either.
Clearly the passage of the IRA was just the first step.
“The Devil’s in the details,” as the old saying goes, and, while it’s been nearly a year since President Biden signed the IRA into law, there is still much less than needed clarity about how it will be implemented practically and fairly. As ambiguity about the IRA reigns across the industry and around the globe, the many departments and agencies involved in this [Dept. of Treasury (USDT), Internal Revenue Service (IRS), Dept. of Energy (DOE), etc.] have been releasing clarifications , but they’ve come in a drip, drip, drip. And, unfortunately, it seems that in many cases the various new Guidance releases lead to several more questions.
Forming, Storming, Norming & Performing is a Six Sigma change-management concept that describes “…the four stages of psychological development a team goes through as (it works) on a project.
In Forming, “a team comes together to address a problem and propose solutions.” With the IRA, part of this happened when the legislation was drafted and debated, and it continues as federal agencies like the U.S. Dept. of Treasury and Dept. of Energy sort out the details to provide rules, regulations and guidance.
Six Sigma Daily calls Storming “the most dangerous phase” in terms of success or failure. This phase often brings out the negatives in terms of group behavior and collaboration, with individuals seeking control and pushing for their own desired outcomes.
In Norming, “A corner is turned” and team members begin “to work together effectively.”
Performing is the stage at which the team is working together toward a shared goal.
IRA Ambiguity
There are several issues with IRA implementation that come under the general heading of “Ambiguity.”
Specificity/Lack Thereof
In some areas of the law there is unnecessary specificity while in others there is none.
Several of our clients operate within both solar and wind, and they’re asking, quite reasonably, why Section 45x of the IRA specifically mentions some parts, meaning they qualify for Advanced Manufacturing PTCs (Manufacturing PTCs or MPTCs), while other critical parts are not mentioned at all. While certain bolts, fasteners, torque tubes and purlins for solar energy are there in black and white, bolts and fasteners for wind energy are conspicuously absent. For that matter, the piles for solar are left out, too, despite the fact that they are just as important to enabling renewables expansion.
As we currently understand Section 45x, a U.S.- based company that manufactures the purlins or torque tubes (from steel being poured and formed in the USA), which are critical for mounting the solar panels and are used for the tracker systems, qualifies for an 87-cent credit per kilogram, but another U.S.-based company that manufactures piles, the foundations for solar systems, does not specifically qualify for anything.
“Wait a minute,” one might say, “the piles and other critical parts can qualify under Section 48c.”
Ah, yes. About that….
Section 48c
The Section 48c Advanced Energy Production Credit ITC (aka Manufacturing ITC or MITC) addresses nearly a dozen categories of technologies, minerals and potential possibilities for parts, components, equipment and materials that are not specifically mentioned in Section 45x.
This section 48c or MITC makes available approximately $10 billion for tax credits. Companies can apply by submitting Concept Papers that outline their intentions aligned with the guidance we received on May 31, 2023 from the IRS and DOE. The DOE will begin accepting MITC Concept Papers no later than June 30, 2023, and the application period closes on July 31, 2023.
Even though they’ll begin accepting applications at any moment now, the guidance as to what those applications need to include – what the companies intend to invest in, how and at what level – or how they will be evaluated, scored and ranked has been scarce. Needless to say, that makes it rather difficult for companies to submit concepts. At the least, it’s making some companies seriously consider whether it’s worth the time and effort.
Those companies that do submit Concept Papers will have to run through a back-and-forth process with the DOE and, ultimately, wait until Q1 of 2024, when the agency is scheduled to announce awards, to hear whether they’ll potentially be receiving under 48c. That’s more than a year-and-a-half after President Biden signed the legislation into law.
Many companies will not move forward with projects until they know where they stand with the awards, and beyond that because once they are notified of an award they’ll be required to resubmit their proposals with more detail and depth, with more back-and-forth before the conditions under which they’ll eventually receive the tax credits are fully clarified.
Despite that, we can anticipate a flood of 48c applications to be submitted for those credits. Since there’s no clear guidance on what they need to contain or how they will be fairly evaluated, wading through them all and comparing apples to oranges to grapes is going to be a monumental task that could delay projects even longer.
Finally, while the renewable energy industry is deeply appreciative for this groundbreaking legislation in Section 48c, $10 billion is a relatively small sum considering the types of materials and infrastructure we’re talking about. To put it into perspective, in 2022 the industry installed roughly 25 gigawatts of wind, solar and energy storage capacity with an asset value that far exceeded $25 billion. Over the next five to 10 years, that is likely to increase to as much as $40-50 billion per year.
Domestic Content
There also needs to be more clarity around domestic content requirements.
Take a wind nacelle (the large turbine unit that sits on top of the wind tower), for example.
Under Section 45x, nacelles qualify for tax credits. However, most of the components inside those nacelles – gearboxes, generators, hubs, main shafts, bearings and slew rings, power electronics, etc., etc., etc. – currently are mostly produced outside the United States. U.S.-based companies import, assemble and incorporate them into nacelles (examples include Vestas in Colorado and GE in Florida).
Since most of the parts inside the nacelles are not domestic, do the nacelles themselves then qualify?
To date, we simply do not know in “black and white.”
If such a nacelle scenario does not fulfill the local content threshold, then why wouldn’t these subparts be mentioned in 45x as critical subcomponents to have manufactured in the USA so these companies receive the same benefits as those producing solar subcomponents such as torque tubes and purlins, to pick just two examples from the list in 45x?
The bottom line is we need many more supply-chain parts and industry segments incorporated specifically into the IRA programs, including the materials to manufacture them – raw materials for steel mills, major casting and forging plants, latest production technologies, improved logistics and construction solutions.
Finally, we also should incorporate everything required for the much-needed transmission towers and power line manufacturing capabilities and capacities. It’s not simply a matter of solving the permitting queue issue for transmission lines; we also need manufacturing capacity and the materials to produce these towers and wires – also critical components left out of 45x.
The Politics of Renewable Energy
As I’ve already mentioned, whether it’s 45x (MPTC) or 48c (MITC), many companies will not know whether they’ll be receiving any credits until sometime in 2024, and potentially even later. By that time, the presidential and congressional elections will be just months away. The uncertainty among renewable energy companies and leaders will be even more tangible than it is now because it is entirely possible that, in January 2025, the USA will have a different president and the power center in Congress will have shifted.
The party currently in the majority in the U.S. House of Representatives has already made its desires regarding the IRA quite clear; it wants to scrap the renewables provisions entirely. In fact, the chamber already passed legislation to do so and fought hard for IRA-provision repeals during negotiations to raise the debt ceiling last month.
Meanwhile, other nations also love renewable energy jobs and investment; they’re not about to sit around and wait for the USA to capture all the world’s suppliers. Instead, they’re using the IRA as a template for their own incentive-based legislation to stimulate development at home.
France, for example, recently announced a credit similar to those in the IRA for investments into renewable energy technologies. It’s not as comprehensive as the IRA, but it’s still significant and could deter European companies from entering the U.S. market.
Which brings us to the IRA irony.
The Devil They Know
The IRA is intended to accelerate investment in renewable energy infrastructure in the United States by both domestic and foreign companies. It’s so good that companies can’t ignore it, but it’s so unspecified and subjective that it’s causing them to delay investment decisions.
Add to that the fact that other nations are passing their own legislation to stimulate growth in renewables, and the delays could become permanent decisions to invest elsewhere.
If I were on leadership teams for European and Asian companies, I’d be wondering if, given the risks of the potential for a new U.S. administration change and/or a substantial modification to the IRA, perhaps staying in my home market is a wiser course of action than waiting for the United States to figure out how the IRA is going to work, for whom and when.
The Devil is in the details, and in this case it could be the difference between “the devil you know” and what seem to be a continuously shifting rules and circumstances in a new market. The result could be that we actually lose critical elements of the supply chain the USA needs.
It’s not about who has invested in what, but who is not investing yet because they simply don’t know how to interpret the IRA.
The Clock Is Ticking
Meanwhile, the USA is already falling short of its renewable energy goals.
The Biden administration “…plans to eliminate fossil fuels as a form of energy generation in the U.S. by 2035. The White House set out a target of 80% renewable energy generation by 2030 and 100% carbon-free electricity five years later.”
On top of that, as the CleanEnergy States Alliance notes, “There are currently 22 states, plus the District of Columbia and Puerto Rico, with 100% clean energy goals.” The earliest target years are 2032, 2033 and 2035 for the District of Columbia, Rhode Island and New Jersey respectively.
Given the delays in clarification to the IRA and guidance in accessing its benefits, additional foreseeable hurdles and the fact that we’re starting from behind in some cases, we could lose additional years before we really get rolling.
We Can Make This Work
It would be difficult to overstate how important the IRA is to the renewable energy industry and the future of U.S. energy security. It’s incredibly smart legislation with the right intent, and it’s created a unique opportunity for the United States; since we were first to market with the major concepts it contains, we also could be the greatest beneficiaries.
We’re confident that we – the government, renewable companies, investors, trade organizations – can improve upon what we’ve already done, move beyond forming and storming to get to norming and performing so we can build a strong advantage in renewable energy supply.
Clearly the federal government needs to move more rapidly; work more closely with the entire industry, not just solar, not just wind, not just energy storage, but a broad spectrum of industries directly or indirectly involved in the renewable space; clearly define exactly how the programs initiated by the IRA are going to work; and provide concrete guidance that U.S. and overseas companies can depend on.
To impact CO2 emissions enough to meet the goals set by the administration and states, we must.
