- Solar Power
- Policy and Regulation
How the IRA Affects the Solar Industry
On August 16, 2022, President Joe Biden signed into law the Inflation Reduction Act (IRA) of 2022, designed to help Americans that are struggling with rising costs. However, the law also includes nearly $370 billion in incentives for clean energy and climate-related programs and is considered one of the most significant spending packages in history for climate change mitigation and adaptation. This blog is part of a series whereby Guidehouse Insights’ subject matter experts cut through the 755 pages of legislation to identify the IRA’s most significant elements and synthesize what they really mean for the future of clean energy technologies.
How the IRA Affects the Solar Industry
One of the most significant provisions in the IRA directly affects the solar industry: a long-term extension of the Investment Tax Credit (ITC). The bill mandates a 10-year extension of the tax credit at 30% of the cost of the installed equipment, which will then step down to 26% in 2033 and 22% in 2034. The 30% credit will be retroactively applied to anyone who installed their system since the beginning of 2022. In the short term, the extension of the ITC is especially relevant for residential applications, as prior to IRA, the ITC for this segment was expected to disappear in 2024.
Local Content, Location, and User Segment Could Further Enhance Solar Economics
In addition to the ITC extension to its prior level, there are several adders that could increase the ITC significantly, there are:
- Domestic content: Solar power projects eligible for the full 30% tax credit can increase their tax credit by an additional 10%, 40% in total, by purchasing domestically produced hardware. It is expected that at least 40% of any component should be of domestic origin, with some initial exceptions, although this is expected to increase with time.
- Location: Projects that are located in former energy communities can earn an additional 10% tax credit. Energy communities are first defined as brownfields and secondly as locations associated with fossil fuels over the last generation.
- Low-income customers: There is also a 10% adder for solar power projects that sell their electricity via community solar projects to low-income individuals.
With all the adders, the ITC for a project could double to 60% of the total installation cost.
In addition to the ITC, the IRA also extend the Production Tax Credit (PTC), previously only available to wind farms, to solar projects. The PTC is set at of $0.025/kWh for the first 10 years of a project’s life, as long as it meets the established wage requirements. It drops to $0.003/kWh if these requirements are not met.
The IRA Also Supports the Local Value Chain
This time, the tax credit did not stop at the project level, and instead was extended to the whole solar value chain. The IRA offers tax credits for manufacturing various solar panel, inverter, and racking components.
- Solar cells – $0.04/Wdc
- Solar wafers – $12 per square meter
- Solar grade polysilicon – $3 per kilogram
- Polymeric backsheet – $0.40 per square meter
- Solar modules – $0.07/Wdc
- Central inverter – $0.025/Wac
- Utility inverter – $0.015/Wac
- Commercial inverters – $0.02/Wac
- Residential inverters – $0.065/Wac
- Microinverters – $0.11/Wac
- Torque tubes for racking will receive 87 cents per kilogram
- Structural fasteners get $2.28 per kilogram
A Midterm Opportunity
For the solar industry, the ITC extension is a breath of relief rather than a revolutionary measure. In the short term, the industry challenges are more technical in nature, such as supply chain challenges, trade disruptions, and labor scarcity, and these are not necessarily improved in the short term by the IRA or the ITC extension. In addition, the residential segment has been growing the most over the past year, partially driven by increased public interest caused by the prior ITC expiration.
The picture changes over the midterm when we expect growth to accelerate. Once the supply chain issues are resolved, and with the addition of new domestic manufacturing driven by the IRA, it is expected that price declines will accelerate to match previous trends. This, with the addition of the ITC extension, and players that in a couple of years should be in a position to take full advantage of the ITC adders, will set the industry on a new growth trajectory.
To learn more about how the IRA applies to large energy providers, reference the Guidehouse Guide to the Inflation Reduction Act for Energy Providers. For more information on how Guidehouse Insights can help you navigate the impacts of the IRA, please reach out to email@example.com.