Impact of the IRA on U.S. Renewable Energy Manufacturing and Supply Chains
The Inflation Reduction Act was designed to enhance domestic manufacturing and secure domestic supply chains. The act, signed by President Biden in 2022, was sponsored by Sens. Chuck Shumer (D-NY) and Joe Manchin (D-WV), with the legislation also drawing from House Bill HR5376 sponsored by Rep. John A. Yarmuth (D-KY 3).
According to a White house Fact Sheet dated August 16, 2023 (one year after the passage of the legislation) “The Inflation Reduction Act of 2022 aims to boost domestic manufacturing, creating good-paying jobs and build more resilient, secure, and trusted supply chains.”
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One of the immediate highlights of the bill was the extension of the Clean Energy Tax Credit of up to 30% credit for qualifying investments in wind, solar, energy storage and other renewable projects that meet prevailing wage standards and employ a sufficient proportion of qualified apprentices from registered apprenticeship programs. Plus, a bonus credit of up to 10 percentage points for qualifying clean energy investments in energy communities. The federal tax credit stands at 30% until 2033, with a reduction to 26% in 2034.
Two crucial sections of the Act, 48C and 45X, support domestic manufacturing. Section 48C focuses on capital investments to enhance manufacturing capabilities, while Section 45X provides tax credits for manufactured products in the renewable energy sector.
Creating Clarity From Confusion
From the onset of the IRA, both 48C and 45X were lacking in initial guidance and understanding. It took the entire first year for manufacturers to begin to understand if there would be any tax credits or other advantages derived from the legislation. Consultants savvy in government programs began to assemble teams to study and understand these two sections as they relate to domestic manufacturing.
This also prompted manufacturing companies, especially ones serving the renewable energy market, to begin investigating potential tax credit opportunities. In one example, I worked with Alexandria Industries, a well-known domestic manufacturer of custom aluminum extrusions, machining, stretch forming, bending, heatsinks, and injection molding. Together, we assembled a team of manufacturing, financial and planning experts and began the process of writing proposals for qualification under 48C.
We also leveraged a third-party consulting firm experienced in government programs who had been studying IRA 2022 and had developed an internal team of experts.
After months of gathering details and studying the proposal guidance, we submitted four individual proposals looking for approval to go to the next step in the process. It was strongly felt that all four proposals included sufficient detail supporting commercial viability, greenhouse gas emissions impacts; strengthening the U.S. supply chains and domestic manufacturing for a net-zero economy; and workforce and community engagement. Months after submittal, we received a negative recommendation for all four proposals based on a “lack of detail.” By program design, the guidelines for submitting proposals limited space, potentially causing the proposals to lack specific detail for approvals.
In closer studying Section 45X, the Solar Energy Technologies Office of The Department of Energy has issued an understandable version of guidance on eligible components and tax credit calculation formulas.
This spurred another round of working with a consulting firm to understand if any products Alexandria Industries manufactured could qualify for 45X tax credits. They had already been producing various components for renewable energy (solar) systems mostly within the residential, commercial, or industrial fix or flat roof technologies.
Interestingly, we found that section 45X limits eligible system components to torque tubes and structural fasteners, also specifying steel as the main metal considered for inclusion. Although torque tube types of solar trackers are the most efficient, they can be expensive and non-practical for multiple other applications. Flat roof, residential roof, and fixed tilt industrial or commercial systems appear to be ignored as qualifying under Section 45X.
Domestic Demand for Renewables Spurs Growth
Extending the Clean Energy Tax Credit plus the inclusion of domestically supplied materials for most renewable technologies has added an extra layer of benefits for domestic manufacturers as renewable technology companies have turned to the domestic manufacturing supply base in qualifying their products for domestic supply consideration. Over the past five years, domestic manufacturing capacities have seen flat to low growth.
In contrast, the renewable market has experienced double-digit year-on-year growth over the same period and, depending on what source you might use as your guide, renewables are set to explode to even greater heights over the next five years. Considering other major economic market trends staying steady or showing slight drops in volumes, renewables look to be the market with the most future growth potential. Domestic manufacturing has already seen an uptick of interest from renewable technology companies looking to strengthen their domestic manufacturing supply chains. The key question will be: “can and will the domestic manufacturing sector keep pace with the demands of the renewable market?”
Most domestic manufacturing companies offer their services to a varied market share versus concentrating on only one or two markets. This diversification ensures the ability to react well to market fluctuations, both strong and weak. Over the initial few years from the inception of the U.S. renewable market taking hold, domestic manufacturers were skeptical to offer capacities and capabilities to renewables, as it was initially considered small and unstable to most U.S. manufacturers.
The last three years plus the future years of renewable growth have made this market extremely attractive for domestic manufacturers of steel, aluminum, plastics, and other materials. One example of this is aluminum manufacturing. Companies in this space have gone from zero exposure in renewables ten years ago, to a much larger capacity allocation simply due to increased demand.
Solar module manufacturers relocating to the U.S. have been seeing potential demand begin to consume a substantial portion of the current aluminum extrusion capacities. Other renewable technologies supplying flat roof, fixed tilt, and commercial/industrial sites also will be looking to consume large capacity allocations from the aluminum and steel domestic manufacturers. The question of the quality of products domestically produced will come into play but there is confidence in U.S. manufacturing to both meet the challenges of increased capacity demands while holding high quality standards.
As the IRA evolves, U.S. manufacturers should view the renewable market as a stable and promising opportunity. The sector, and individual company growth, will depend on expanding manufacturing capacity, improving efficiency, and maintaining high quality standards.
Over the coming years, domestic manufacturers should focus on capacity growth and efficiency improvements to keep pace with the exploding renewable market. Manufacturing aluminum, steel, plastics, glass, and other materials has the potential to experience double-digit growth but must also navigate the pressure of controlling and reducing manufacturing costs while maintaining quality and reliability.
Strong domestic supply chains will be one of the key requirements for the continued growth of the renewable energy market. Supported by legislation such as the IRA and acceptance by the population in general, renewables have the potential to be one of the most prolific growth markets ever experienced both domestically and worldwide.
—Mark W. Turley, MBA, leads solar market development for Alexandria Industries and is owner of Projected Energy, LLC. He has 45 years of experience in helping manufacturing companies navigate the business landscape, and more than 20 years specializing in the renewable energy market.