This piece was contributed by Yezin Taha, founder of Nevados, an all-terrain solar tracker manufacturer.
Apart from solar power’s environmental advantages, PV has geographic advantages — energy generated anywhere you need it, with no fuel inputs. That “local energy” advantage shrinks, however, if you need to source components from the other side of the world.
Made-in-the-USA solar power got a boost when Congress put bonuses for domestic content into the Inflation Reduction Act in the form of the solar Investment Tax Credit and Production Tax Credit.
As always, details can get messy whenever tax policy is involved. Yet, tax policy has been critical to the growth of our sector and will continue to be as we scale up to meet the need for fossil-free energy and to maximize the economic advantages here in America.
All in the details
The IRA included a tax credit for tracker components like torque tubes and structural fasteners. The IRS recently issued its long-awaited guidelines on this tax credit, confirming that eligibility will be determined by a “substantial transformation” test.
That means eligible products must be substantially transformed at a U.S. factory to be considered as a U.S. manufacturing process. Eligibility uses two tests: one for steel and iron, and another for manufactured products. Under the steel and iron test, 100% of the structural steel in new projects must be U.S.-made.
The manufactured product test requires that 40% of the cost of manufactured products must be from U.S.-made products. The fraction steps up by 5% a year for projects that start construction in 2025 and beyond, maxing out at 55%.
Under the draft IRS guidelines, solar modules are counted as manufactured products. The IRS also proposes treating solar trackers as manufactured products — whereas fixed-tilt steel racking will be counted as steel and iron.
We are still waiting for final confirmation on some key questions, particularly for the domestic content bonus:
- While the IRS categorized the tracker as a manufactured product, the initial guidance did not specify the tracker’s components. Which components must be U.S. origin for the tracker to receive full credit under the manufactured-product test?
- Will the IRS continue to require that taxpayers report only direct materials and direct labor costs for the domestic content calculation, or will it change the standard to price paid, as requested by industry?
- When it comes to trackers, which entity will be recognized as the tracker manufacturer? The engineering, procurement, and construction company who integrates the tracker into the array? Or will it be the company that sells the tracker system to the EPC or developer?
Hair-splitting, perhaps, but normal in tax-related matters.
Business of buying domestic
Developers face myriad questions in optimizing the tax credits.
First, to decide which tax credit to use: The ITC is intended as an upfront tax credit that doesn’t vary by system performance. By contrast, tax credits claimed under the PTC are earned over time based on the energy actually produced, which may provide a more attractive cash flow, albeit delayed.
Department of Energy guidance suggests that deciding between the two largely comes down to a project’s total cost, sunlight availability (or “insolation”), and whether or not the project is also eligible for bonus tax credits.
As a rule of thumb, the Energy Department says that large-scale solar PV projects in sunny places stand to receive greater value if their developers opt for the PTC. Projects in less sunny areas, with high installation costs, or that qualify for bonus tax credits, are likely to benefit more from the ITC.
Which brings us back to the question of when it makes sense to buy domestically produced components.
The answer typically comes down to the developer’s ability to source domestically manufactured solar cells, whether conventional PV or First Solar’s thin film modules. Without this, based on current understanding, it will be difficult to qualify for 40% domestic content (and up to 55% later on).
Advantages of American-made
Yes, domestically manufactured equipment can come at a higher cost. However, buying domestically reduces the risk of supply chain and logistics disruptions. Do not forget the complications of 2021, when a rapid uptick in economic activity went up against severe supply bottlenecks and surging logistics prices.
Domestic supply chains can be both more robust and more efficient, such as by reducing shipping times and associated carbon emissions. Purchases of as much domestic equipment as is available right now can help prepare a company for a future when more U.S. solar module capacity has come online.
Also, buying domestically creates new factory jobs in the solar sector, helping to build community support for projects — and political support in Washington, D.C. for maintaining the tax credits.
IRA in action
The Solar Energy Industries Association predicted the IRA’s domestic content provisions would result in a “flood of investment” in American-made solar equipment and components. News reports have suggested billions of dollars’ worth of investments are in the pipeline and reviving ancillary domestic industries.
For example, our company, Nevados, just announced the launch of a new U.S. factory line in Mount Pleasant, Texas, 2.5 hours east of Dallas. Our manufacturing partner is Priefert Steel, a third-generation family-owned business and “America’s #1 name in ranching and rodeo.” This new production line in the heart of Texas’s nation-leading solar industry has become even more lucrative for Priefert with those domestic content incentives.
In Nevados’ case, Priefert manufactures our components all the way from American-made steel coil to finished goods at its Texas factory, which ensures that our products will qualify for the tax incentives. We can offer either internationally sourced equipment, or levels of domestic content up to 90%, at varying price points — all while continuing to expand our U.S. manufacturing capacity with the goal of 100% domestic content.
Procurement in 2024
Solar developers are already operating under the IRA. Some developers are starting to plan for the tax credit adders by sourcing U.S.-origin products, while others continue to source internationally at lower prices. As U.S. solar supply chains continue to build out, and as tax rule impact comes into focus, it is up to equipment suppliers to provide multiple procurement options.
Yezin Taha is the founder of Nevados, an all-terrain solar tracker manufacturer, which launched its new U.S. production facility in Mount Pleasant, Texas.
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