Domestic influence: Calculating the unintended consequence of ‘domestic content’ in small-scale solar

Full disclosure, I started this domestic content tax credit adder article before the election. We all expect the Trump administration and a Republican Congress to cut/alter/destroy some aspects of the Inflation Reduction Act. One scenario in the rumor mill is domestic content turning into a mandatory requirement to earn the base level 30% investment tax credit (ITC). That is pure speculation, but point being, the guidance below is very likely subject to change — and could possibly influence the market even more than this current assessment.
Note: this piece has been updated to reflect the most recent domestic product announcements.
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The domestic content tax credit adder in the Inflation Reduction Act (IRA) received a lot of love from all sides of the solar industry, and why not? It’s an extra 10% tax credit just for sourcing a percentage of the system from the United States. It is a nudge of support for U.S. solar supply chains, which is a nice political message (jobs!) and a nice environmental message (reduced emissions!).
To qualify for the domestic content tax credit adder for either the investment tax credit (ITC) or production tax credit (PTC), the PV system must satisfy the Adjusted Percentage Rule, using this equation:
Domestic cost percentage = (U.S. manufactured product cost + U.S. manufactured components cost) / Total manufactured products cost.
That adjusted percentage started at 40% in 2024 and steps up 5% each year until it reaches 55% in 2027. Note: The law only specified the 5% annual escalation for the PTC, not the ITC, but our sources say that it was an oversight, and most assume it will be revised so that the 5% escalation applies to the ITC as well.
The domestic content adder, like much of the IRA, was conceived more with larger-scale solar projects and big business in mind. The DC adder is only available to commercial tax entities, which means a homeowner cannot earn the tax credit when buying a system via cash or a loan. The DC adder is only available in residential solar via third-party ownership (TPO) financing.
For MW-scale projects, achieving that 40% to 45% domestic content percentage in 2024-2025 is only possible by including some amount of solar modules made in the United States — which was really the spirit of the whole thing: building the U.S. solar module market. Smaller scale solar projects on the other hand can achieve the domestic content percentage without U.S.-made PV modules, with the right combination of inverters and racking.
In this article, I’ll explore some of the unintended consequences of the domestic content tax credit adder in the C&I and residential markets.
Calculating the solar domestic content adder
On May 24, the U.S. Treasury issued guidance N-24-41 that includes the New Elective Safe Harbor — a simpler path to calculating the minimum portion of domestic content required without the need for direct cost information from suppliers. The method uses a table with weights for applicable project components and manufactured project components. If you see any manufacturer touting their domestic content percentage, they are using this table.
Product | Components | Rooftop (MLPE) | Rooftop (String) |
PV Module | Cells | 21.5 | 30.8 |
Frame/backrail | 3.1 | 4.4 | |
Front glass | 2.2 | 3.1 | |
Backsheet/backglass | 2.1 | 3.1 | |
Junction box | 1.0 | 1.4 | |
Edge seals | 0.1 | 0.2 | |
Pottants | 0.1 | 0.2 | |
Adhesives | 0.1 | 0.2 | |
Bus ribbons | 0.2 | 0.3 | |
Bypass diodes | 0.2 | 0.3 | |
Production* | 6.7 | 9.6 | |
Inverter | Printed circuit board assemblies | 16.0 | 2.5 |
Electrical parts | 1.6 | 1.1 | |
Climate control | – | 0.3 | |
Enclosure | 1.6 | 0.8 | |
Production* | 16.4 | 2.9 | |
Roof Racking | Fasteners | 11.1 | 16.0 |
Rails | 8.6 | 12.3 | |
Production * | 6.1 | 8.7 |
* Consistent with Notice 2023-38, the direct cost of producing a Manufactured Product counts toward the Domestic Cost Percentage only if all its Manufactured Product Components are domestically produced.
The Safe Harbor table assigns more value to module-level power electronics (MLPE) than string inverters. The combination of either MLPE or string inverter plus racking would get a project well over the threshold of 40% in 2024. If all inverter and racking manufactured product components are made in the United States, MLPE without a domestic module hits 61.4%. String inverters without a U.S. module only gets to 44.6%. In this scenario, MLPE would continue to qualify for the DC adder for the remainder of the IRA, while string inverters would no longer qualify beginning in 2025, when the adjusted percentage very likely steps up to 45%.
“I fully agree with you that the IRS cost tables look to favor MLPE inverters, as string inverters can only get a fraction of the total project value,” says Joe Shangraw, research associate, power and renewables, PV inverters and trackers coverage, at Wood Mackenzie. “However, racking also has a higher weight in the string inverter scenario, meaning that 40-45% is still very obtainable if you can get a couple of percentage points from domestic module components.”
Solar + storage projects are another story. The New Elective Safe Harbor treats solar + storage as one project. The numerator = (the Domestic Cost Percentage of the solar project x the solar nameplate capacity) + (the Domestic Cost Percentage of the BESS x the BESS nameplate capacity x a BESS multiplier that is 0.69 for rooftop with MLPE, and 0.99 for rooftop with string inverters). The denominator = the solar nameplate capacity + post-multiplier BESS capacity.
For a hypothetical rooftop solar + storage DG project, Philip Shen, analyst with investment firm ROTH Capital, sees a pathway to meet the 40% ITC threshold by combining MLPE with racking and select battery pack components without the need for U.S. solar modules and cells. As for string-based solar + storage projects in residential, Shen sees a path without domestic cell/module, however, “it requires fully domestic racking or a domestic battery pack cell. Assuming fully domestic racking, we see an adjusted percentage of 40.6% for a rooftop string inverter project.”
These Safe Harbor Table scenarios instantly gave me flashbacks to the introduction of rapid shutdown in National Electric Code. That code change had a dramatic impact on the PV inverter marketplace because installers essentially had to design systems with either microinverters or an optimizer-based solution, shrinking options from a field of brands to two or three.
The DC adder is not code, obviously. Solar installers are free to ignore all of this and choose any system components to best meet project expectations and industry best practices. But the siren song of the 10% tax credit is most definitely having a material influence on product selection and residential solar financing.
U.S.-made solar inverters & racking
Regardless of the MLPE/string Safe Harbor table calculations, only a few inverter companies have U.S. manufacturing.
Wood Mackenzie began covering PV inverter manufacturing capacity earlier this year and currently sees around 8-9 GW of operating U.S. manufacturing capacity, led by seven companies with the largest U.S. factories (a mix of residential and utility-scale inverter OEMs such as SolarEdge, Enphase, Siemens, and TMEIC).
“Based on announcements for new plants/expansions from Power Electronics (20 GW), SMA (3.5 GW), and TMEIC (9 GW), U.S. inverter manufacturing capacity could surpass 40 GW by 2027, with a large chunk of that coming from central inverters,” Shangraw says.
These factories are all eligible for the 45X production tax credit, which is an incentive to manufacture in the United States, even if developers decide they don’t need U.S. inverters to get the 10% adder.
“Most factories still do not source 100% of electronic components from the U.S., meaning that they cannot capture the production component of the U.S. domestic content tax credit adder,” Shangraw continues. “Most currently have U.S.-made printed circuit boards, giving them about half of the possible points. For MLPE, this is enough to capture 40% when paired with racking, but won’t be enough once the threshold jumps to 45% in 2025.”
SolarEdge and Enphase will both have 100% U.S.-made MLPE. Tesla’s inverter will not qualify as MLPE.
Enphase started shipping domestic microinverters that will earn the full 36% back in September, and initial shipments of U.S.-made IQ8X Microinverters and IQ8P-3P Commercial Microinverters started shipping in December. Battery manufacturing capability in the United States also came online during Q3 2024. Enphase shipped approximately 574,000 microinverters from its contract manufacturing facilities in the United States that qualified for 45X production tax credits.
SolarEdge’s facility in Austin, Texas, produced over 500 MW in the third quarter of 2024 and is expected to ramp production in the fourth quarter of 2024. SolarEdge’s second U.S. facility near Tampa, Florida, began shipping power optimizers in Q2 2024 and is expected to reach a production capacity of approximately two million per quarter. The facility is adding commercial inverter and power optimizer production starting in Q1 2025.
Racking companies in the DG space have certainly noticed the influence domestic racking has in achieving the adder and are heeding the call by securing U.S. manufacturing if they didn’t have it already. S-5! says its rail-less system for metal roofs qualifies for the 37% domestic content for rooftop PV systems (with string) because the extended shelf on the clamp functions as a rail. Unirac is also touting its SolarMount racking systems, which can contribute up to 25.8%, and its “US-manufactured NXT, SolarMount, and SolarMount light rails that contribute 8.6% and can get you over the 40% threshold when using a fully domestic microinverter.”
TPO trending up
The DC adder is only available to commercial tax entities, which means a homeowner cannot earn the tax credit when buying a system via cash or a loan. The DC adder is only available in residential solar via the third-party ownership (TPO) model, which is in part influencing a shift to leases in residential solar.
TPO already comprised a significant portion of the residential market in 2023 and 2024, due largely to higher interest rates. Zoë Gaston, principal analyst, US Distributed Solar, for Wood Mackenzie, puts it in context for us:
“The national third-party ownership market share has increased substantially over the last two years since the IRA was passed. The TPO share was 20% in 2022 and has ticked up to 38% in Q2 2024, the segment’s highest quarterly market share since 2017. We expect the TPO segment to continue gaining momentum over the next few years, reaching over 40% market share in 2026,” Gaston says.
The domestic content adder certainly adds to that appeal for the lease providers. “Generally, the availability of the ITC adders is a significant reason for the shift to TPO. Recently, multiple lenders have even launched their own TPO products,” Gaston says. “While financiers have already qualified systems for the LMI [low and moderate income] and energy communities adders, many report that it has not been a significant portion of their portfolio. There is definitely a heightened focus on the domestic content adder because projects across the country can qualify.”