A year ago, Congress passed the Inflation Reduction Act or IRA. Among other things, the IRA offers tax incentives for building solar power plants or renewable energy plants with a high level of domestic content. In Episode 13 of Power Players by Origis®, host Michael Eyman discusses strategies and best practices to ensure the proper domestic content in a project, the benefits to industries beyond solar and renewables and potential barriers to success.
MEET THE PLAYERS
Chris Gauldin is Vice President Supply Chain for Origis Energy. He has more than 20 years of experience in supply chain management across multiple industries, including defense, tech, construction and O&M. He holds a BA from East Carolina University and a MA from Texas A&M.
With twenty years of leadership and operations experience, Managing Director Michael Eyman ensures that Origis Services’ rapidly growing solar and energy storage portfolio performs for owners and communities.
Inflation Reduction Act
A year ago, Congress passed the Inflation Reduction Act or IRA. Among other things, the IRA offers tax incentives for building solar power plants or renewable energy plants with a high level of domestic content.
Gauldin explained one of the big goals is energy independence, and that means being able to build and manufacture the materials needed for a solar or renewable energy plant here in the United States. So, the government, as part of the Inflation Reduction Act, created a set of domestic content requirements that peak around 55% of the material costs of a new operation in 2027. And if developers can meet those domestic contents, then there’s an “adder” or additional 10% tax credit.
There is a recognition the domestic supply chain is not mature enough to meet 55% U.S. sourced content immediately. Thus, policy makers built an escalator into the law. While projects now need to be at 40% domestic content to get the tax incentives, every year, an additional 5% is added to the target, culminating at 55% to reap the extra rebate.
Gauldin went on to break down how system components contribute to the overall calculation. Major buckets include modules, trackers, eBOS and inverters. The first qualifier is using U.S. steel. Piles, rebar, and pads all need to be U.S. steel to qualify.
American based assembly is not enough to qualify as domestic content. For example, a tracker consists of the controller, the torque tubes, and the mounting hardware. Utilizing qualifying steel, with controllers and other parts made in the United States, developers can count the bulk of the tracker cost as domestic content.
Panels are the Key Component
Solar panels are typically 30-35% of the total cost of the project. But they make up about 65% of the materials costs. Gauldin believes for developers to meet the domestic content goals, panels are the key.
He suggests finding manufacturing partners in the United States for solar panels building high quality products. This is easier than it has been in the past. Since 2020, $11 billion has been invested by panel manufacturers for new facilities in the United States. IRA is fueling historic investment.
That doesn’t mean a company should only partner with domestic companies. Gauldin says developers need to determine how they want to approach the finances of a project to determine the right partner.
While there’s a lot of demand for renewable energy, not every project will qualify for the tax credits in the IRA. If a developer understands a project will likely not achieve the domestic content needed for the tax credit, then Gauldin advises it to get the lowest possible cost possible. However, in cases where the credit is achievable, it can be worth paying a small premium for panels produced domestically because the benefit of the tax credit adder will more than offset it.
Geopolitical Realities and Reactions
Gauldin explained while the goal is to use as much domestically sourced content as possible, the bulk of the capacity for solar manufacturing today, whether it’s modules and other parts, is still in China. Most developers and operators have very little control over global issues affecting the supply chain.
The prudent response is to be fully diversified. Gauldin elaborated it’s more than geopolitics. It can be weather-related, like a tsunami. If a company has all its suppliers in a high-risk area, and there’s an earthquake or some other natural event, an entire supply chain could be wiped out, putting projects and companies at risk. He recommends a diversified supply chain, across multiple regions, blending those costs together. It may be a little bit higher than just sourcing at the lowest cost, but it assures supply for a long period of time.
Not Just New Construction in Renewables
While the economic benefits of the IRA for the renewable energy space have been widely discussed, there is another beneficiary: traditional manufacturing.
“For the average American that maybe isn’t in renewables, or maybe has been getting a lot of mixed signals about renewables, the key about the IRA is not giving money away to renewables,” said Eyman. “The key about the IRA is stimulating an entire network of supply chain that feeds a whole bunch of other traditional industries, including oil and gas, and is ultimately about, from what I hear you saying, jobs, jobs, jobs.”
Gauldin agreed. Jobs and energy independence are the key. The incentives in the IRA created a re-energization of bringing some commodities and industries back to the United States.
“What we’re seeing is your big players in the tracker space … are all looking at their supply chains and asking, ‘How can I assure I hit these domestic contents and give my customers the flexibility between cost and domestic content to hit their needs?’” said Gauldin. “You’re seeing a resurgence in demand for domestic steel, domestic transformation capabilities, as well as circuit board assembly, motors, things like that, as the big tracker guys go look and identify ways where they can meet the developers’ needs by hitting that high level of domestic content.”
Additionally, the demand for materials is not only for developers, but also for owners and operators. Gauldin says industry forecasts indicate high demand for replacement components for solar plants approaching the 20-year mark of a 40-year life cycle. Supply chain strategy is an important tool throughout the entire life cycle of a plant.
During their conversation, the power players discussed how the Inflation Reduction Act is affecting the supply chain for solar developers and operators:
- Broke down what the tax credits are in the IRA and how to achieve them for solar projects.
- Discussed best practices for deciding how and where to source materials for solar projects.
- Teased out benefits of IRA tax credits that have not been as widely discussed as new construction in renewable energy.
We’d like to thank our Power Players, expert guest Chris Gauldin and host Michael Eyman, for their insightful conversation on supply chain.