Investing

Opportunities and Challenges in the Inflation Reduction Act

Solar panels
Credit: Shutterstock

Since the Inflation Reduction Act was signed into law Aug. 16, a flood of company announcements has made it seem like the world is already changing. But we still have a long way to go to create the robust domestic manufacturing sector and supply chains that firms will need to qualify for the maximum tax credits in the law.

The ink was barely dry on President Biden’s signature before the deal announcements started coming.

As First Solar announced $1.2 billion for more U.S.-based solar panel production, the CEO of the Arizona-based solar manufacturer said because of the IRA, "solar’s going to be investible again" in the United States. Hanwha Q Cells of South Korea is also scaling up here, with more announcements expected from the Chinese solar leaders.

Honda Motor and LG Energy Solution said Aug. 29 they would spend $4.4 billion on an EV battery factory. That matched Tesla and Panasonic’s commitments to put a $4 billion EV battery factory in Oklahoma, and another in Kansas.

Importantly, it has emerged since the Act was passed that it fixes the Supreme Court’s ruling nullifying the Obama-era Clean Power Plan as a regulatory overreach. Greenhouse gasses are now defined in the Act as an industrial pollutant, accomplishing what the Court requested: that Congress make itself clear on its desire for net-zero solutions.

The IRA ushers in a new phase in U.S. energy production, laying a runway for renewable energy to take off with clear goals of reaching net-zero in the future. “Defining CO2 and other greenhouse gasses as pollutants instills confidence in the Environmental Protection Agency’s ability to support a net-zero future through this energy transition,” said Climate Commodities Co-Founder Julian Tung. “It ensures a legal landscape that promotes positive commitment from the energy industry, and promotes investment in the green economy,”

However, the Act also raises the bar on the cleantech industry: to get the maximum tax credits in several sectors, not only must manufacturing occur in the U.S. but also an increasing percentage of the raw materials must be sourced here or from a free trade agreement partner nation. Along with their new factories in Ohio and Georgia, First Solar and Hanwha and other panel manufacturers are busy looking for qualifying sources of aluminum and zinc.

For the next few years, there is unlikely to be enough domestic content available to meet these requirements, so special waivers may be issued in the short term for companies increasing their percentage of domestic inputs. The U.S. Geological Survey’s periodic Mineral Industry Survey reports the “net import reliance” for various minerals each year. In 2021, the U.S. produced 55% of the copper it consumed and 52% of the nickel, but only 24% of zinc and cobalt, and none of the graphite. These numbers are likely to increase over time, but it will be a path of gradual accumulation.

In a federal filing to the White House interagency working group (IWG) on mining reform, the National Mining Association expressed similar concerns: "Despite being home to extensive and varied mineral resources, the United States is facing grave mineral supply chain challenges. Our import reliance has been a well-documented and increasingly problematic issue for decades and has now become a crisis, exacerbated by pandemic-and war-related challenges, and the electrification of our economy."

As Simon Moores, chief executive of Benchmark Mineral Intelligence, put it, “Considering it takes seven years to build a mine and refining plant but only 24 months to build a battery plant, the best part of this decade is needed to establish an entirely new industry in the United States.”

Domestic hydrogen production will get a major boost from the new law, which creates incentives for production of both blue hydrogen (produced from fossil fuels with carbon capture) and green hydrogen (produced from water using renewable energy). The production tax credit increases in tiers based on the lifecycle carbon emissions per kilogram of hydrogen produced.

Blue hydrogen producers capturing most of their carbon emissions will see benefits from the lower tiers, while the credit for green hydrogen producers will increase to as much as $3/kg if they also meet wage requirements.

These wage requirements stipulate that any laborers and mechanics employed in the construction of their projects are paid prevailing wages in the locality of their projects as determined by the Secretary of Labor. Qualified facilities must also ensure no fewer than the “applicable percentage” of total labor hours are performed by qualified apprentices. The applicable percentage is 10% for projects beginning construction before 2023, 12.5% before 2023, and 15% for 2024 onwards. Each contractor and subcontractor who employs four or more individuals to perform construction must employ at least one qualified apprentice.

Following the lead of many state-level solar programs, the IRA places a much-needed emphasis on community benefit while creating additional financial incentive for solar projects less than 5 megawatts. “The expansion of the solar investment tax credit will spur historic investment into low and moderate income communities, as it will financially incentivize developers to construct vital infrastructure in those communities that have been hit hardest by the shift away from fossil fuels,” said Adam Woda, Community Solar Lead at EDPR NA Distributed Generation.

He also noted that, The added focus on distributed generation will help to facilitate an expedited rollout of renewables onto the grid and transmission system with the full backing of the tax equity market, since investors can now monetize a full suite of new incentives geared towards this segment.”

The new law also allows taxpayers receiving credits for clean hydrogen, CCS, and advanced manufacturing to opt into a direct pay program, immediately funding projects without needing to wait for an eventual tax refund. Although direct pay only covers the first 5 years after the project comes online, the bill should also help to support growth in the tax equity market by allowing credits to be sold; currently companies without tax liabilities are unable to take advantage of credits.

The U.S. has a long way to go to achieve the emissions targets we have committed to, but this bill creates a framework which will hopefully bring us much closer over the next few years, while promoting investment in domestic cleantech production.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Nicholaus Rohleder

Nicholaus Rohleder is the Co-Founder of Climate Commodities, a climate economy-focused platform company with operating subsidiaries in physical trading, mineral processing & refining, transportation & logistics, renewable power, insurance, and financial services.

Read Nicholaus' Bio