US solar: the long and winding road to domestic module procurement

The Inflation Reduction Act (IRA) has spurred a wave of interest in the renewables space in the US. The development project pipeline has reached 438 gigawatts (GW)_ac across wind, solar and storage. For solar alone, more than 3.0 GWdc of new projects were contracted in Q1 2023, 25% more than Q1 2022.

However, despite this momentum in the renewables space, the recently proposed IRS guidance for the Domestic Content Requirement (DCR) makes it difficult for developers to qualify.

Demand for domestic solar equipment is soaring… but new IRS guidance may have a short-term impact

The domestic content adder has captured significant interest from developers, as a solar project can obtain an additional 10% tax credit if the project meets the DCR. Based on our understanding of the guidance, to qualify for the bonus adder, the equipment used for the development of a utility-scale solar project is placed into two broad categories:

• Construction goods

A construction good is classified as anything primarily made of iron or steel and is structural, such as module racking, pile or ground screw, and rebar. All iron and steel used in this component category must be 100% from the US (including Puerto Rico, Guam, American Samoa, US Virgin Islands and the Commonwealth of the Northern Mariana Islands). The guideline does state that any metallurgical refinement process for the steel and iron used in these components can take place outside the US.

• Manufactured products

This is classified as equipment that is manufactured (altered to add value and not mere assembly) and then incorporated into the utility-scale solar facility. Examples include PV modules, inverters and trackers. To meet this requirement, 40% of the total cost of the manufactured products must be domestic (including direct manufacturing labor) for projects starting construction before 2024. This will progressively increase by 5% each year till it reaches 55%.

Despite this new incentive, our preliminary analysis shows that importing modules will continue to be the most economic option through 2025. This is for three key reasons:

1. Cost

One of the main business cases for using a domestically-made module is to leverage the 10% domestic content adder. Our analysis indicates that to meet the DCR, the cell in a US-made module must be made in the US, which represents both a cost and a price uplift.

Tier 1 manufacturers are currently quoting prices ranging from 50-60 cents per watt (c/W) for a US-made module with a US-made cell that would start being delivered in 2025. In our latest PV Supply Chain Pulse, we estimate that modules imported from Southeast Asia and delivered by 2025 will be priced at 33-35 c/W. To make economic sense to procure domestic, the benefit obtained from the 10% ITC must be higher than the price delta between an imported and domestic module.

2. Time

Manufacturers have announced more than 52 GW of module manufacturing capacity and 20 GW of cell manufacturing capacity since the passage of the IRA. The new guidance this month shows that for modules to meet the DCR, cells must be US-made.

While this is expected to drive the development of a US supply chain further upstream than just supply of the module, cell manufacturing would be a new industry in the US. Ramping up to full production will take anywhere between 24-36 months.

3. Complexity

The guidance provided by the IRS is challenging to implement. Since the calculation for domestic content is cost-based, manufacturers must provide full transparency on their cost stack and margin levels, which is impractical and inconvenient for manufacturers.

The guidance is unclear as specific components (such as torque tubes) could be considered a construction good or a manufactured product. Implementing the guidance will require an intricate dynamic between manufacturers and developers.

Increased US cell manufacturing is a possibility – but the economics remain a challenge

Assuming US manufacturers are able to offer domestically manufactured modules and cells at more competitive prices than are currently being offered, the guidance should result in increased US cell manufacturing capacity over the next two or three years. However, if modules with US-made cells are 4-5 c/W higher than imported modules, the upside from the domestic content adder is lower than the savings from using imported modules.

If more cell capacity comes online, the industry can reach a critical volume in which both cells and modules become commoditized and prices lower. During this period, manufacturers and developers can work together to develop a methodology to comply with the IRS guidance and streamline the administrative process with an adequate balance of cost transparency and IRS compliance.

We track changes in the US solar segment closely. Find out more about our solar research.