After the Inflation Reduction Act: Solar’s New Horizon

After the Inflation Reduction Act: Solar’s New Horizon

Insights |
By The Sol Systems Editorial Team

This article is part of the March 2023 edition of our publication The Sol SOURCE. Click here to read the full publication.

After the excitement that followed passage of the Inflation Reduction Act (IRA), reality is setting back in as we await implementation guidance from the Biden Administration. However, clean energy isn’t the federal government’s only focus—2021’s Infrastructure Investment and Jobs Act (IIJA) has started to take effect, not to mention the continued war in Ukraine, increasing trade and tensions with China, and a tumultuous U.S. economy made even rockier by the recent collapse of Silicon Valley Bank and ongoing uncertainty about the debt ceiling. Analysts, investors, and state governments are setting new expectations for clean energy deployment as we all dig deeper into the challenges and opportunities ahead.

New Law, New Projections

The IRA’s effect on solar growth projections is unmistakable. The Solar Energy Industries Association (SEIA) projects a 69% increase in solar deployment over the next 10 years, which would lead to five times more solar in the ground. 85 GW of new solar manufacturing capacity have been announced since the IRA was signed—an 870% increase. With annual overall investment in renewables set to increase from $64 billion in 2022 to $116 billion in 2031, the U.S. is now projected to cut its economy-wide emissions by more than 50% by 2030.

The End of the Solar Coaster

The unprecedented scale of these projections is largely driven by the new longevity of federal clean energy tax credits under the IRA. For the first time, the ITC and PTC will persist at full value for 10 years—or longer, if emissions from generation aren’t reduced by at least 75% in that time. The longer horizon is intended to encourage sustained investment in clean energy, instead of the too‑familiar boom-and-bust cycles brought on by periodic one- and two-year extensions. Under the IRA, the credits also transition quickly to technology-neutral clean energy credits, aligning with scientists’ and policymakers’ focus on emissions outcomes rather than technological inputs.

States Step Up

While we await federal guidance for implementing novel portions of the new law, state governments are stepping up to make the most of this moment. Encouraged by the new federal attention on clean energy that we saw in 2022, a number of states have passed or are studying 100% clean electricity commitments. As we highlight in our State Markets section, since the IRA was signed, Minnesota and New Jersey have made fresh commitments to 100% clean electricity, marking the first time that more than half of Americans live in jurisdictions that have made this commitment. States are also looking ahead at how they can leverage a clean electricity supply to decarbonize other sectors, such as transportation and building operations. The IRA and IIJA’s significant investment in these harder-to-decarbonize sectors is largely funded through states, making their role particularly important.

New Challenges

Portions of the IRA’s larger and longer-lasting tax credits rely on further federal guidance for their implementation. Because of the limits of the budget reconciliation process under which the IRA was passed, the law itself could not include the specific instructions needed for implementing its novel credit adders and financing options. Rules and definitions related to domestic content, energy communities, credit transferability, and direct pay are left to the IRS and other federal agencies to develop before the credits can be monetized. For example, the IRA incentivizes building clean energy infrastructure in “energy communities,” defined by their proximity to Superfund sites or recently closed coal facilities, or by lost fossil fuel employment. Each of these criteria requires additional information from the IRS to be actionable—defining census tracts, proximity rules, and so forth.

Another key hurdle to fulfilling the promise of the IRA is a challenge facing many industries in 2023—finding enough workers. According to some estimates, more than 100,000 new clean energy jobs have been created in the six months since the IRA took effect. At the same time, the U.S. construction industry was short 413,000 workers as of December, while 764,000 manufacturing sector jobs remained open, according to the Bureau of Labor Statistics. McKinsey & Company expects a further 550,000 new energy transition jobs by 2030, of which they estimate only up to 10% will be filled by workers leaving the oil and gas industry. Even with the significant support the IRA provides for apprenticeships, this issue remains potentially the most important challenge to achieving the full value of the IRA over the long term.

What Else Is Going on in Solar?

Setting aside the IRA, familiar policy topics remain in focus for the industry. International trade issues are still an important concern, including tariff policy and complications from our ever-evolving relationship with the People’s Republic of China. In the near term, we expect a final determination on the AD/CVD investigation by May 1, 2023, which will establish tariff rates for a substantial portion of solar panel imports. President Biden (D) stayed the effect of this decision through June 2024, although Congress is now considering overturning that critical near-term tariff relief and imposing retroactive tariffs, which would debilitate the industry. Purchasing decisions already stretch past the end of the tariff relief, and we look forward to better pricing certainty as we onshore manufacturing capacity. As we write this, solar panel imports have begun to unstick from the logjam that followed the Uyghur Forced Labor Prevention Act. Trina Solar, for example, noted that more than 900 MW of panels have cleared customs recently with less than one percent detained. This is a significant improvement from the effective freeze we saw after the law took effect last year.

Domestic challenges also remain. At the forefront are ever-worsening interconnection processes, which are hampering many regions’ efforts to connect new renewable generation. In PJM, which serves 14 jurisdictions from Pennsylvania to North Carolina to Illinois, grid operators worry that interconnection uncertainties may threaten future reliability. In the near term, the ongoing threats of federal default and bank insolvencies hang over investors and developers alike as the U.S. approaches the federal debt limit, currently estimated to be reached as soon as June. At the local level, an Astroturf campaign threatens to impose overly restrictive siting requirements for solar—if not outright bans—in many counties. Meanwhile, the State of Illinois recently passed a national model for streamlining siting requirements across geographies and technologies.

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