Unraveling the IRA’s domestic content rules

From pv magazine

The IRA sets two requirements for the domestic content bonus of its tax credits. First, all structural steel in new products must be U.S.-made (the “steel and iron” test). And second, 40% to 55% of the cost of manufactured products in solar, battery, and wind installations – including the labor costs required to make them – must relate to U.S.-made products (the “manufactured product” test).

Treasury guidance

The U.S. Department of the Treasury and Internal Revenue Service has issued guidance for taxpayers to access new investment tax credits (ITCs) and production tax credits (PTCs) and bonuses.

On May 12, the Treasury published interim guidance which will apply until a final rule is set down. While some aspects of domestic content bonuses remain unclear, the Treasury clarified which parts of solar, battery, and wind systems fall under the manufactured product test and which the steel and iron test.

For example, while modules are unambiguously manufactured products, solar trackers comprise complex machinery with a structural solar project role but are made of steel. The Treasury considers trackers manufactured products but fixed-tilt steel racking is deemed steel and iron.

The Treasury listed the manufactured-product components in crystalline silicon PV modules, which will determine domestic content bonus eligibility under the manufactured product test, but did not list equivalent components for trackers or inverters.

The Treasury also specified that subcomponents – the parts and materials that go into making manufactured-product components – will not be counted in the manufactured-product test. For example, the location a solar cell was manufactured will be considered in the test but the region the wafer subcomponent was made in, will not.

For the manufactured-product test, the Treasury requires a calculation of the direct cost of manufactured-product components. This definition, of “direct cost” is a very specific and limited portion of total costs and the party claiming the IRA tax credit will need to provide accounting of the direct cost for every manufactured-product component.

This is perhaps the most challenging part of the domestic content bonus, as many manufacturers consider direct costs to be confidential and are not prepared to share them with their customers.

The treasury guidance left many questions unanswered. Is aluminum racking considered in the steel and iron test, the manufactured-product test, or not considered at all? What are the manufactured-product components that the treasury will consider for inverters? And finally, will electrical balance-of-system (BoS) components be considered manufactured products? If so, which parts of the electrical BoS will be considered manufactured product and which components?

These questions are likely to be addressed in the final rule the Treasury issued a notice of intent, on May 12, to introduce. In the interim, however, the lack of clarity on these details presents challenges to parties attempting to claim tax credits.

Accessing credit

CEA has run many scenarios to see how a PV project owner could claim an ITC or PTC. For those projects using crystalline silicon modules, by far the most direct way to reach the 40% to 55% threshold is to use a module with a domestic cell, as the cell represents the highest cost of all the manufactured-product components.

This is easier said than done, however. There are, currently, no crystalline silicon PV cell factories in operation in the United States. Several are planned or under construction but it will be more than a year before the first US-made cells roll off the production line. Even when manufacturing does begin, there is far smaller production capacity planned for domestic cell factories than there is for US module fabs.

There are other ways to access the domestic content bonus. One is to use thin-film solar; however, U.S. manufacturer First Solar is sold out for many years ahead, which limits the ability of many buyers to take that route.

Tax-credit-bonus applicants could attempt to reach the domestic content threshold via other materials, such as trackers, inverters, or electrical BoS equipment. This is also very challenging, however. While several of the largest tracker suppliers have ample domestically produced components available, there are very few inverters suitable for utility-scale solar applications which are made in the United States.

Evolving ruleset

Ultimately, there are many hurdles between buyers and the domestic content bonus, under the current rules issued by the Treasury. Beyond the challenge of getting all suppliers of manufactured product to share their direct costs, there is the problem of accessing U.S.-made cells, thin-film modules, or sufficient other domestic components to meet the 40% to 55% threshold.

CEA is looking forward to reviewing the final rules that the Treasury implements for the domestic content bonus. There is broad anticipation that these will address some of the gray areas in the current guidance. There is also the possibility that the Treasury will move away from its “direct-cost” construct.

Either way, CEA will be guiding clients on how to comply with the complexities of the new tax credits to help expand the U.S. solar industry on both the manufacturing and deployment fronts.

Learn more from leaders and experts about the U.S. manufacturing renaissance during the pv magazine USA Roundtables 2023 event on October 12.

Christian Roselund leads policy research and communication on consultant CEA’s market intelligence team, with a focus on trade, supply chains, and national policy. He has 13 years’ experience in clean energy, including serving as a founding editor of <b>pv magazine USA</b> and as editorial director at the Rocky Mountain Institute sustainability research body. He has written extensively about solar policy, manufacturing, and technology.