Maintenance Mindset: Why domestic clean energy manufacturing still relies on foreign materials
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The part of the Inflation Reduction Act (IRA) of 2022 aimed at U.S. investment in the clean energy manufacturing sector recently got further clarification on the tax credit’s rules and eligibility.
On October 24, the Internal Revenue Service (IRS) and the Treasury Department released the new final rules for the Advanced Manufacturing Production Credit, section 45X. After considering stakeholder comments, the final rule further outlines the IRA regulations to incentivize the production of clean energy components in the U.S, including certain solar energy components, wind energy components, inverters, qualifying battery components, and applicable critical minerals. The most significant changes from the proposed rules and important news for manufacturers relates to the rule’s determination on sourcing materials outside of the U.S., and the inclusion of material and production costs in the total cost consideration for tax credits.
So far, the Treasury Department said that the Advanced Manufacturing Production Credit has brought more than $126 billion in private sector investment in clean energy manufacturing, including around $77 billion for batteries, $6 billion for critical minerals, $19 billion for solar, and $8 billion for wind. The tax credit is in part to incentivize domestic production, so all production must take place in the U.S.
A solar energy component is a solar module, photovoltaic cell, photovoltaic wafer, solar grade polysilicon, torque tube, structural fastener, or polymeric backsheet. Eligible wind energy components include blades, nacelles, towers, offshore wind foundations, and related offshore wind vessels. Qualifying battery components include electrode active materials, battery cells, and battery modules. This more detailed list of eligible components for the Advanced Manufacturing Production Credit outline some of the definitions and component requirements.
The cost of production: can the U.S. go it alone?
Some input received on the proposed rule questioned whether all materials had to be sourced from the U.S. The proposed regulations did not require materials or subcomponents used in the production of an eligible component be subject to domestic production requirements. Given that some materials cannot be sourced from the U.S., the final rule remains silent about sourcing materials and components outside of the U.S. It’s also interesting the rule choses to be “silent regarding the location of production or sourcing of constituent elements, materials, and subcomponents,” the rule says.
The proposed regulations also did not allow the cost of materials to be included in determining total production costs for tax credit amounts. “Electrode active materials and applicable critical minerals differ from all other eligible components described in section 45X because their credit amounts are calculated as a percentage of production costs rather than specifying a fixed dollar amount or rate,” the report said. The credit amount is 10% of the production costs for electrode active materials and critical minerals.
Originally, the law wanted to unsure that companies couldn’t claim a tax credit simply for purchasing raw materials, or double crediting, where companies try to claim production costs for the same material multiple time. As an example, in some cases, electrode active materials are precursors for the production of other electrode active materials.
Approximately 70 comments addressed the definition and scope of the production costs of raw materials, and many commenters recommended that all costs related to electrode active material production should be included, from direct material to indirect material costs to raw material extraction. Commenters noted that the production costs are a large portion of the total cost of producing electrode active materials, so not including those costs would essentially disincentivize the production of these materials.
“The Treasury Department and the IRS have reconsidered the treatment of extraction costs in these final regulations for taxpayers that extract raw materials domestically and for taxpayers that acquire either domestically or foreign-sourced extracted raw materials,” the final rules said. For both electrode active materials and applicable critical minerals, the final rules allow taxpayers to include extraction costs related to the extraction of raw materials in the U.S., but only if those costs are paid or incurred by the taxpayer that claims the credit for the relevant material.
While the law is aimed at increasing domestic clean energy technology production, it still relies on non-domestic sources. In some cases, the U.S. couldn’t make certain components without foreign suppliers, so how independent are we really?
