The Inflation Reduction Act (IRA), flagship legislation focused on accelerating decarbonization in the US, will significantly boost annual investment into renewable energy deployment in the region.
Wood Mackenzie said that the Inflation Reduction Act means for US renewables manufacturers’, provides an initial assessment of how the IRA will greatly support the expansion of US renewables equipment manufacturing capacity, though specific opportunities will vary per segment and important, to be released guidance on the implementation of the IRA will influence the scale of growth in the sector.
According to Woodmac, there will be a rise from $64 billion in 2022 to nearly $114 billion is expected by 2031.
“The IRA will completely reshape the renewables supply chain in the US, incentivizing the reopening of shuttered facilities as well as provide opportunities to build entire equipment supply chains from scratch,” Daniel Liu, principal analyst at Wood Mackenzie, stated.
Two key provisions of the IRA are likely to be game-changing for renewables equipment manufacturers. First, the IRA provides a tax credit, known as the advanced manufacturing production credit, for US-made renewable equipment.
Second, the Act incentivizes developers of US renewable projects to purchase domestically produced equipment by providing an additional tax credit if they meet domestic content requirement thresholds. To qualify, 40% of all equipment must be US-manufactured on projects installed before 2025, and 20% for offshore wind. This rises to 55% after 2026, and 2027 for offshore wind.
“It’s high stakes for US equipment sales, as the IRA provides incentives that cut the manufacturing cost of solar panels, storage equipment and wind towers in the US by anywhere from 4% to 30%. This, along with tariffs on some imports, potentially puts domestic manufacturing on a cost-competitive footing with imported equipment,” Liu said.
Onshore wind: a fair wind is blowing for OEMs
“We expect the US onshore wind manufacturing community to take full advantage of the AMPC. The credits will help original equipment manufacturers (OEMs) reverse declining equipment sales margins in the short term and incentivize investment in manufacturing capacity,” Liu added.
The US has enough manufacturing capacity to supply most domestic demand for turbine equipment to 2031, though the industry faces a near-term shortage of US-produced equipment. This creates an opportune pricing environment for manufacturers, as not all developers will be able to meet DCR thresholds within the Act.
Developers can potentially meet pre-2025 DCR thresholds with US-manufactured wind turbine components, such as domestic foundations, towers, and balance-of-plant equipment. Turbine blades will help developers reach the 55% threshold after 2026.
Offshore wind: AMPC to fuel manufacturing capacity expansion
Despite the nascency of US offshore wind manufacturing, the country is one of the most attractive markets for offshore wind suppliers due to its ambitious targets, lack of existing supply chain, focus on local content in tenders, and consolidated client base.
“We expect manufacturers to capture the full value of the AMPC given the limited capacity of US manufacturing, the natural cost advantages versus imports, and the need to invest in domestic manufacturing capacity,” Liu stated.
It’s not smooth sailing for solar
“Utility solar PV has a somewhat foggier outlook, however. With such a small solar manufacturing base currently in the region, juxtaposed against substantial forecasted growth in solar additions, fully meeting US solar needs with domestic equipment will be more challenging than other sectors,” Liu explained.
PV panel manufacturers face considerable challenges when it comes to developing a self-sufficient domestic manufacturing capability. US manufacturing costs are 16-33% higher than imported equipment, but the AMPC will help close this gap.
Investment depends on further guidance, costs, supply, and demand
The Internal Revenue Service (IRS) will provide eligibility requirement guidance on how to access support in the form of tax credits, which will be a critical factor for investment decisions by the manufacturing community.
“The decision to invest in equipment manufacturing capacity expansion depends on the interplay of three factors. First, the cost of manufacturing equipment in the US compared with imports, considering the benefits the AMPC provides. Second, the expected supply/demand imbalance for renewables equipment, and finally, specific guidance from the IRS on what constitutes ‘domestically produced equipment’,” Liu concluded.
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