🔋Cell Me A Factory
Solar manufacturing is yet another industry neglected in the US. Is the IRA enough to spur a domestic manufacturing boom?
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Back in January I touched on the solar market in A Bright Future, where polysilicon prices were and continue to fall. In that piece I recognized the prevailing trend towards more and more utility and residential solar installations over time through the various tailwinds, while contrasting with the various headwinds which are different for utility vs residential. As we are halfway through the year, we have a better idea how the industry is faring.
Supply chain delays plagued solar in 2022, leading to a strong Q1 2023 compared to Q1. Installed capacity is up 47% and new contracted projects up 25%, the former heavily influenced by the delayed projects from 2022. Supply issues effected utility and commercial to a larger degree, with lower year over year installations in 2022 while residential growth stayed strong. With all the factors taken into account, one of the most pressing matters for the industry remains the supply chain and of course the re-shoring of manufacturing.
With the passing of the Inflation Reduction Act (IRA), new tax credits and funding (now flowing through the economy post debt-ceiling resolution) are widely available for renewable energy companies to take advantage of. One of the core themes of the bill is sourcing materials domestically as we have seen with batteries as well. It has been pretty obvious of late that the US government has been keen on lowering its dependence on nations such as China and Russia through various forms like outright sanctions, trade disputes, resource battles, and political control.
The solar manufacturing process contains four heavily simplified steps in which silicon undergoes transformations from a raw material to concentrated ingots, to wafers, then cells, and finally a module/panel. Similar to many battery/rare-earth materials, China is the dominant player in each stage of this process globally.
In 2010 the picture was not like this, where the US had a number of factories producing ingots and wafers. This is an energy intensive process, which is why China has a stranglehold on the industry with its willingness to use cheaper and less environmentally friendly sources like coal as power. Regardless of the factors getting them here, for the US government this poses and existential risk to their climate goals and energy security. The current state of solar production in the US is pretty small on every front. Since module manufacturing could be done in the US with imported supplies, it is important to also look at the manufacturing capabilities of above the supply chain ladder as well. Currently there is a whopping zero GW of solar cell manufacturing in the US. This is followed by 30GW of module capacity, again representing a small slice of the global share. Growth is expected in both areas in coming years albeit slow.
However, the IRA is set out make US manufacturing cost competitive again. There are multiple solar tax credits in the IRA, an advanced manufacturing production credits (AMPC) and additional credits for developers meeting domestic content requirement (DCR) thresholds (other credits for consumers as well). The AMPC helps wind more, but attempts to lower the cost to manufacturing wafers, cells, and polysilicon in the US. In a fully integrated process, the AMPC could be worth up to 29% of the US manufacturing cost which is significant.
For the DCR thresholds we look to the new IRS guidance. Solar cells and construction goods like steel must be made in the US, along with a percentage of the cost of other materials such as inverters, modules, and trackers must be from the US to meet the new 10% tax credit. It takes 2-3 years for cell manufacturing facilities to become operational in order for any modules to meet the DCR. Since US module production is more expensive than in China and no domestic cell manufacturing exists, it is projected that cost parity is unlikely to be achieved until 2025 at the earliest. Until this happens, credits for manufacturing are projected to not recoup the added cost as compared to imports.
Qcells, headquartered in South Korea, is planning a $2.5 billion investment in a vertically integrated facility in Georgia which will produce ingots, wagers, cells, and finished panels. This way, the company can take full advantage of the IRA. Enel and Vikram Solar are planning similar operations in the US. CubicPV is a third company who has obtained funding to build a facility for wafer production, while continuing research on its module designs.
While solar is booming, the domestic manufacturing isn’t yet. Even with new manufacturing credits from the IRA, the economics aren’t attractive enough for a new boom in manufacturing yet. Only when wafer and cell manufacturing comes to the US in scale will the full force of the IRA take effect and more companies willing to manufacture solar panels in the US. This is why only a few companies with vertically integrated processes have made their moves so far since they are able to take full advantage of the IRA and be viable.
The IRA is a crucial piece of the puzzle for solar manufacturing projects to be viable. This solution only comes through government intervention and expenditure since energy and labor costs make it prohibitive otherwise. Polysilicon prices are low currently, actually adding to the attractiveness of imports vs domestic manufacturing. As long as higher interest rates last, funding large projects for companies is more difficult. It isn’t abundantly obvious when the federal reserve will be forced to lower interest rates. Further, if commodity prices rise more broadly over the next few years or we get a recession, domestic manufacturing projects could be delayed. With macro forces likely acting as headwinds, the largest tailwind is US spending. Until next week,
-Grayson
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I'm curious as to why the US can't be competitive without the government support--not that I'm complaining, that's the best use of federal money in decades (verses Iraq wars, tax cuts, too much stimulus, etc.) I say that because we produce food cheaply and efficiently, along with lumber, oil, and even some autos (well not in the last few years though). Cost of real estate and regulatory hurdles perhaps? Real estate could be solved by setting up manufacturing in places like Detroit or smaller cities with good values. Overregulation is something the US has to come to terms with simplifying, it's egregious at times for no good reason. Wages are another hurdle but solar plants would be mostly automated anyway, I would think.