U.S. Treasury Is Expected to Issue Guidance on Various Clean Energy Incentives in Months Ahead

The passage of the Inflation Reduction Act was heralded as the largest climate legislation in U.S. history. As a result, the legislation has had an impact on technology adoption expectations and, in some cases, the competitive landscape. While the legislation has already led to a dramatic impact on industry activity, we believe market participants are awaiting additional clarifications from the IRS on certain incentives prior to making further investments. We highlight three specific incentives to watch as the U.S. Department of the Treasury issues clarifications in the months ahead.

In an effort to encourage domestic manufacturing, the act includes a 10% bonus credit for projects using domestically produced equipment. However, ambiguity remains over how much of a supply chain must be located domestically for the end product to be classified as domestic content. We see this as most relevant for solar panels, where investors await clarity on if final module assembly alone is enough to qualify as domestic content. First Solar FSLR has among the most at stake on the final clarification, with management stating further domestic manufacturing expansions hinge on the outcome.

The competitive balance of power in the duopolistic U.S. residential solar inverter market could also be altered by forthcoming guidance. The act includes manufacturing credits for inverters, but they vary by technology—microinverters receive nearly double the credit as residential inverters. The outcome of this clarification has implications for the competitive landscape between Enphase ENPH and SolarEdge SEDG.

Among the most notable incentives in the act is the $3 per kilogram credit for the production of green hydrogen. This was widely expected to unlock a wave of investment, but industry participants are awaiting further clarification over the definition of what qualifies as “green.” The clarification has implications for Plug Power PLUG along with a host of others in the green hydrogen ecosystem.