TD has acquired Cowen Inc. Please bookmark TD Securities for further updates.

Implications Of Elevated & Vitalized U.S. Solar Policy

A shot looking over a landscape littered with solar panels under a sun drenched sky at dawn representing our podcast on the implications of solar policy in the U.S.
Insight by , and

On this episode of TD Cowen’s Thematic Outlook Podcast, John Miller, ESG & sustainability policy analyst for TD Cowen Washington Research Group, and Jeff Osborne, TD Cowen’s sustainability & mobility technology analyst, join Bill Bird, TD Cowen Head of Thematic Content. Together they discuss the emergence of a novel intersection between classical trade, national security, and climate policy, resulting in the most consequential U.S. solar policy ever passed. With this unprecedented policy support, many businesses in the solar value chain stand to benefit.

Press play to listen to the podcast


John Miller:

One way you can make climate policy bipartisan is if you make it, again, a jobs bill, an industrial policy bill, and a conversation, vis-a-vis China, that adds jobs in tax credits to local districts.

Bill Bird:

The topic of today’s episode is the new U.S. solar policy framework. For decades, U.S. solar energy policy relied primarily on protectionist tariffs to help U.S. manufacturers. Despite this, U.S. policy failed to meaningfully stimulate domestic manufacturing and job growth. Our guests today recently published an Ahead of The Curve Series report, which makes a strong case that a novel intersection has emerged between classical trade policy, national security, and climate policy, which is likely to produce more resilient and effective U.S. solar manufacturing policy support.

My name is Bill Bird, head of TD Cowen thematic content, and to help us unpack this topic, our guests today are John Miller, ESG and sustainability policy analyst for TD Cowen Washington Research Group and Jeff Osborne, TD Cowen senior research analyst covering alternative energy, mobility technology and industrial technology. Jeff and John, welcome and thanks for joining us today.

John Miller:

Thanks, Bill.

Jeff Osborne:

Thanks for having us.

Bill Bird:

Let’s dive right in. John, can you set the stage for us? At a high level, how is U.S. policy towards solar changing and what do you think may be underappreciated by the market?

John Miller:

Sure, absolutely. Thanks, Bill. Thanks for having us on. Really appreciate it. Lots have changed, right? And it’s changed very quickly, which is pretty interesting for a policy space, which generally takes years to evolve. The backstory here is really beginning with the Obama administration. Back in the early 2010s, there was a push from what was left of the U.S. domestic solar manufacturing industry to throw up tariff protections to protect that industry from what was viewed as a flood of low-cost imports, coming initially from China, and then throughout the rest of Southeast Asia. And the response was piecemeal. It was conducted under the Department of Commerce to protect that industry through classic trade policy. Setting up anti-dumping and countervailing duties. What we saw is that that just kicked off basically a whack-a-mole structure of increasing trade policy and then the industry in Asia would respond.

So the Chinese manufacturers first move out of China itself to Taiwan and later across Southeast Asia. So no matter what the various administrations, the Obama administration or the Trump administration, could do using trade policy, they kept running into the fact that it just wasn’t enough to build the support for a domestic call on higher cost U.S. produced product. So the process there is long, and I don’t need to go through all the details, but it started out with these anti-dumping tariffs. There were a 201 tariffs under the section of the trade code, 301 tariffs targeting China writ large under the Trump administration. And what we see now is a new evolution and there’s two key pieces of legislation that we can walk through in more detail later in this conversation. But the first is the Uyghur Forced Labor Prevention Act, or UFLPA, which basically establishes a sanction like structure and says that any import coming in out of supply chains touching Western China has a rebuttal presumption that there’s various trade and human rights abuses throughout the operations in that space.

And that has been hugely impactful for particularly silicon and polysilicon, which is a key ingredient in the solar space. And the second element has been the embrace really from both parties of domestic industrial policy. And we saw Trump talk a lot about this when he was president and running for president, the manufacturing hollow out in the United States and what could be done there. And the Democrats have leaned into that too as well through the Inflation Reduction Act. So a lot of changes very quickly moving from just a tariff shield to having a tariff shield in place in addition to the Uyghur Forced Labor Prevention Act and industrial policy under the Inflation Reduction Act.

Bill Bird:

John, let’s go a little deeper on the Inflation Reduction Act. You’ve published a tremendous amount on it, you called it a major policy leap. Tell us what is so significant about the law as it relates to solar.

John Miller:

Yeah, for sure, and it continues to be our view that this is a major transformation of subsidy policy in the United States, and a lot of things point in that direction. It’s holistic in that it seeks to incentivize the supply side, being domestic manufacturing, across the solar value chain, and it also seeks to stimulate the demand side. So it’s holistic and it’s seeking to produce and support a U.S. domestic manufacturing base and the purchase of that product for renewable energy installs. So that’s unique and different. It’s unique and different in its outlook. It’s effectively a 10-year plus policy. Historically, extensions for investment tax credits and production tax credits in the renewable space have been inside of three years, which is nice, but very difficult for an industry that thinks many instances in the utility side in multi-decade investment plans. So those two elements alone make this very, very powerful and are still our view that it’s very underappreciated by the marketplace.

There’s this view that this is new, it’s going to take a while to figure out, there’s going to be risk going forward. What happens with a potential Republican sweep in 2025? And we think that a lot of those risks are overvalued right now. The support for this structure is unique in many ways as it’s been positioned, not simply as a climate bill, but as a jobs bill, as an industrial policy bill, and as a wider conversation, vis-a-vis China. When it’s presented that way, it becomes very, very difficult to unpack some of these really core tax elements. So this is an interesting week. So right now, republicans in the house are moving forward with their energy package. They’ve had really more than three years to think about what a Republican view of the energy transition would look like. Republicans also fully understand that this bill won’t go anywhere in the Senate, which is currently controlled by Democrats.

So this is less of a policy bill and a communications bill. So this would be a great Republican opportunity if they believed it was a successful message to deliver that, “We don’t like the advanced manufacturing credits or the 45X credits within the Inflation Reduction Act. We don’t like the extensions to the clean energy investment tax credits and production tax credits.” This would be their opportunity to communicate that and we’re not seeing that at all because these messages are not popular at the moment. We’re seeing large capital flows into purple and red-leaning states tend to have a lower tax base, lower cost operations, and that was an element of this bill too as well. One way you can make climate policy bipartisan is if you make it, again, a jobs bill, an industrial policy bill, and a conversation, vis-a-vis China, that adds jobs in tax credits to local districts. So I think a lot of those elements are all coming together at once and the market and investors are still trying to unpack that and what that means. We’re very constructive on this for the long term.

Bill Bird:

Let’s turn to the implications of new solar policy on solar suppliers, and let’s bring Jeff into the conversation. Jeff, what businesses in the value chain do you think are best positioned to benefit and how do you see the impact unfolding overcoming years?

Jeff Osborne:

Yeah, it’s a great question, Bill. And what’s important about the IRA bill is that it incentivizes both supply side and demand side economics. I think most of the subsidies in the past were more demand driven. On the supply side specifically, we need to build an American supply chain across the renewable landscape in general. We need that for electric vehicles, we need it for batteries, we need it for wind, and lastly on solar. And there’s a very prescriptive element in the IRA bill that incentivizes production of every step of the supply chain. So I think that was critical in the way it was structured.

As to who benefits, certainly there’s a handful of producers today that make solar panels in America, very large thin film producer and the largest producer in America’s first solar currently. We will see more announcements in the coming months as this clarity from the Treasury Department’s released. The area that we’re the most excited about are solar cell and panel making as well as in the inverter space. The inverters are really the brain of the solar system that are directing traffic on whether power goes to the grid, whether it goes into your home, if it’s a residential deployment or whether it goes into a battery, which we’re seeing increasing support of as well.

Bill Bird:

Jeff, you touched on some of the demand incentives as well. Can you go a little bit deeper on that? How do you see the IRA impacting demand for solar products?

Jeff Osborne:

Yeah, you really need to unpack solar as an industry. There’s roughly four different major sub-segments. There’s residential, commercial, utility scale, and lastly, an emerging presence of community solar, which allows folks that live in apartment buildings and multi-dwelling units to access solar. So as you look at the four major markets, we’re seeing the most pronounced demand shifts really at the utility scale level. That would be folks like NextEra, one of America’s largest renewable utilities, but even local utilities in your own state. There’s over 3000 utilities in the U.S. Many have state driven policies, called renewable portfolio standards, that have been trending towards renewable demand over time, and this really turbocharges demand for wind and solar. On the utility scale side, we’ve seen the most behavior. The challenge in America around these behavioral changes is what’s referred to as the interconnect queue. So there’s literally thousands and thousands of megawatts trying to be added. And so we do need to see some infrastructure support on the policy side to enable all these renewables.

But looking beyond the utility scale side, which we see growing a steady 20 to 30% over the next decade, the other areas that are quite exciting are residential. We see a little bit more muted growth, high single digits, low double digits there. This typically costs the average American household about 30 to $40,000 to go solar. So getting this credit is certainly helpful, but in this type of economic environment, it certainly is a big commitment, but there’s been quite a bit of electricity price inflation, and so the monthly payments are really what solar installers are selling, and people are saving typically 20 to 30% in getting a sub 10 year payback period on their system. So residential’s quite exciting, pairing that with batteries and as the electrification of everything in the household happens, namely electric vehicle, this will also entice people to move in that general direction.

The other two areas are doing very well on the commercial side, you’ve seen a lot of ESG initiatives for corporations where they had laid out long-term plans over the next decade to move towards solar-powered buildings. And now, with these increased subsidies, makes this more economically attractive to accelerate some of those initiatives that folks have had in place for some time. And then on the community solar side, it’s very geographically diverse. There’s a handful of states, namely Colorado, Minnesota and New York that have been promoting community solar for quite some time. And I think you’ll start seeing more states go down that path where you have what looks like a small scale utility scale system, and then typically 40% of the offtake is taken by a corporate buyer, and the remaining 60% could be individual subscribers, if you will, that live in the apartment building. So netting it all out, we’re very excited about all four segments. The one that’s the biggest turbocharge demand clearly is utility scale.

Bill Bird:

John, earlier you alluded to some new policy developments. This is obviously a very fast changing area with lots of politicization around solar and alternative energy as a whole. John, what are some of the policy initiatives, or political developments, that you’re watching that investors will want to pay attention to? And what do you see as some of the potential risks including a concern out there, right? Amendment of the IRA?

John Miller:

Yeah, absolutely. This is a very fast moving policy space. Clean energy has always been that way. Basically trying to make wholesale revisions to an existing either electric power or transportation space that for decades has built infrastructure to operate in one fashion and make it operate in a different fashion. And that’s certainly a challenge. And we’re seeing that across the board. I think I’d break that question into a couple different pieces. The most frequent question we get on this is timing and glide path to understanding the intricate details of pulling down the various credits within the IRA. And that was something that Jeff mentioned earlier. This is probably framed as implementation guidance. And so the way public policy is effectuate in the United States is the legislature. Congress writes a law, you can think of that as the index, and then the technical agencies provide the specific guidance through rulemakings and proposed staff guidance, finalized staff guidance, that allows corporates to fully understand all the details and pathways they need to follow to pull down that money.

So while there are a range of new tax subsidies through the IRA affecting both the supply and demand side for renewable energy and solar specifically, we’re still waiting for a lot of details that make those tax credits really actionable. So we’re getting lots of questions on that. Lots of questions on the details, on the pathways and timelines. It continues to be our view that the United States Treasury and the IRS, which is a sub-component of treasury, are working at the pace of government on this. They’re moving as quickly as they can. These are complicated issues. They are open to lots of stakeholders and receiving lots of feedback. Continues to be our view that really by the end of the first half of this year, so late May, early June, we’ll be in a place where the market broadly understands the components and details and tools they need to access these credits. So that’ll be very important.

So what’s still outstanding is a great question. The domestic content adders is something that there are a lot of questions around. So if you’re a renewable developer, you’re eligible, if you follow some specific rules about paying the right wages and having an apprenticeship program, for up to a 30% investment tax credit for a new clean energy project. If you purchase capital equipment for that project, the solar module, the wind turbine, the energy storage components from a domestic manufacturer, you can receive an additional 10% boost. So that brings it up to 40% investment tax credit. So what are the requirements behind domestic manufacturing? There’s fairly clear requirements for the steel components, the metals components, but there’s more questions about the manufactured elements. So that’s being unpacked now too as well. We’ve also discussed 45X, which is the advanced manufacturing credit, and there are a lot of details that need to be defined there too as well.

It’s fairly straightforward for Congress to write X cents per watt for this type of technology, but then that technology needs to be defined and that’s impactful because there’s lots of different integrated types of technology. A cell may not be as straightforward as it may seem. A power optimizer may not be as straightforward as it seems. An energy cell may not be as straightforwards it seems, and there’ll be winners and losers through that process. So we’re working through that. That is the key question and how this will play out. It will dictate how firms update their guidance and capital allocations and it’ll dictate the pace of deployment behind these dollars. The next question is what are the risks to this style bill? As we mentioned earlier, right now, there’s negative sentiment coming from certain parts of the Republican Party, and you’re also seeing some negative commentary from centers Democrats who don’t like the way the bill is potentially being implemented.

Maybe it’s not as strong as they had expected on the domestic jobs and labor side. So that needs to be unpacked. Another interesting development in the space is that the industrial policy and the trade policy aren’t fully aligned the way one would expect them to be. As Jeff mentioned, a lot of the front end investments that are being stimulated by the Inflation Reduction Act are going to the module manufacturing side with the expectation that they then can purchase solar cells coming in as an import. And that will begin to increasingly conflict with how the Uyghur Forced Labor Prevention Act is being implemented, making it difficult to get those cells if there’s a touchpoint in Western China. And then the emerging tariff framework, through an anti-circumvention investigation, will likely make it more expensive to import those cells from Southeast Asia. So there are some conflicts there that need to be played out to understand will there actually be physical availability of these cells for the new industry and at what price point.

The last thing that I’ll mention, and then we can move on to the next question [inaudible 00:17:03], but as Jeff hinted to earlier as well, the states are being active in this space. So the 2022 election cycle, there was a lot of focus on the U.S. Congress, but there were a number of states that elected governors and their state legislatures as well. And we saw some significant democratic wins that have led to a reconsideration of climate policy. So the Upper Midwest is a really interesting area, specifically the state of Michigan, Minnesota that have unified democratic government, are moving quickly around climate. So they’re updating legacy renewable portfolio standards, which in many instances haven’t been touched since the early 2000s. And that will force the local utilities to accelerate their investment plans and will also greater incentivize the commercial industrial and residential market that Jeff was mentioning earlier. So there’s a lot of pieces in play. They’re not all unified in how they’re impacting the space, but they’re certainly out there. And the direction of travel really seems to be increasingly clear that there’s unified interest in this space.

Bill Bird:

Jeff, from your vantage point, what do you see as some of the risks in operationalizing new policy and what are some of the catalysts that you see coming up that investors will want to pay attention to?

Jeff Osborne:

Yeah. I’d say the biggest catalyst that we’ve talked about thus far is really the clarity on the implementation of the Treasury Department and setting the mechanics of how all of these great things will work for the next decade. It is truly the most consequential solar policy that’s ever been passed, you could argue on the planet, and trying to be emulated in Europe as well. But this guidance over the next few months will be imperative for how capital allocation occurs across the board. In terms of risks, I’d say the biggest near term risk in light of some of the banking challenges has been around financing interest rate volatility. Typically, solar projects are getting anywhere from 60 to 70% leverage on them, and so interest rate swings as well as inflation really can impact the profitability of the project. So those are the two things that need to be monitored by investors.

I would also say the Uyghur Forced Protection Labor Act, implementation by Customs and Border Protection, really thus far has gone scrutinized, let’s say, three of the largest module makers in the world. And should that be expanded beyond modules or potentially into wafers and cells as those are imported into the U.S. is another big open-ended question that I don’t think anyone quite frankly has the answer to. Other things that maybe aren’t talked about enough, but really, if you study what happened in China, what happened in Germany in the 2007 through ’10 timeframe is both of those regions built a whole solar corridor. If you go to China between Shanghai and Nanjing, that whole stretch of highway is littered with solar supply chain participants. So above and beyond silicon, wafers, cells and modules, there’s things like silver paste that are used to interconnect the solar cells together. There’s aluminum frames, there’s solar glass.

That entire industry needs to evolve in the U.S. So some of these ancillary pieces of equipment that are often not talked about need to be supported would be one. In Germany, they did that in the East German area near Dresden. That whole area had that industrialization. And then lastly, two critical areas; one is on the battery side, there’s certainly a scarcity of some of the materials for batteries. More and more of these projects are being paired with batteries. There’s a lot of new long duration storage technologies that are entering the market above and beyond the two and four hour timeframe that lithium usually provides.

And then the big 800 pound gorilla in the room is interconnect reform. All of these projects need to plug into the grid, and that process is a very painful process in the U.S. It’s becoming a painful process in Europe as well, but it literally can take years. So really you need to go out and find land, be close to a substation that can take your power and work with both local and regional utilities to interconnect the process. And it’s an expensive and timely process that hopefully can be reformed through an infrastructure bill that is well-thought-out to embrace a decarbonized and decentralized world that we’re headed towards.

Bill Bird:

Jeff and John, you host a lot of events and expert calls throughout the year. What are some upcoming solar related events you’re hosting that are worthy of highlighting?

Jeff Osborne:

On my side, we have the TD Cowen Sustainability Week. It’s a virtual conference that’ll be going on June 6th through the 9th virtually. And then we have some in-person events on the West Coast, June 5th, targeting private companies. But we have over 10 analysts participating a hundred plus companies throughout the week, boot camps, as well as ESG oriented sessions that John can touch on. And then the big trade show in the space, we typically host investors for booth crawls and one-on-one access to corporates. That’s called the RE+ Conference. It used to be known as Solar Power International, and that’ll be in mid-September in Las Vegas.

John Miller:

Yeah, absolutely. I would highlight that the June Sustainability Week event as well from the policy side, absolutely be hitting on these issues. We’ll be bringing in conversations from the United States Trade Representative to understand what’s happening on the trade side as climate trade policy and national security continue to collide. We’ll bring in experts to discuss what’s really possible when we’re looking at infrastructure reform. That will be done in detail. We’ll also bringing experts in to understand how ESG is being considered broadly as a political topic, as a litigation topic and how it’s impacting capital flow. So those are super important conversations we’ll be having. We’ll be hosting and be a virtual event. In the back half of this year, there’s two interesting catalysts on the trade side too as well. One will be a regular structured review from the Biden administration under the 301 tariffs, which are targeting directly towards China.

This could be an opportunity for the administration to reconsider do they need to continue these tariffs on certain capital equipment that’s necessary to build the manufacturing infrastructure for a solar value chain in the United States. Currently, right now, under Section 301, there is an incremental cost for bringing in the machinery that’s necessary to build the ModCos, to do any of the upstream operations if we want to go down the cell side. There’s an incremental cost because of the tariffs at this point. It’s our view that the politics of that are challenging. Any attempt to scale back a 301 directly targeted towards China will be perceived as soft on China politics, will likely be jumped on by Republicans, making it difficult. There’s also a regularly scheduled review cycle for the safeguard tariffs under Section 201, and this will be an opportunity for the Department of Commerce to look at a technical level and decide, “Can we allow more solar cells to come into the United States, which is currently limited to around five gigawatts a year? Can we increase that number?”

And that would be very important for the module manufacturers because yes, they could get the cells, but they’d be paying a tariff on top of that. The problem is it runs into a lot of the same politics. Anything that involves China, or touches China from a derivative level, can be viewed as soft on China politics. So we’ll see how that plays out. Right now our view is in both instances, even though the administration may be leaning towards revisions to these types of tariffs, it’ll be difficult for them to do so and even more difficult into a presidential election cycle.

Bill Bird:

Well, John and Jeff, we’ve covered a lot of ground today. Thanks to both of you for joining us, and I’m really looking forward to checking in with you in coming months to see how things are progressing. I also want to thank our listeners. We appreciate you and look forward to getting together for next month’s episode. Thanks, and be well.

Get the Full Report

If you’re already a member of our Research portal, log in.

Log In