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10 August 2022

Inflation Act may not be enough for US polysilicon

The Inflation Reduction Act has passed the US Senate, with the last potential Democrat holdout, Senator Sinema, extracting only minor concessions unrelated to energy. It will soon be passed through the House.

The Act includes $30 billion in Production Tax Credits (PTC) and $10 billion in Investment Tax Credits (ITC) for renewable manufacturing, with several companies announcing their interest, especially regarding the solar supply chain. These include Qcells America, subsidiary of Hanwha Solutions, and First Solar, which have both stated they would expand production after the bill was passed, Nextracker, which stated it will now “increase hiring at its factories,” and Gamechange Solar, which has announced a new 6 GW tracker factory.

The subsidy payments per unit produced, i.e. the Production Tax Credit, are around a third of the marginal cost of production seen in the Chinese industry, but even that doesn’t look sufficient to protect and incentivise a fully verticalized supply chain against China – cells and modules are all good to go, but for polysilicon and wafers it is dubious.

For polysilicon production cost is $6 per kilogram (leaving aside current price fluctuation in the raw material, silicon powder), and the subsidy is $3. But polysilicon cost is split roughly evenly three ways between wages/miscellaneous, electricity, and raw material. If we say US electricity costs three times as much, with wages/miscellaneous twice as much, and raw materials even, that suggests a polysilicon production cost of $12 per kilogram, which is too high for the subsidy to bridge the gap – unless it is aided by sanctions or tariffs on Chinese imports – and is being used in US wafer factories, not sold back to China.

Perhaps a new generation of Western polysilicon makers could cut costs, as there are some technological changes in the sector, but when polysilicon’s price fell below $12 per kilogram a few years ago, that is when OCI, Hanwha and other non-Chinese manufacturers began shuttering their polysilicon facilities, outcompeted by Chinese companies. And right now, the Chinese companies are building millions of tons of new production capacity, which will lead to overcapacity and a vicious price war to try to get to $5 per kilogram there, or maybe lower.

For other supply chain elements the payments are similarly generous – $0.07 per Watt for modules, when modules cost $0.25 per Watt to make when the polysilicon price is at $7.5 per kilogram (which it may well be in 24 months’ time). Of the $0.25 per Watt, $0.12 of the cost would be from making the cell – and for cells, the Inflation Act subsidy is $0.04 per Watt.

And lastly for wafers the payment is more generous, at $12 per square meter – with an estimated cost of production (still using Chinese data and a future price of $7.5 per kilogram for polysilicon) at $24, so that payment is fully half of the cost.

All told, module and cell manufacturing is definitely going to be pushed by the bill, and seemingly wafer too, but polysilicon beyond what already exists looks like a harder sell. If the US used all of its own polysilicon output, instead of selling it to Chinese wafer manufacturers, then together with First Solar’s CdTe cells that would be enough to meet the 2021 installation figure, but would still only be a fraction of future years’ demand.

Other solar supply chain elements being subsidized are inverters, torque tubes and structural fasteners of trackers, and polymeric backsheet.

For batteries the subsidies are $35 per kWh for battery cells greater than 12 Wh size, and $10 per kWh for battery modules greater than 7 kWh size. Electrode active materials such as cathodes, anodes, solvents, and electrolyte salts will received 10% of cost of production, the same payment to be granted to “critical minerals.”

The tax credit schemes are to last from December 31st 2022 to December 31st 2029, phasing down to 0% at the end of 2032.