Local content requirements threaten renewable energy uptake

The world's ambitious plans to reduce reliance on fossil fuels are likely to be costly for consumers and governments in the short term even as the long-term benefits are clear. Yet, the United States and many other countries are adding needless costs by insisting on locally produced solar panels, wind turbines, photovoltaic (PV) cells, and other renewable energy products. Such requirements make renewables more expensive than necessary—thereby aggravating rather than mitigating climate change.

These local content requirements (LCRs) have played a growing role in renewable energy policy for more than 20 years. LCRs—rules requiring firms to use a minimum level of domestically manufactured goods or domestically supplied services—directly distort trade and encourage substituting imports with domestic goods, even when domestic goods are inferior and more expensive than foreign imports.[1] Such trade distortions discourage competition and increase overall costs for downstream power producers in the short term.[2] LCRs also often lead local producers to specialize in relatively simple, unsophisticated components, such as casings and bearings that typically can be used in other production chains. Overspecializing in such rudimentary items undermines industrial efficiency and competitiveness and discourages investment in new technologies.

Still, the politics of achieving economic self-sufficiency have become a hallmark of renewable energy policies, especially since 2008. A report published by the Organization for Economic Cooperation and Development (OECD) finds that between 1999 and 2015 at least 21 countries planned or implemented "green" LCRs in solar PV and wind energy, including 7 OECD countries, summarized in appendix table 1.[3]

LCRs are most often imposed as a precondition for access to government programs that guarantee above-market prices for renewable energy producers, known as feed-in-tariff (FiT) programs. They are also imposed as part of eligibility requirements in renewable energy public tenders. Of the 28 green LCRs introduced before 2015, 16 were preconditions for FiT eligibility and bonuses, 6 were preconditions for renewable energy public tenders, 3 were preconditions for access to public financing, and 3 were preconditions for both FiT eligibility and public tenders.

Proponents of LCRs claim the measures can help develop a domestic manufacturing base for renewable technologies, broaden support for renewable energy incentive programs, create local jobs in renewable energy, and encourage technology transfer. In the United States, the Biden administration sees LCRs as a way to fix supply chain bottlenecks and decrease reliance on foreign countries, especially China, the world's largest producer of solar panels. The rationale is that protected solar PV and wind industries will become self-sustaining over time. Because LCRs are inherently costly, this hope is seldom realized.[4]

Nevertheless, green LCRs are on the rise. Appendix table 2 adds to the list of active renewable energy LCRs 13 new ones introduced in ten countries since 2015. Six of these countries—Australia, Germany, Ghana, Japan, Oman, and the United Kingdom—and Taiwan had not implemented green LCRs prior to 2015.[5] Five of these countries—Australia, Ghana, Indonesia, Oman, and Saudi Arabia—introduced new LCRs in 2017, the year with the greatest number of new local content policies within the past five years. Green LCRs are also durable: Of the 20 LCRs that were active in 2015, 18 are still ongoing.[6]

Since 2014, high-income countries have increasingly embedded LCRs in the bidding processes of their solar PV and wind energy public tenders. In the Australian Capital Territory, each applicant's offer of local benefits accounted for 20 percent of the positive evaluation of its solar bid in 2014 and 7.5 percent in 2020. In Japan, "local contribution," including a track record of both engagement with stakeholders and impact on local and national employment and manufacturing, accounted for 40 points out of 240 in the evaluation of 2020 offshore wind bids. In Taiwan, application requirements are especially strict. To participate in 2022 offshore wind auctions, applicants must commit to locally procure 26 "key development items" set by Taiwan's Industrial Development Bureau (IDB) for at least 60 percent of its proposed capacity. In addition, applicants must gain at least 10 points from "point-adding items" to be qualified bidders, meaning they must either locally procure more key development items than required or locally procure other items the IDB deems "point adding." Germany is also using green LCRs, but in a more targeted way. To incentivize wind expansion into southern Germany, the 2021 Renewable Energy Act stipulates that 15 percent of successful tenders between 2021 and 2023 must be awarded to plants in southern Germany. Between 2024 and 2028, this quota will rise to 20 percent.

Until very recently, the United States did not have a national LCR policy in renewable energy.[7] Some states that tried to adopt such policies have abandoned them as too expensive. California and Washington implemented FiT programs in the mid-2000s that are still ongoing today, but Massachusetts, New Jersey, and Ohio abandoned their LCRs in three years or less. The $1.2 trillion Infrastructure Investment and Jobs Act (IIJA), signed into law by President Biden on November 15, 2021, does include major domestic procurement requirements for infrastructure materials, fulfilling the president's pledge in 2020 to support US industry through local content requirements.[8]

The law essentially bars the use of federal financial assistance for infrastructure unless iron and steel, manufactured products, and construction materials used in the project are produced in the United States, though there are several exceptions.[9] For solar and wind projects started prior to 2025, bonus credits are awarded if 40 percent of project inputs are domestically sourced. This percentage increases to 45 percent in 2026 and 55 percent thereafter.

The Biden administration has also said it will seek to protect domestic producers by imposing countervailing or antidumping duties on imported renewables if trading partners engage in unfair subsidies or export products at below cost. On November 24, 2021, for example, the US International Trade Commission determined that import relief to manufacturers of crystalline silicon PV cells continues to be necessary to protect America's emerging solar sector from serious injury. On the other hand, the Commerce Department recently rejected a request to investigate a case brought by US manufacturers against Chinese solar equipment producers that were operating companies in Malaysia, Vietnam, and Thailand. Commerce determined that these Asian companies did not sell solar cells at below cost and were therefore not subject to US tariffs.

In the end, for all their well-meaning intentions, LCRs tend to drive up costs, hamper international competition, and increase investment risk and uncertainty, inhibiting rather than encouraging local manufacturing. If the goal of renewable energy policy is to make solar PV and wind energy more affordable and widely used, local content requirements are an obstacle, not a solution.

Appendix

Tables summarizing wind and solar LCRs before and after 2015

Notes

1. One example is India's solar program. The Jawaharlal Nehru National Solar Mission auctions power purchase agreements to solar developers at a premium, requiring them to use cells and modules manufactured in India (with some exceptions). See Gary Clyde Hufbauer and Jeffrey J. Schott, 2013, Local Content Requirements: A Global Problem, Washington, DC: Peterson Institute for International Economics.

2. Between 2014 and 2017, local content requirements resulted in a 6 percent per kilowatt hour increase in the cost of solar PV power generated from projects with LCRs when compared to similar projects not subject to the same LCRs. During this same period, Indian solar panels remained around 14 percent more expensive than international panels. See Benedict Probst, Vasilios Anatolitis, Andreas Kontoleon, and Laura Diaz Anadon, "The Short-Term Costs of Local Content Requirements in the Indian Solar Auctions," Nature Energy 5 (November 2020): 842–50.

3. The seven OECD countries are Canada, France, Greece, Italy, Spain, Turkey, and the United States. The non-OECD countries are Argentina, Brazil, China, Croatia, India, Indonesia, Jordan, Malaysia, Morocco, Russia, Saudi Arabia, South Africa, Ukraine, and Uruguay.

4. China is the notable exception to this experience in both solar PV and wind energy.

5. Australia and the United Kingdom had policies similar to local content requirements in place prior to 2015, but neither country was included in the 2015 OECD report on renewable energy LCRs. In the Australian Capital Territory, proponents' offer of local benefits accounted for 20 percent of the evaluation of their bids in 2014. In the United Kingdom, applicants for solar energy generation tariffs were required to use local, Microgeneration Certification Scheme (MCS) installers starting in 2010.

6. Three renewable energy LCRs were abandoned between 2015 and 2021: one national LCR in Indonesia and two subnational LCRs in the United States. Indonesia's Regulation of MEMR No. 17 of 2013, which stipulated a 20 percent FiT bonus for 40 percent local content, was repealed in 2015. Massachusetts's Commonwealth Solar II Rebate Program, which stipulated a bonus for 12 percent or more state content, was abandoned in 2015. New Jersey's Renewable Energy Manufacturer's Incentive Program, which stipulated a bonus for 50 percent or more state content, was abandoned in 2011.

7. High antidumping and countervailing duties (AD/CVD) can be used as an alternative to LCRs. The United States has used such measures in the past to curtail renewable energy imports from competitors, most notably China. On December 7, 2012, the US Department of Commerce, via AD/CVD orders, levied 30 percent import tariffs on crystalline silicon photovoltaic (CSPV) products from China, focusing on solar cells from China and modules, panels, and other CSPV products assembled with solar cells from China.

8. See Division G, Title IX of the Infrastructure Investment and Jobs Act.

9. Exceptions include: (1) where the inclusion of domestic products would increase the overall cost of the project by more than 25 percent, (2) where applying Buy American policies would be inconsistent with public interest, and (3) where iron, steel, manufactured products, and construction material produced in the United States is not in reasonably available quantities or of satisfactory quality.