The Defense Production Act and the U.S. Race to Build Up Clean Energy Industrial Bases

Clean energy technologies underpin the U.S. commitment to achieving its climate goals, including mid-century carbon neutrality. The clean energy sector also presents the nation with an opportunity to speed up decarbonization while creating economic opportunities if the United States was able to develop a manufacturing base for such technology components. As Congress has appropriated large funding for domestic supply chains, the Defense Production Act (DPA) has emerged as one of the primary tools of choice for the Biden administration to jump-start the national capabilities in this space.

A federal law enacted in 1950 in response to the start of the Korean War, the DPA is a tool to mobilize the nation's industrial base to meet national needs, including in energy systems. To be clear, this is not the first time that the DPA is considered to avert shortages in the energy sector. For example, in response to the 2000–2001 electricity crisis in California, the U.S. Department of Energy (DOE) used DPA Title I to ensure the emergency supplies of natural gas to California utilities. Also, the U.S. Department of Defense (DOD) has made several Title III awards in the recent years as part of the U.S. government effort to strengthen the nation’s supply chains for critical minerals.

Under the presidential determination of June 6, 2022, those national needs include transformers and other grid components, solar photovoltaics, insulation, and clean hydrogen (electrolyzers, fuel cells, and platinum group metals). For these technologies, the DPA would be applied to develop and reshape supply chains for products in short supply, products presently supplied from foreign countries, and products that will be necessary to achieve national energy priorities.

As the DOE seeks to formulate a successful program around DPA Title III authorities, several issues merit close attention. The below derive largely from the comments the authors submitted to the DOE in response to the department’s request for information, which closed on November 30, 2022.

Supply-Side Intervention Tool

As the DOE is pursuing national energy objectives, articulated in the Infrastructure Investment and Jobs Act or IIJA (P.L. 117–158) or the Inflation Reduction Act or IRA (P.L. 117–169), DPA interventions could help speed up the development or deployment of products, but the DPA is unlikely to serve as an effective replacement for long-term market shifts. The DPA is most appropriately applied to time-limited and focused interventions on the supply side, including filling supply-side gaps and ensuring that industry can meet national needs in a timely way.

DPA Title III tools can serve as complements to existing tools and authorities that are available at the DOE, such as lending programs in the Loan Program Office (LPO) and funding programs for regional clean hydrogen hubs. First authorized by Congress in 2005 with broad bipartisan support, the LPO is equipped to support manufacturing of materials for advanced technology vehicles as well as efficient end-use technologies, such as mining, extraction, and processing of critical minerals. Meanwhile, the DOE’s Regional Clean Hydrogen Hubs program has up to $8 billion to establish multiple hubs to facilitate the production, processing, delivery, storage, and consumption of clean hydrogen. These programs offer loan and grant authority linked to outcomes in deploying clean energy, retooling infrastructure and manufacturing capacity, and developing new strategic technologies. As the Request for Information (RFI) notes, domestic manufacturers will also be eligible for tax credits under the IRA. In implementing the DPA, the DOE would benefit from carefully ascertaining where one tool is better suited than the others, or where DPA interventions could provide a complementary effect to other authorities.

The DPA Fund, which is a Treasury account that is available to carry out all of Title III provisions, allows for a multiyear pursuit of a given strategic objective because the monies in the fund do not expire. DPA funding can thus support multiyear efforts to reshape supply chains, making interventions at different stages of production (raw materials, components, finished products, or deployment) when needs arise. The DOE might consider how DPA projects can be sequenced to help meet national needs. Benchmarking the progress and effects of initial intervention might help inform the pace and scope of subsequent intervention along the supply chain in question.

These considerations would favor interventions like targeted support for providing financial assistance to domestic manufacturers when they are expanding capacity or adding equipment, as opposed to making purchase agreements for final or intermediate products. The products the DOE has identified for support all have regulatory or tax incentives to create market pull. For example, the demand for electrolyzers and hydrogen fuel cells can be expanded through the aforementioned Regional Hydrogen Hub program under the BIL, and the clean hydrogen production tax credit under the IRA (Section 45V). Meanwhile, solar photovoltaic (PV) demand can be supported through several provisions under the IRA, such as the renewable electricity PTC extension (Section 45), the extension of energy investment tax credit (ITC) and the new clean electricity ITC (Section 48), as well as the residential clean energy credit (Section 25D). The DPA, if and where used, can be more complementary by making interventions on the supply side.

Ascertaining the Benefits

The DOE RFI stresses that the expanded capacity to manufacture and deploy clean energy technologies can yield the following benefits: grid reliability, critical energy infrastructure protection, lower fuel prices, domestic clean energy industries, family-sustaining jobs, economic prosperity, decarbonization, and environmental justice.

These are valuable benefits that could arise from the expanded manufacturing and deployment of clean energy technologies. Among them, grid reliability should be prioritized. Grid Reliability is a critical aspect of the energy system, as is resilience to shocks that interrupt service. Previous CSIS research has documented state and federal initiatives to improve reliability and resilience in the power sector. Key findings from that research point to the importance of establishing clear definitions to evaluate program effectiveness and goals.

The fundamental purpose of the DPA is to provide materials that are necessary for national security in a timely fashion. The nature of the supply chains that provide goods, such as insulation or solar PV, is less critical, even if they provide desirable benefits, such as lower fuel prices, environmental justice, or reduced emissions.

Moreover, DPA project selection could also advance capacities which other countries may be incapable of creating or fulfilling, thus meeting U.S. national defense needs while also providing global public externalities. The DOE RFI asks how the DPA can be used to “attract foreign companies and foreign direct investment to the United States.” While this is an important question, the DOE could also actively consider how the DPA could buttress the U.S. leadership in expanding global supply chains, to make them more resilient to supply disruptions, whether from a natural disaster, pandemic, or geopolitical tension. Foreign investment may be more effectively driven by other tools, such as tax credits under the IRA. In fact, the IRA has provided a template for encouraging foreign investment in U.S. supply chain capacities in clean energy technologies. For example, the IRA’s Clean Vehicle Credit (Section 30D) provisions seek to reshape the supply chains for clean vehicles like electric vehicles through generous consumer tax credit. Despite strong frustration by allied governments over their protectionist orientation, these tax credit provisions are reportedly raising foreign business decisions and interests in moving their supply chains to the United States.

The Defense Production Act is a tool that can improve the resilience of the nation’s energy system and has clear potential benefits for national security. Used appropriately, it can empower the nation’s ability to withstand national emergencies that include disruptions to energy technology supply chains. CSIS research indicates that experience in other contexts prefers financial assistance to help companies expand production, retool, or otherwise make capital investments to reduce risk and meet future demand. Such interventions can have desirable other effects, like job creation or emissions reductions, but the priority use case for the DPA is securing the timely availability of materials necessary for energy and national security.

Joseph Majkut is director of the Energy Security and Climate Change Program at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Jane Nakano is a senior fellow with the CSIS Energy Security and Climate Change Program.

Joseph Majkut
Director, Energy Security and Climate Change Program
Jane Nakano
Senior Fellow, Energy Security and Climate Change Program