The U.S. solar industry reached a critical milestone this year, surpassing 100 GW of installed electric generating capacity. But despite significant growth across the solar sector, attention is now turning to supply chain constraints, which continue to be on the rise since the second half of 2020.
The number of U.S. renewable energy projects that can realistically come online by the end of 2023 is currently dwindling, according to Edison Energy’s Q2 2021 Renewables Market Update. Significant demand for renewable power from a host of buyers is leading to many projects being contracted and moved off market. Meanwhile, other projects are seeing their online dates pushed into 2024.
PPA prices for new renewable projects in the U.S. have been trending upward over the last two years, with many developers citing huge shifts in macroeconomic factors as the driving force behind these increasing costs. Some of that price pressure can be sourced to the supply chain and specifically to commodities markets, where the price of steel and aluminum have ticked up significantly over the past year.
Solar costs on the rise
Increasing costs of solar panels has been an unexpected development, with many developers anticipating that as the technology continued to improve, the cost would gradually decline. However, in the short term, there is a huge crunch in availability of solar modules. This is being driven partly by demand, as well as supply chain-related constraints on inputs to solar modules, which are also seeing price increases.
The costs of many solar array components continue to increase, including steel prices, which are up 210 percent in the last calendar year. Solar modules are another pain point, where shortages in inputs like polysilicon are driving prices up, according to Wood Mackenzie.
Beyond the components, other areas of the economy are also experiencing a supply-side squeeze, including the shipping and logistics sector, which continues to be in high demand, according to the Solar Energy Industries Association (SEIA). The trade group reports that virtually every part of the shipping and logistics sector has been impacted, from the availability of shipping containers to the workers needed to fill the containers and drive the trucks. This has led to delivery delays for solar-related products.
In addition, solar panel manufacturers continue to be under significant scrutiny around the potential use of forced labor within the supply chain. In June, the Biden administration issued an import ban on equipment from Chinese solar companies based on allegations of forced labor in the Xinjiang region of China, where approximately 50 percent of the global supply of polysilicon is produced. Since 2018, the polysilicon industry in Xinjiang has quadrupled, according to the U.S. Dept. of Labor.
Almost every developer is now reevaluating how they source their panels and which suppliers they trust. This problem is still early on, so there’s not yet a straightforward and transparent metric like an international seal of approval to guide purchasing decisions. Since information is provided from the solar manufacturer, a developer must trust the information being shared. This has resulted in some developers opting to change to more trusted manufacturers.
Earlier this year, nearly 200 solar companies signed a pledge opposing forced labor in the solar supply chain. The pledge is part of an industry-wide effort, led by SEIA, which supports the development of a supply chain traceability protocol and a comprehensive update to SEIA’s Solar Commitment, which defines common practices and expectations for the solar industry.
Many developers are now sourcing from vendors who can provide the most transparency around their supply chains, which creates higher demands on select solar manufacturers, as well as increased prices for panels that were already in short supply. This has added to the growing list of challenges that are now impacting the bottom line for both solar developers and installers.
Mitigating risk of shifting timelines
Given the supply chain constraints and pricing pressures in the markets, some developers are pushing out their targeted online dates.
An extension of the full value of the solar investment tax credit (ITC) has given developers more flexibility to bring projects online later, while still taking advantage of the higher incentive. The deadline for projects to be eligible for this credit was extended two years to 2025 for projects that started construction by the end of 2019.
The realities of development timelines in several markets will require some projects to come online later. In PJM and MISO territories, slow interconnection timelines and protracted permitting processes have left just a small inventory of 2023 projects on the market. Conversely, SPP and ERCOT are a better bet for earlier online dates, with fewer hurdles in getting projects up and running. That said, challenges continue to exist in ERCOT around interconnection, congestion and mineral rights.
Buyers looking to purchase renewable energy in today’s complicated marketplace need to be mindful about mitigating risk. First, they need to understand the project development cycle and to be aware of the challenges developers are facing. Through detailed due diligence, they need to identify the risks that remain for each project they evaluate.
Buyers, particularly those with near-term renewable energy goals, will want to value mature assets. The further along a project is in development, the more likely it is that the developer will be able to bring the project into operation at the price and on the timeline that they offered.
However, there is risk in every development-stage project. The final approach to mitigating risk is in the contracting stage, where buyers and sellers will negotiate to determine a fair allocation of these risks.
A critical factor that will also help buyers in this environment is the buy-in of all relevant team members and departments well in advance of the start of their renewables procurement, allowing them to act quickly when they find the right project.
While it is anticipated that demand for renewables will continue to grow and competition for projects will remain high, there is hope that supply chain constraints will ease over time. The timeline for the resolution of these issues, however, is not yet known.
Mary Kate Francis is senior director of renewables supply at Edison Energy.