The US solar industry has become accustomed to year-over-year system cost decline, but for the first time in over a decade, the average PV system prices for residential and commercial PV rooftop projects will increase year-over-year in 2021, according to new research published by Wood Mackenzie.
Utility-scale PV costs are still elevated, however the implementation of large-format modules may prevent an increase. Macroeconomic trends have posed immense risk to project economics. Commodity prices and skyrocketing freight costs are the main culprits. According to Wood Mackenzie’s Solar Systems and Technology Service data, average residential system prices will increase 1% on average year-over-year in 2021, while average commercial rooftop projects will increase 3% during that time. Utility-scale project costs are elevated in 2021, which will mostly impact projects expected to reach commercial operation in 2022.
There is much uncertainty among EPCs and developers, particularly for those in the commercial and utility-scale markets trying to predict prices. Procurement decisions are increasingly difficult, not only due to rising costs, but also due to uncertainty around product availability and shipping schedules.
Developers are revisiting PPA contracts as a result. In the utility-scale segment, while most of the supply chain constraints will impact system costs for 2022 COD projects, 2021 projects are still at risk due to shipment delays and elevated freight costs. However, it is likely that for 2021 COD projects, equipment has already been secured, particularly through safe-harbor strategies.
The short-term and long-term impacts on system costs are causing utility-scale developers to either increase prices to the offtaker, absorb the cost increase, or delay product procurement and the COD, until prices come down. The developer’s strategy will depend on various factors. Along with the supply chain and logistics challenges, there is more risk to consider. Covid-19 variants pose risk globally to the solar industry, and uncertainty around policies in the US still loom.
Rising metals prices, banned materials and uncertainty around product availability and shipping schedules all contribute to rising solar PV system costs
According to Wood Mackenzie’s metals and mining research suite, annual copper, aluminum and steel prices are set to increase on average year-over-year in 2021. Copper is prevalent in PV products including inverters and balance of system components such as cabling, combiner boxes, solar PV tracker controls and more, and will cause an increase in overall EBOS prices.
Steel and aluminium will impact racking costs, and aluminium price increases will impact solar module frame costs. Utility-scale PV projects will be hit especially hard by steel price increases, given the magnitude of such projects, however the C&I and residential solar segments will still see some impact.
Average solar module prices increased in Q2 2021 by 15% from Q1 as a result of increased polysilicon, aluminium, glass, and freight costs for shipments to the US. Freight costs have also heavily impacted tracker prices, DDP to the US, especially for products that are imported rather than sourced locally.
As the U.S. Customs and Border Protection (CBP) begin to enforce the recently passed Withhold Release Order on module component imports containing silicon from Hoshine Silicon Industry (Shanshan) Co., module prices are expected to remain inflated through the year and into the first half of 2022, until beginning their slight decline later in the second half.
The price inflation reflects the additional management steps that will be required to provide the proper documentation to prove that the product does not include traces of the banned materials, and also the additional costs associated with any shift in supply chain that manufacturers must make to cut ties to the aforementioned company. If a container is flagged, the extra time spent at port that it will require to prove the absence of banned material will add associated costs, as well.
The impact on prices to the customer will vary, as manufacturers may choose to either absorb some of these raw material price increases or pass them directly to the customer. For residential and small commercial projects where components are typically procured through the distribution channel, there will likely be a longer lag time between when manufacturers increase prices, to when the end customer sees a price increase. Further, with all the volatility, manufacturers may only guarantee price quotes to customers for a matter of hours or days, whereas previously it would be a matter of weeks or even months.
Developers and EPCs continue to navigate policy uncertainty and the risk of logistics and raw material price fluctuation
The US utility-scale PV market is dominated by solar modules imported from Southeast Asian countries such as Malaysia and Vietnam. Port congestion and production delays due to Covid-19 have caused shipment delays. Not only have freight costs posed risk to PV project economics, but extended transit timelines are also impacting commercial operation dates. Further, looming legislation around an ITC extension and the potential associated labor requirements will have implications for PV costs, along with the risk of Section 201 and Section 301 tariff extensions.
Even with elevated system costs, utility-scale project costs are expected to decline in the long-term through 2026 from labor efficiencies, and improvements in racking and electrical balance of system components. Project sizes on average in the US continue to climb, which will lead to economies of scale benefits and a lower $/W. Large wafer format modules will likely become mainstream in the US over the next couple of years, which may help lower costs.
The long-term demand outlook in the US is still positive, but some of the supply chain issues may not be alleviated anytime soon. For example, international freight costs may stay elevated for a few years before normalizing again, and commodity prices may continue to fluctuate.