Solar energy developers in the U.S. have spent a lot of time attempting to find ways to extend the federal Investment Tax Credit. But these plans didn’t include the COVID-19.
Solar energy developers working in the U.S. have spent years refining their plans to secure the federal Investment Tax Credit for as much of their pipeline as possible by “safe-harboring” projects in advance of the step-down taking place. As long as developers meet certain criteria, projects brought online after the step-down begins can still secure a 30 percent tax credit.
But even the most carefully laid plans didn't account for COVID-19. The disease’s spread has squeezed the global economy and brought disruptions to supply chains, including for the solar power industry.
As of March 10, most cases of the virus have been reported in China, the epicenter of solar panel manufacturing. Extended factory shutdowns in February had the solar power industry bracing for possible impact.
For many U.S. solar energy developers, spending 5 percent of a project’s total cost on solar modules and other equipment became the preferred safe-harbor method. Now, some solar power industry watchers worry that delays caused by COVID-19 may force solar companies to choose between running down their solar module supply stowed in warehouses or making force majeure claims on some projects.
“I think you’re going to see a lot of force majeure claims under the coronavirus, up and down the supply chain,” said Sheldon Kimber, CEO and co-founder at utility-scale developer Intersect Power.
While production delays appear to be putting constraints on certain projects already, including Invenergy and NextEra solar panel installations in Wisconsin, impacts in the U.S. ultimately may prove relatively muted. Tariffs on Chinese solar modules mean many U.S. developers buy from Southeast Asia already, and solar inverter supplies come from Europe and the Middle East as well as China.
But the virus has undoubtedly injected another element of uncertainty into the complex undertaking of spreading the Investment Tax Credit beyond its established timeline.
As things stand now, “the risk to projects with a 2020 [commercial operation date] is limited — delivery for February to April may be late by two weeks, one month tops,” said Xiaojing Sun, a senior solar analyst at Wood Mackenzie Power & Renewables. “It should not create material damage.”
Still, there's no telling how widespread the coronavirus outbreak will become. That could require difficult decisions from developers if it puts further constraints on equipment delivery or the broader supply chain.
To qualify projects for the ITC, developers have to track all of the equipment they’ve purchased or manufactured as it moves from storage to project sites. Those “magic modules,” as Kimber calls them, need to be incorporated into each project in order for it to secure the 30 percent tax credit.
“They have to use the magic modules in each project. So, if they use all of the 2 gigawatts now because they can’t get the non-magic modules, that’s a bad outcome,” said Kimber. “That has a knock-on effect and means that some [developers] don’t get [the] ITC on their pipeline.”
Potential force majeure claims could cause “ripple effects,” hitting engineering, procurement and construction firms, developers and eventually power contracts, Kimber said.
The coronavirus may further complicate what was already a carefully calculated dance to stretch the ITC’s benefits for as long as possible. Developers in the U.S. stockpiled solar modules, signed contracts and shipped equipment ahead of the step-down. Then they had to decide where to put it all.
Storing modules and other equipment represents a "very real cost for developers," said Jessie Robbins, senior director of structured finance at developer and financier Sol Systems. “It’s also a bit of a risk when you think about liability and equipment in transit for a long period of time.”
Vivint Solar, the country's second-largest residential solar installer, told Greentech Media it’s currently planning to store its 115 megawatts' worth of modules (valued at about $50 million) in a portion of a 160,000-square-foot warehouse in Tempe, Arizona. Neighboring California is Vivint’s largest market, but Tempe is a cheaper and less risky place to store solar panels.
“In Tempe, there’s no real risk of earthquake, no real risk of flooding or those types of things,” said Rob Kain, Vivint's vice president of investor relations. “It drastically lowered the insurance cost.”
Plus, Tempe is a transit hub, making it easy to move solar panels from their storage layover to regional warehouses. The equipment stops in those locations before reaching its final destination at a project site.
SunPower told Greentech Media it’s storing its 172 safe-harbored megawatts at two warehouses in California: one in Riverside and the other in Fontana, both in an area of the state known as the Inland Empire, California’s unofficial warehouse capital. The developer selected those locations because they’re close to SunPower’s usual warehouse, said a spokesperson, who added that insurance costs made up a small part of the overall price of storage. The residential solar installer is also considering adding another storage location on the East Coast.
Due to tight module supply fostered by ITC demand, Vivint also chose to enter into an solar inverter manufacturing contract. Contracts to produce original components are designed to meet the “work of a significant nature” test for safe-harboring equipment. Vivint’s solar inverters will go straight to the company’s regional warehouses.
Intersect, which is building projects in Texas and California, also relied on the "construction of significant nature" test for a 2-gigawatt pipeline. The company invested in transformers, a strategy the wind industry has used for years to qualify for the federal Production Tax Credit.
“It seemed odd to me that so many people were scuttling for modules,” said Kimber of last year’s rush on module procurement ahead of the ITC step-down. “You’re taking this huge technology bet, a bunch of risk, it requires more cash…and you have to go into a module market that was — at the time — on fire, because everyone was trying to safe-harbor modules.”
The company plans to store $25 million worth of transformers in Asia, near their site of manufacture. Kimber declined to comment on the specific location of the warehouse.
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