Contributed by Adam Bernardi, Director of Renewable EPC Sales & Commercial Strategy at Burns & McDonnell
Many expected an upsurge in solar projects following the passage of the Inflation Reduction Act (IRA) in 2022. However, as we look at the utility-scale projects planned versus completed for 2023, you’ll notice that so far, the market has underdelivered. According to a report published by American Clean Power, 16,639 MWs of clean power projects (67% of those being solar) have experienced an average delay of 14 months. It is difficult to point to one single factor for these delays. Even with a few challenges that are emerging, a bullish market for utility-scale solar projects is proving to be a reality.
Generally, these projects are coming in at more refined stages of the development cycle — with power purchase offtake agreements in place, firm real estate contracts for sites, and a favorable outlook for interconnection approvals from regional transmission authorities (with many region-specific exceptions). This is somewhat different than what we were seeing just a few years ago, when developers would bring more speculative opportunities to the table.
Working through the latest solar coaster
The solar industry has seen a lot of ups and downs, twists and turns. From COVID to AD/CVD to crowded interconnection queues, the industry has seen its fair share of challenges. With renewed clarity from Washington on some AD/CVD issues and interconnection reform starting to take place, there are a lot of solar projects queued up to get underway, though nothing is moving as fast as expected.
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For most of 2022, uncertainty over the U.S. Department of Commerce (DOC) deliberations over antidumping and countervailing duties (AV/CVD) rules was creating logjams of solar modules stuck in ports. The DOC has now issued a final ruling, and while there are still some uncertainties over AV/CVD, it appears we’re getting past most of those issues.
Some of the slowdown in projects we’re seeing today could be attributed to certain compliance aspects created by the new IRA regulations, although these factors may vary and require a region-by-region or even project-by-project review. Although the IRA has injected a dose of optimism into the solar industry like never before, it has made the contractor’s job of executing projects more complicated and has taken time for owners and contractors to find a middle ground.
Prior to the passage of the IRA, contractors played no role in whether a project qualified for tax credits. The owner would build a facility, file a return, and be reasonably sure that tax credits would be forthcoming.
Now, more burden has shifted to the contractor, particularly regarding compliance with the prevailing wage and apprenticeship requirements. One of the key goals of the IRA is to support the construction industry by boosting wages and addressing shortages in skilled trades. While we strongly support that goal, the net result is that starting projects has been a bit slower as contractors and owners work to find a middle ground on requirements that are not well defined in the new and proposed rules but have huge financial implications for the project owner.
As a direct-hire construction company, we have been in communication with industry peers representing owners, labor, contractors, and financing parties among others to better understand how the industry is responding to the new and proposed provisions under the IRA. Tax credits under the IRA are critical for project economics, but no contractor is willing to shoulder the liability risk of not meeting the requirements needed for an owner to qualify for those credits. It’s an issue the entire industry is working on to get it right.
Supply chains risks
Supply chains remain high on the list of trends we are watching. Many of the bottlenecks we saw during the COVID pandemic have greatly improved, but a few critical items are still in short supply, and high-voltage breakers top the list.
These breakers are in high demand because of the influx of renewable energy sources connecting to utility grids. Utilities are being overwhelmed with this demand and have seen a large influx of interconnection facilities projects. In order to keep pace, some are buying breakers in bulk quantities.
The result is that high-voltage breakers are a pinch point for solar projects. It’s not uncommon to see 80-week lead times for ordering these breakers. Complicating things even further is the fact that manufacturers impose firm deadlines for placing these orders. If an order is placed even a day or two past the deadline, for example, it is not unusual to see production lead times go from 80 weeks to 100 or even 120 weeks, simply because of the crunch manufacturers are facing. The dire implications for project schedules are obvious.
Now that the Department of Commerce has finalized its AV/CVD ruling, market reactions will be interesting to watch.
The DOC has engaged in a lot of back-and-forth discussions to address Chinese dominance in the solar marketplace. China will remain as a force to be reckoned with for some time to come, but it does appear the ruling could level the playing field somewhat. Solar equipment and components still can enter the U.S. market as long as Chinese manufacturers follow at least one of three pathways for compliance.
The first pathway is for manufacturers to source at least four critical solar module components from companies outside of China. These may include items like silver paste, aluminum frames, glass, back sheets, or junction boxes among others.
The second pathway would be to source silicon wafers from non-China sources. Currently, it appears that these sources will primarily be countries in Southeast Asia. Vietnam is emerging as a leading player to land a major new facility from Trina, one of the largest Chinese solar manufacturers. Once these non-Chinese components are produced, they could be shipped to facilities within China for final assembly and export to the U.S.
A third pathway would be for solar manufacturers to begin opening facilities in India or Mexico. This could be the most interesting development of all. The IRA attempts to restart solar manufacturing within the U.S., but it is a possibility that the inexpensive labor available in India and Mexico could attract some facilities there. This is a wait-and-see proposition, but with our favorable trade relations with India and Mexico, we could see a number of solar module manufacturing facilities going to those two countries.
Giant economic puzzle
The clean energy transition is gaining momentum, but the process of getting there is really a giant economic puzzle being worked on by government regulators, utilities, investors and developers, the engineering and construction industry, and international partners, among others.
There is more corporate demand for clean energy than ever before. But solar projects are taking longer to come online, due to labor and supply chain issues and lengthy queues for interconnection approvals from regional transmission authorities. Solar projects also are competing with new chip manufacturers, new battery plants, and many other types of clean energy projects for the same construction labor and some of the same components and materials that solar projects need.
Challenges facing the solar industry can vary by region or even by project. The IRA is set to have a huge positive effect on the industry, but it is taking time to sort it all out and the benefits available in one region may not be available in another.
It’s important to not only keep a pulse on the power market, but also look at the trends we see in the market for data centers, or the rising demand for high-voltage transmission infrastructure can be part of what forms our perspective and strategy for building potential solar projects.
We are progressing toward a greener energy future and the market continues to find solutions to these challenges. Solar development is not going away anytime soon given the positive climate for interconnections, growing supply chain, and high demand for offtake agreements.
But the reality today is these projects are getting more complicated to execute. Getting into the nitty-gritty of finding a contractor with the resources experience and capacity to execute with ready access to the equipment, materials, and labor is where the hard work begins.
About the author
Adam Bernardi is the Director of Renewable EPC Sales & Commercial Strategy at Burns & McDonnell. Adam has nearly 20 years of experience within the power generation industry, primarily supporting utilities and developers in the upfront development of renewable energy projects, from siting and commercialization strategies all the way through startup and commissioning.