It is one of the most important things to ever happen to the US wind and solar industries — and almost nobody saw it coming.
One week before Christmas, President Barack Obama signed into law a five-year extension of the two key federal tax incentives, launching the sectors into a new period of robust growth, sustained profitability and policy certainty.
“This is seismic and a major step forward,” says Greg Wetstone, president of theAmerican Council On Renewable Energy, the nation’s leading non-profit advocacy group for the sector, noting that the importance of stable, longer-term tax policy cannot be overstated. “We never had that. It’s critical.”
The investment tax credit (ITC) and the production tax credit (PTC) are essentially the main subsidies for the wind and solar industries — lowering the cost of energy, encouraging private investment and making financing easier. Since 1999, Congress has allowed the PTC to expire multiple times, then renewed it for short intervals, causing boom-bust cycles that have hurt wind development.
Utilities, independent power producers and corporations now have visibility into the early years of the next decade to develop, finance and realise projects, while the supply chain can more effectively plan its capital expenditures, whether for new plants and products or research and development initiatives, says Dan Shreve, partner at MAKE Consulting in Boston. “These short-term deadlines prevented major innovation-type projects such as new wind turbine designs for the US market,” he says.
Ty Daul, senior vice-president at SunPower, notes that a five-year ITC will allow “recovery of the capital and resource commitments that drive advancements”.
Equally important, passage of the extensions by a strong bipartisan majority is a reassurance for investors in an election year in which several Republican presidential candidates say they would work to kill most federal support for renewables.
That tactic would now appear to have little chance of success. “There is really no precedent for going back retroactively and changing tax law. I don’t think that is on the cards no matter who is in the White House,” says Wetstone.
With stable game rules, expect to see a lot more money coming into solar and wind from Wall Street, and investors in Asia, Canada and Europe through financing and equity investments. Both industries are maturing, have achieved a reasonable level of operational excellence, sell to creditworthy off-takers and generate good returns.
Boom time ahead
Now that tax credits are no longer a hostage to politics, consultants predict the US could add as much as 103GW of solar and wind by the end of 2020 — more than the combined 94GW installed over the past four decades. If that occurs, wind’s share of the nation’s power mix could double to 9% and more than triple for solar to about 3.5%.
“That’s significant. The criticism of solar has been, yes, it is growing at a record rate but is still below 1%. Now, you are going to see solar play a major role when you look at new generation over the next six years,” says Dan Whitten, chief spokesman for the Solar Energy Industries Association (SEIA).
Analyst GTM Research, for example, expects the 30% ITC will drive about $40bn in additional solar investment and25GW of extra PV capacity. By 2020, it says the industry will be in position to add 20GW annually, matching the target set by China.
“We’re excited about the prospects across the board both for developing projects as well as supplying equipment. We’re bullish on all fronts,” says John Huffaker, vice-president of development at OCI Solar Power, which has module assembly and tracker system factories in San Antonio, Texas.
The PTC will spur an extra 14-19GW of wind and induce as much as $35bn investment. The ITC for wind could provide a vital financial lifeline for three proposed pilot offshore projects and several early-stage commercial ventures by enabling developers to reduce upfront expense and power prices. That will make it easier to win regulatory approval for off-take deals and obtain project financing.
Achieving these lofty installation levels will require further reduction in both industries’ capital costs; improvement in module and turbine performance; better regional planning to diversify generation sources; more efficient steps to permit and site projects; and investment to expand and upgrade the nation’s ageing grid to handle more renewable energy.
As part of a compromise with the Republican-led Congress that cleared the passage of the $1.1trn spending bill — of which the tax credits were a small part — Obama reluctantly agreed to largely eliminate the PTC and ITC by 2022 and to end a 40-year crude-oil export ban.
Wind and solar now have a precious few years to reach grid parity with fossil-fuel power, and if they manage to do so, it will revolutionise the power industry — and most experts believe such a goal is well within reach.
Bloomberg New Energy Finance values the solar and wind credits at about $25bn over five years. Since 1918, oil and gas has received an average $4.86bn in annual federal tax breaks and subsidies in today’s dollars, according to venture capital firm DBL Investors.
Smoother market
Beyond volume, the extensions will also help steady the market over the coming half-decade, avoiding the boom-bust cycles that the wind industry has weathered because of uncertainty caused by short-term tax policies.
“The certainty of the PTC extension through 2019 allows me to develop a five-year business plan and look into the eyes of my board members with the confidence that it supported by a certain regulatory environment,” adds Gabriel Alonso, chief executive officer of EDP Renewables North America, a major wind developer. “It’s now easier for me to line up capital internally to build up my pipeline and aggressively pursue off-take agreements to construct new projects.”
The solar sector faced a similar scenario as developers rushed this year to complete projects before the ITC was due to decline to 10%. This put the supply chain under enormous pressure and led to inflated prices and shortages for certain components and services. Without the new five-year extension, Whitten says many of the industry’s 8,000 supplier companies faced possible financial ruin in 2017-18 as demand was set to plummet.
“Now, there is more natural demand and supply when it comes to building out your plans over the next few years,” says First Solar’s US president, George Antoun.
Whitten says with the new scenario of measured growth well into next decade, the SEIA is confident that suppliers can ramp up to meet demand. “It’s something they can definitely handle,” he claims.
With policy stability, foreign suppliers will flock to the high-growth US solar market as the European market continues to slow down and China faces an uncertain economic outlook.
“That puts the onus on us who are US-based equipment manufacturers to sharpen our pencils and remain competitive going forward,” says Huffaker.
With order books filling over multiple years, OEMs and their suppliers are moving quickly to negotiate longer-term deals on better terms for raw materials, services, logistics and labour. Cost savings will bolster profit margins across the industry.
Turbine makers GE, Vestas and Siemens are expected to continue dominating the US sector, although the longer time horizon afforded by the PTC will give Gamesa, Nordex and Senvion a chance to build market share, says Shreve.
Alonso says with the PTC extension, turbine suppliers in the US now have the right signals to invest in R&D to reduce the levelised cost of energy (LCoE).
“Turbine suppliers active in the US have received the right signals to invest in R&D to further develop their pipeline of new wind turbine models and look for optimizations in their industrial plans, all of which should help a continuous reduction in the cost of wind power,”he says.
Who benefits where
Solar executives see the ITC extension lifting the entire industry, with the utility PV segment providing the most new capacity nationwide. Developers that froze dozens of projects knowing they could not complete construction this year now have plenty of time to revive them. Big winners will be those with sizeable project pipelines such as Canadian Solar, First Solar, NextEra Energy Resources, Sempra Generation, SunEdison and SunPower.
“We are going to see more midsize utility-scale projects in the 10-40MW range, instead of 100-200MW,” says Thomas Koerner, president of Canadian Solar USA, which, together with subsidiary Recurrent Energy, has 1.03GW of late-stage projects in the country.
Not only is it easier and quicker to build, finance and obtain regulatory approvals for smaller facilities, which lowers costs, they are a better fit for the populous Midwest, Northeast and Southeast, where there is less land available for development and demand for solar is surging.
Projects over 100MW will be largely limited to the arid Southwest, many on federal lands, and in high-growth Texas, where they can be cost-competitive with traditional generation.
Koerner also sees the commercial and industrial PV sector as one of the strongest markets in the years ahead as costs come down amid ITC certainty. This will further encourage companies, municipalities and other non-utility buyers to sign more power-purchase agreements (PPAs).
Huffaker agrees, but sees major growth here from distributed generation (DG).
“DG was taking off anyway. I think it is gaining a great deal of momentum from the ITC extension just because you have better margins.”
Antoun does not expect the ITC extension to impact PPA pricing much, as driving prices down will depend on market fundamentals and technology.
For wind, the PTC renewal will facilitate development in California, the Midwest, New England, the Plains states and south Texas. If transmission build-out occurs, this could allow access to the best resource in eastern Montana, northern Texas and southern Wyoming.
Developers see PPA prices beginning to stabilise and even appreciate a bit later this decade now that they have more time to negotiate and shop around for buyers. As the PTC loses value, deals below the $20/MWh seen in Texas and several Plains states will not be economically viable going forward.
If developers cannot compensate for declining value and eventual elimination of the PTC through technology, better resource, cheaper financing, O&M, or other factors, they will have no choice but to start to elevate PPA prices, Shreve says.
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