POWER SURGE AS SOLAR SUBSIDY EXPIRES IN US
▶ Stampede for panels expected – but installers risk being stuck with unsold inventory by the time federal tax credit winds down next year
America’s biggest solar power developers are stockpiling panels to lock in a 30 per cent federal tax credit that is due to start being phased out next year. It is a strategy that could backfire if projects do not materialise or panel prices slide substantially.
Duke Energy, 8minute Solar Energy and Shellbacked Silicon Ranch are among those working to claim the full subsidy, which is available to operators that either start construction or spend five per cent of a project’s capital cost by the end of 2019. Consumers who purchase residential solar this year are eligible for the full tax credit, but the rules that allow the subsidy to be locked in now for systems installed much later apply only to companies.
North Carolina-based Duke, for example, plans to claim the maximum credit on as much as 2 gigawatts worth of panels.
That is enough to power 380,000 homes, even though some of those projects might not go online for years.
Clean-energy mandates in many states and a push by companies to go green have given Duke confidence it can recoup its investment, said Chris Fallon, vice president of the company’s renewable energy arm.
“We know there will be customers out there, we just don’t know who those customers are yet,” Mr Fallon said.
China’s Trina Solar estimated about 20 per cent of current US demand for solar panels is being fuelled by tax considerations. That heavy up-front spending has been good news for global panel manufacturers, including Trina, which is sold out through the first quarter of next year.
Consultancy Wood Mackenzie projects developers will “safe harbour” about 31.2GW of US solar installations, representing nearly $30 billion (Dh110.17bn) of investment in coming years to maximise their tax credits.
Installers could get stuck with inventory if US solar demand weakens or if current technologies rapidly become outdated.
They are also paying a premium for panels amid the rush to beat the year-end tax-credit deadline. Module prices are up by more than 10 per cent from earlier in the year, according to Wood Mackenzie.
It is a major departure for an industry that has experienced steady declines in panel prices, thanks to improvements in efficiency and low-cost Asian imports.
“There is a definite risk” but it is “still worth doing,” said Tom Buttgenbach, chief executive of 8minute Solar of Los Angeles, which builds large solar power plants in the southwestern US.
The phase-out of the Investment Tax Credit is a major change for an industry that has relied on it to fuel growth. Since the tax credit was introduced in 2006, US solar installations have expanded by more than 50 per cent a year, according to the Solar Energy Industries Association. Falling costs have enabled solar to compete with fossil fuel-generated power. The solar industry trade group last week kicked off a lobbying push to preserve the ITC with a letter to Congress. Democratic policymakers in both the House and Senate support extending the subsidy. But an extension is opposed by Chuck Grassley, the Republican chairman of the Senate Finance Committee, which oversees tax issues.
A long-time supporter of credits for both wind and solar, Mr Grassley promised subsidy critics in 2015 – the last time it was extended – that there would be no repeat. The extension would need Republican support to pass.
If allowed to sunset, the tax credit would drop to 26 per cent in 2020, with an annual step-down until 2022. It would then settle at a permanent 10 per cent for utility and commercial projects and be eliminated for residential systems.
“The message really is ‘act now,’” said T J Kanczuzewski, chief executive of Inovateus Solar. Based in South Bend, Indiana, the solar developer expects to safe harbour 15 projects this year.
8minute Solar plans to build 6GW of projects in the US over the next five years, all while maximising tax benefits. Its 200 megawatts Eland solar and battery project in southern California, for instance, is not slated to begin operating until 2023. But the company began building a substation for the project this year for an undisclosed price, allowing it to claim the 30 per cent tax credit. Mr Buttgenbach said even a modest decline in the ITC to 26 per cent next year makes a huge difference.
“In terms of project economics it’s equivalent to the entire profit margin,” he said.
Silicon Ranch, a Nashville, Tennessee-based developer, is taking a cautious approach, accumulating panels only for projects for which it has signed contracts. As a result, “we perceive the risk to be extremely low,” chief executive Reagan Farr said. Residential solar company SunPower has said it will hoard at least 200MW of panels this year, enough for more than 25,000 homes.
The safe-harbour practice does not apply to the federal tax credit for residential projects, which also begins to step down next year and expires completely in 2022. But homeowners who decide to lease a solar system, rather than own it themselves, could benefit indirectly if the owner of the panels has locked in a higher tax credit than they might qualify for by owning the project outright.
The stockpiling has been a boon for panel makers.
Trina, one of the world’s largest manufacturers, is sold out up to the second quarter of 2020, according to Steven Zhu, head of the company’s operations in the Americas.
Rival First Solar said in May that its supplies were completely committed until the end of next year, prompting the US panel maker to consider extending production of a panel technology it had been planning to phase out.
Some industry veterans expect panel demand to cool in 2020 following this year’s tax-driven buying frenzy, while planned expansions by several manufacturers should help to boost supply.
For now, panel makers are enjoying their sellers’ market, a rare ocurrence in an industry accustomed to sliding prices and razor-thin margins.
First Solar chief executive Mark Widmar expressed optimism, along with a reminder that the unique conditions now benefiting the industry are temporary.
“As we look across the horizon, we feel very comfortable,” Mr Widmar said.
“But we know this will continue to be a very challenging and demanding market.”