The coronavirus continues to threaten a disruption of supply chains for power generation assets, with a lag potentially coming with implications for renewable projects utilizing tax credits. The real delay, however, may be stalling projects in early-stage development.
"Clearly, disruptions in global supply chains are giving investors and lenders concern," said Ram Sunkara, a partner at Eversheds Sutherland LLP who leads the firm's natural gas liquids, petrochemical and distributed generation and renewable corporate procurement teams. "For renewable projects specifically, a COVID-19 related delay to expected timelines for wind turbines or solar modules could potentially impact tax equity financings as the tax regulations require projects to be under continuous construction within a four-year period."
Many projects that entered construction in 2016 need to come online by the end of 2020, noted Sunkara. "However, industry participants are already discussing ways to mitigate this risk, whether it comes in the form of 'excusable delays' under the regulations or the potential extension of the four-year window for continuous construction."
Most utility-scale projects due online in 2020 have largely sourced their components by now, said Mona Dajani, partner and co-head of the energy and infrastructure projects team at Pillsbury Winthrop Shaw Pittman LLP. She expects those projects to remain on track.
"Largely speaking, most of the utility-scale projects are going forward" despite "a couple that have had one-off challenges," agreed Andy Klump, founder and CEO of Clean Energy Associates LLC, a North American-owned and China-based supply chain management and engineering services firm.
"Tax equity is continuing to move forward with a large number of 2019 deals that have spilled over into 2020," said Dajani. "However, tax equity will likely require clarification of the four-year safe harbor for 2016 start of construction and the extension of four years to five years due to force majeure-COVID- related delays."
Force majeure clauses in contracts, which allow for counterparty exemptions from liabilities associated with a nonperforming asset, have received outsize attention over the past month, with law firms addressing the issue in online publications.
"My outlook on the industry remains bullish," said Dajani. "Regarding the supply chain, from the deals I am working on, we're hearing that 98% of the factories in Europe remain open, including, for example, all but a few of the wind energy plants that America relies on [and] supply chains to China are now reopening."
Among challenges facing suppliers are getting equipment to job sites, from delays on imports being shipped to the U.S. to issues around transporting goods domestically.
"Hiring drivers to transport materials is obviously not as easy or straightforward as it was once was, in particular, getting workers across different state lines," said Klump. "But largely, solar demand is still very strong and very robust. Our teams are still at very high utilization."
Wood Mackenzie, in an April 1 report, predicted the coronavirus could delay 10% to 26% of new solar capacity. Somewhere between 2,000 MW and 5,000 MW of the 19,500 MW of solar expected online could be stalled, according to the report, pushing projects' start date further into 2020 or into 2021. Despite the potential delays, the firm deemed the risk of cancellation for most of these projects "marginal."
"I'm anticipating anything that is [scheduled for the] second half of 2020 is probably pushing well into 2021," Carl Jackson, a founding partner of solar project developer Glidepath Ventures LLC, said in early April. Meanwhile, wind turbine blade manufacturer TPI Composites has said that, despite strong demand, it expects 2020 earnings at the low end of guidance due to the economic impact of the coronavirus.
Smaller and midsized projects are likely to have bigger challenges than large utility-scale projects, according to Klump. "Once it's past a certain point, the equipment's already arrived, you've dealt with a lot of logistics issues. The teams are more or less isolated on these kind of remote areas where a lot of these solar farms are being assembled. There's not as much of an impact."
Projects that are set to begin construction late in the year and may seek financing, however, may be more likely to see delays.
"Many of those I think, are getting pushed off," said Klump. "But, once again, I still see this as kind of demand push out not demand erosion."
"In terms of debt, we are monitoring risk appetite for liquidity," said Dajani. "While more established deals are moving forward, early-stage deals are dealing with repricing to reflect the changing cost of capital."
Meanwhile, despite whatever difficulties development and construction-stage renewable assets may have, the tumult in the oil space could bode well for the sector.
"The latest oil prices that we're seeing globally have heightened the unpredictability of returns on hydrocarbon investments," said Dajani. "We just saw a decade of growth in global oil demand erased practically overnight. That makes the business case for renewables even stronger."