The wind and solar industries expected a big year in 2020 as federal tax incentives were expiring, renewable portfolio standards increased and corporate interest increased. That optimism has been largely erased by the coronavirus pandemic as the industry shifts its mindset with the global economy entering a recession. The $2 trillion federal relief package did not include focused incentives for renewables but the industry will continue pressing for support and legislative clarity as the pandemic puts projects in development at risk.
According to S&P Global Market Intelligence data, over 13,000 MW of wind capacity and 6,600 MW of solar capacity are currently under construction in the U.S. with most expected to come online before the end of 2020. As the global shut down expands, supply chains are likely to be affected causing delays both to projects under construction and projects planning to break ground in 2020.
There were concerns that delays to these projects would affect the tax credits investors would be able to claim. The production tax credit, or PTC, was extended at the end of 2019 allowing projects beginning construction before the end of 2020 to receive 60% of the original credit, but beginning in 2021 projects will no longer be able to take advantage of the PTC at all.
Similarly, the investment tax credit, typically used by investors of solar projects, is in the middle of its phase down. The full 30% rate ended in 2019 and projects that start construction in 2020 will receive a 26% ITC rate. This phase-down continues until 2022 where it settles at 10%. Projects that secured tax equity financing based on fulfilling the requirements needed to take advantage of the tax credits in a given year are potentially at risk should the delays continue long enough.
There is hope, however, that there is an exception already built in to the tax credit guidelines that would grant developers an extension if the coronavirus pandemic significantly delays construction. The safe harbor clause gives projects four years from the start of construction to begin operation in order to claim the tax credits for the year construction began. Wind projects that satisfied either the physical work test or the five percent safe harbor test in 2016 must be completed in 2020 to receive the full 2.3 cents/kWh rate. Additionally, the project must demonstrate continuous progress on construction over the four years to qualify meaning an extended work stoppage could cause that project to lose eligibility.
The exception is known as an "excusable disruption" and it allows wind projects to remain qualified for the desired PTC if construction must stop due to reasons beyond the control of the developer. The coronavirus pandemic would appear to fit this criteria. This will need to be clarified, but the good news is that this can be done simply by order from the US Treasury. Industry experts have said that even a one-year extension from the Treasury due to coronavirus delays would ease a lot of tension in the supply chain.
The issue for solar developers is different as the safe harbor clause applies to the beginning of the project and not its completion. Solar developers who fulfilled the 5% harbor rule before the end of 2019 by paying for the equipment have three and a half months to take delivery of said equipment to remain qualified. That deadline is April 15th, 2020; thus the issue is much more immediate. Deliveries of solar panels that have been delayed may put these projects at risk; however there might be wiggle room as the requirement is not actual physical delivery but reasonable expectation of title or delivery.
These issues could be fixed relatively easily as they would not require new legislation to be passed but simply an order from the Treasury. This does not help projects not yet under construction and especially projects still in early planning hoping to procure financing as timid investors hold out to determine the extent of the coronavirus-fueled recession.
An extension of the ITC and PTC could help these projects but such legislation will be difficult in the current hectic legislative environment. Even then, the tax equity market is not near as bullish as it once was and investors are more likely to remain conservative until the markets settle and the full extent of the coronavirus pandemic is clearer. A lengthy extension will be needed to bridge the gap. A bill focused solely on renewables is unlikely to gain traction; however, there is a possibility of legislation that paired renewables incentives with fossil fuel caveats similar to the bill that extended the tax credits along with lifting the ban on oil exports in 2015.
The federal coronavirus relief bill does not directly address many concerns within the renewable industry; however, wind and solar companies may still take advantage of corporate assistance within the package to remain afloat through near-term uncertainty. Further assistance is still needed, however, according to experts in the industry. The solar industry expects to be hit hard and residential solar companies are bracing for massive layoffss in the face of a large number of cancellations. Sunpower Group Ltd.recently withdrewSunpower Group Ltd. its 2020 financial guidance as well as other money saving measures in preparation for the coronavirus fallout.
On the utility-scale side, larger wind and solar developers are expected to be better equipped to weather storm but as the impact of the coronavirus pandemic increases, more companies will take a hit. Smaller developers that are not as well capitalized and with projects in financing limbo will face a very tough road moving forward. It remains to be seen which companies will be forced to shut their doors and which projects will be shelved once the dust settles.
Like many industries around the globe, the recession will have a significant impact on the wind and solar industries but the industry has encountered — and survived — similarly difficult roadblocks before and is poised to do so again, even if some government assistance is needed along the way. The landscape of the industry will certainly change and adapt but overall, the renewables market will remain firmly standing.
Regulatory Research Associates is a group within S&P Global Market Intelligence.
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The 2020 US Renewable Energy Outlook