Following years of robust growth,1 even in the earlier days of the pandemic, solar projects as a whole endured a volatile year in 2021 from a pricing perspective, particularly in the latter half of the year. This volitivity was largely driven by an intertwined web of congested supply chains, U.S. government restrictions and opportunistic players in the transportation and manufacturing markets.2 Nonetheless, solar installations in the aggregate remained relatively healthy across several segments of the U.S. market with 5.4 GW of solar PV capacity installed in Q3 2021, which adds up to 113.5 GW of total installed capacity to date.3 Both the development and investment communities continue to recognize solar as a staple asset in the energy transition during 2022 and beyond. This is shown by the substantial amount of growth capital flowing to an increasing number of development outfits, who, given an extreme demand, are looking to bolster their pipelines across the country.4
Meanwhile, it appears that battery storage systems have come of age at a time when both market forces and, oddly enough, natural events, require such maturity. 2021 demonstrated that utilities are aggressively turning to batteries as short and long-term solutions for their goals of reducing peak demand, foregoing expansion of transmission infrastructure (albeit due in part to significant impediments to transmission development) and, ultimately, controlling energy costs for their customers. Relatedly, the impacts of Winter Storm Uri in February 2021 shone a bright light on the Electric Reliability Council of Texas (“ERCOT”) with respect to battery integration. The effects of Winter Storm Uri illustrate the economic tension that Texas developers (and others) now face between costs associated with winterizing their new and existing renewable assets, and investing in storage assets which, if scaled properly, would help offset the catastrophic lack of available power experienced during last year’s event.
Finally, 2021’s legislative agenda with respect to solar and battery storage left a number of key market players holding their breath, anxiously waiting to exhale upon Congress’ enhancements to the Production Tax Credit (“PTC”) and Investment Tax Credit (“ITC”). Congress is expected to expand the PTC to standalone batteries, which would be welcomed by financing parties, developers and utilities alike. However, it appears that the Build Back Better Act may have to wait, but there is the possibility for more discrete action on incentives for renewables in 2022. Regardless of the outcome on the tax incentives, the future for solar, wind and batteries will be one of robust investment and development, and we expect 2022 to be a busy year.
Solar Down, But not Out
The cost of constructing solar has risen sharply over the last year, namely because of the significant increases in the costs of solar panels. The average pricing for panels in 2021 was approximately 18% higher than in 2020 and these panels serve as the centerpiece of most utility-scale projects in the U.S.5 Other critical equipment components of solar projects, such as trackers and inverters, also experienced significant price jumps due in part to a gridlock in the upstream supply chain initially driven by the effects of COVID-19 and its variants. The pricing debacle has been the impetus for solar’s largest challenge in both the U.S. and other developed markets: substantial demand, but rising costs with increasingly inconsistent (or unreliable) supply. As a result, the current environment has forced some developers to go back to the proverbial “drawing board,” which in practice amounts to uncomfortable discussions with purchasers under the power purchase agreements (“PPAs”) attached to their projects, wherein developers are seeking to (1) delay the commercial operation date (“COD”) of the project by months or even years,6 (2) adjust PPA pricing to account for the material increases in supply/construction costs or (3) in rare cases, create offramps that would allow them walk away from building the project altogether. One result of this disruption in the solar development market is that offtakers (and their downstream customers, where applicable) may want to consider taking a more active role in their commercial diligence of key project agreements and take a deeper look in order to assess project execution risk on a more granular level.
Despite the challenges associated with scaling solar projects in the current market, the financing community remains active and optimistic in seeking out viable projects, and it appears that those developers who manage to get their projects to COD without significant obstacles may be able to benefit from competitive pricing given the scarcity of operationally viable options. Even more, solar is expected to regain its growth toward the end of 2022 and into 2023, which coincides with the timing of an expected calming in the supply chain and logistics markets, as well as what appears to be an easing of U.S. trade restrictions. The U.S. Court of International Trade issued an exemption for Section 201 tariffs of bifacial solar panels7 (and such tariffs are set to expire in February 2022 in any case), and there are reports from industry insiders that U.S. Customs and Border Protection has recently begun releasing previously detained solar panels imported from Chinese-based manufacturers.
In sum, while solar developers experienced pricing and scheduling hardships in 2021, we expect market forces to continue to resolve themselves during the latter half of 2022 and beyond.
At the start of 2021, renewable industry stakeholders promulgated a familiar outlook on battery storage that many observers recount from recent memory: batteries are going to be an extremely important aspect of the energy transition. Not only did 2021 illustrate their importance operationally and politically, but developers and utilities put their dollars and suppliers to work by actually purchasing, installing and energizing batteries at a record pace.8
Utilities have emerged as perhaps the most prominent customer demographic in terms of battery-focused solutions, in furtherance of their not-so-new mission to reduce peak demand on their transmission and distribution (“T&D”) systems. Thus, many in 2021 came to recognize battery systems as beginning to function as a newer version of a “peaker” plant, effectively “stepping in” to alleviate real system constraints. That said, no event in 2021 demonstrated the need for system constraint relief (and an extremely avid need for battery storage) than Winter Storm Uri, which left Texas power producers and T&D utilities gasping for air in terms of how to mitigate unreliability on the ERCOT system. As a result, developers such as Broad Reach Power and Q CELLS have begun to rapidly expand their Texas storage footprint.9 This expansion coupled with pending market redesign by ERCOT that seeks to incorporate (and appropriately compensate) battery storage resources,10 highlights that not only is Texas a hotbed for storage expansion, but it may be a model for other geographic regions whose infrastructure may have similar deficiencies and needs for similar storage-related solutions.
Additionally, while not an entirely new trend in 2021, developers continued to procure batteries for projects to reduce the intermittency of underlying solar projects. To that end, while battery systems experienced substantial price increases in 2021 for many of the same reasons as solar, such an increase was (and still is) due, in part, to exploding demand among developers and utilities. In practice this demand has spurred original equipment manufacturers (“OEMs”) and suppliers to demonstrate unprecedented leverage in battery supply negotiations; that said, similar to solar, we expect this dynamic to ease toward the latter half of 2022.
In any event, on the topic of OEMs and suppliers, the lack of capacity in the battery supply market (coupled with ever-hectic developer/utility-side scheduling demands) has allowed new market players to emerge outside of the relative giants such as Tesla and Fluence. For example, suppliers such as Powin, LLC came on the battery scene hard and fast in 2021, as evidenced by their notable capital raises and flourishing pipeline.11 These new additions in the supplier market are important, as both sponsors and financing parties are beginning to adapt to the presence of new faces and names in renewable project development. So far, we have not seen significant pushback from the financing community as the presence of other reputable players in a project’s development and construction help mitigate the lack of a supplier’s lesser-known namesake. For example, where reputable EPC contractors are involved in battery installation and/or well-known O&M providers plan to be engaged.
Finally, in addition to the operational-based need for storage, the nature of battery expansion will continue to depend on its economic viability, particular as it relates to expansion of the ITC to standalone battery systems that could be coupled with a direct pay option.12 While utilities in particular have moved ahead with standalone battery systems despite the lack of third party tax equity financing, enhanced ITC measures would be a boon to smaller developers who would benefit greatly from incentives to bring tax equity into the picture, or otherwise monetize the tax benefits themselves for those projects. We remain cautiously optimistic that legislation expanding the scope of the ITC for battery storage will be enacted in 2022, given what generally appears to be bipartisan support for the measure. However, a lack of new legislation for 2022 seems unlikely to deter overall demand.
1Wood Mackenzie US Solar Market Insight Q4 2021, available at: https://www.woodmac.com/industry/power-and-renewables/us-solar-market-insight/.
2Solar’s Growth Stumbles Just as the World Needs It Most (October 25, 2021), available at https://www.bloomberg.com/news/articles/2021-10-25/solar-energy-growth-rate-slows-with-supply-chain-shortages-rising-panel-prices.
3U.S. Solar Market Insight Q4, Key Figures (December 14, 2021), available at: https://www.seia.org/research-resources/solar-market-insight-report-2021-q4.
4SEIA/Wood Mackenzie Power & Renewables U.S. Solar Market Insight 2021 Q4, U.S. Solar PV Deployment Forecast, available at: https://seia.org/solar-industry-research-data.
5Biden’s New Problem: Rising Solar Panel Prices (June 2, 2021), available at: https://www.instituteforenergyresearch.org/renewable/solar/bidens-new-problem-rising-solar-panel-prices/.
6Financing: Log Jam Could Delay Project Finance Market in 1H22, But Pricing Environment Expected to Remain Competitive (January 3, 2022), available at: https://newprojectmedia.com/source-share1984#source-sharing/view-source-sharing-intel/61d33bf381d5d2001e45fce9/.
7U.S. Trade Court Reinstates Bifacial Tariff Exclusion, Returns Section 201 Tariff Rate to 15% (November 16, 2021), available at: https://www.seia.org/news/us-trade-court-reinstates-bifacial-tariff-exclusion-returns-section-201-tariff-rate-15.
8Battery Storage in the United States: An Update on Market Trends, Growth Across U.S. Electric Power Market Regions, (August 16, 2021), available at: https://www.eia.gov/analysis/studies/electricity/batterystorage/.
9Texas Adds Battery Storage to Support Grid Ahead of Winter (November 12, 2021), available at: https://www.power-eng.com/energy-storage/batteries/texas-adds-battery-storage-to-support-grid-ahead-of-winter/.
10Project No. 52373, Review of Wholesale Electric Market Design, Public Utility Commission of Texas, Approval of Blueprint for Wholesale Market Design and Directives to ERCOT (January 13, 2022), available at: https://interchange.puc.texas.gov/Documents/52373_336_1180125.PDF.
11Powin Energy Raises $100M to Compete for Leadership in Grid Storage Market (February 5, 2021), available at: https://www.greentechmedia.com/articles/read/powin-energy-raises-100m-to-compete-for-leadership-of-grid-storage-market.
12Financing: Log Jam Could Delay Project Finance Market in 1H22, But Pricing Environment Expected to Remain Competitive (January 3, 2022), available at: https://newprojectmedia.com/source-share1984#source-sharing/view-source-sharing-intel/61d33bf381d5d2001e45fce9/.
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