Tag: ITC

Will High Interest Rates Stifle Solar EPC Development?

Posted on by bop-admin

Solar development is thriving across the United States, but why? 

While we can suggest growth is directly tied to climate change goals, nuance is missing. Climate change drives solar adoption, but maturing technology and lower costs influence it, too. 

Lower Costs, More Adoption 

New technology is always expensive when it first hits the market.  

Like electric vehicles, computers, and MP3 players, solar panels cost less than what they did when they were first sold. According to the National Renewable Energy Laboratory (NREL), the cost of residential, rooftop commercial, and utility-scale solar fell 64%, 69%, and 82%, respectively, from 2010 to 2020. 

In 2022, a tariff moratorium benefited the solar industry by allowing companies to import low-cost solar panels from Asia. Though the tariff is ending, it has given domestic manufacturers time to increase production. Domestic panels may be more expensive but cost less to ship and have a shorter supply chain. 

Soft costs are also improving, though more slowly than hard costs. Unfortunately, there isn’t one universal policy, leaving communities and states to create rules. This results in processes that slow down solar projects and potentially increase costs. 

Despite political and technical hiccups, solar installations are up. Solar Energy Industries Association (SEIA) data suggests solar accounted for 75% of new electricity capacity added in Q1 2024. The organization also mentioned utility solar projects were doing well, setting quarterly records in Q1 2024. 

But amongst all the excitement, a storm cloud could derail momentum. 

Tackling Climate Change with Solar 

Generating electricity isn’t always clean or cost-effective, but it’s part of our daily lives. 

Unlike fossil fuels, solar energy and other renewables are cheaper, cleaner, and infinitely available. As a result, solar farms are playing a critical role in upgrading our clean energy portfolio. 

According to the U.S. Energy Information Administration (EIA), the country added 15.8 GW of solar power from January to September 2023 – up 30% year-over-year. While it’s great news for the industry, the country, and the environment, the solar boom is facing headwinds. 

Wood Mackenzie, a data and analytics company, believes inflation could temper solar energy’s sunny outlook. When inflation rises beyond the normal range, it sends ripples throughout the economy. With inflation spiking in recent years, Wood Mackenzie fears the renewable market could be impacted more than other industries. 

The group says photovoltaic (PV) installations are expensive to establish, resulting in high investments and low returns. However, solar has long been an attractive choice because of its levelized cost of electricity (LCOE), a metric comparing different types of energy to one another. 

Solar has a much lower LCOE than fossil fuels like natural gas, but its advantage shrinks as inflation rises. 

Inflation Looms Large 

Inflation-wise, life was pretty good for many industries emerging from the Great Recession. 

Rates were low and steady, allowing businesses and the economy to flourish. But after more than a decade of stability, COVID-19 ruined the party. 

As the world reopened and life returned to normal, inflation boomed. By the middle of 2021, the 12-month inflation rate had risen to more than 5%. A year later, we saw inflation rates around 9%. The rate has cooled but still sits far above where it was only a few short years ago. 

Some inflation is good because it encourages businesses to invest, but excessive inflation does the opposite. Over time, higher inflation means less profit. High inflation makes operating costlier, ultimately hurting industry growth, especially in emerging markets. It also makes it harder to plan for future projects because money is “more expensive.” 

How Higher Inflation Affects Solar EPCs 

The simple response to the impact of inflation on the industry is to say, “Everything is more expensive.”  

However, several areas of solar development may feel the brunt more than others. 

Projects Are More Expensive 

When interest rates increase, so do financing costs. 

In straightforward terms, financing costs are tied to borrowing money for funding projects. These costs include loans, interest, and other fees. As these costs increase, it’s harder to afford more or larger projects. 

For solar sites, upfront costs make up the majority of expenses. Engineering, Procurement, and Construction (EPC) companies must purchase racking, solar panels, wiring, and connectors while juggling permits, taxes, and land costs. Once the project is complete, costs fall dramatically as maintenance and operation costs are much lower. 

Of course, the upfront costs bring new solar projects online. When rates are high, companies are less willing to jump into new projects. Over time, the number of delays increases alongside cancellations. 

A Ripple Effect 

Delayed or canceled projects have impacts far beyond one job. 

Higher interest rates may cause delays and cancellations, potentially impacting solar development in certain areas. With fewer projects, there aren’t as many jobs for installers, electricians, and other professionals. 

On the other hand, solar is still a growing industry with a shortage of qualified professionals. More delays may lead to fewer opportunities in the short term and more trouble finding labor if demand picks up. 

Additionally, as we saw during COVID-19, supply and demand metrics can throw the entire supply chain off. When interest rates are high and projects slow down, companies are less likely to hang onto inventory because it’s more expensive. When materials sit on shelves, it creates sunk costs because inventory isn’t moving. 

Supply chains could suffer, especially when the solar panel moratorium ends. For two years, solar installers have had access to low-cost panels from overseas, specifically East Asia. The moratorium was supposed to help increase domestic manufacturing, but the domestic supply still poses concerns.  

In this case, companies may have to pay more for materials while dealing with supply chain hiccups. 

Beating Back Inflation 

Inflation may be high, but there’s hope for companies, installers, and the industry. 

The Federal Reserve will likely reduce interest rates this year, but it’s not guaranteed. With that said, solar installers have options to reduce costs and keep projects moving. 

Take Advantage of the Inflation Reduction Act (IRA) 

The IRA has plenty of initiatives and incentives to encourage solar development. 

Some of the most common are ITC and PTC credits that kick in upfront or over time. For example, an ITC credit does not change based on variables, but a PTC credit could change based on project costs, other available credits, and even the environment the array is in. 

Expanding on the IRA’s benefits, the law also includes other incentives and programs for underserved regions. Their goal is to encourage the development of low-cost, reliable energy projects in rural, low-income, and tribal areas. 

Simplify Permitting 

One problem associated with solar development is navigating a maze of permitting red tape. 

Though the process has improved, states and communities may have vastly different procedures. Solar EPCs should look for communities, regions, and states welcoming solar. These areas are more likely to have simpler permitting processes, which can get projects off the ground faster. 

Several organizations and agencies have information available to streamline the permitting process, including: 

Improve Productivity 

Besides materials, labor is a massive cost center – especially on larger projects. 

Keeping projects on track often means using parts that reduce in-field work as much as possible. Pre-made components limit mistakes in the field because all parts have been tested before leaving the factory. They also allow crews to get on and off the site faster, letting them move on to the next project. 

For example, bundled wire and pre-made PV connectors cost slightly more than single reels and field-made connectors. The higher cost is more than returned in savings, as workers can install PV wire up to 80% faster. Over several projects, the labor and time savings more than cover the extra cost with fewer workers on site. 

Light at the End of the Tunnel 

Inflation remains high but is slowly falling. 

As with anything in life, what goes up must come down. Construction input prices have slipped recently, leading some experts to take it as a sign of easing inflation. The hope is with softening prices, the Federal Reserve may cut interest rates in the coming months. 

Though construction is tangent to solar farm installation, it offers the economy hope. Solar EPCs are in a unique situation right now. Although costs are increasing in the short term, so is the demand for renewable energy. 

We thought the market might slow down, but it has stayed strong. This has encouraged installers and manufacturers to continue pushing for long-term projects and development. Meanwhile, the industry is navigating a labor shortage, opening the door for people to access high-paying solar jobs. 

The industry is stronger than ever, prompting companies, utilities, and communities to invest in solar. These installations provide clean power to the electrical grid and help reduce greenhouse gas emissions caused by fossil fuels. 

EPCs still have options to save money despite the economic environment. It only requires forward-thinking site placement, permitting strategies, material sourcing, and labor decisions.

How Do Solar Investment Tax Credit Adders Work?

Posted on by Mike Zimm

When it comes to the government, there’s no such thing as a simple, straightforward solution. 

Unfortunately, for developers, financiers, and engineering, procurement, and construction companies, known as EPCs, that means knowing when, how, and where projects qualify for federal solar tax credits. Without them, it’s harder to complete jobs quickly and effectively. 

When the Inflation Reduction Act of 2022 was signed into law, it opened the door for a massive uptick in tax credits for solar. However, not everyone qualifies for all the tax credits, and plenty of intricate rules must be followed to receive them. 

Projects can qualify for ITC solar credits up to 60%, with adders tied to domestic materials and products, location, and low-income communities. 

But what projects qualify for federal funding? 

What is the Base ITC Credit? 

When the Inflation Reduction Act was signed into law, it extended the shelf life of the Investment Tax Credit (ITC) for solar installations and increased its value. 

From now until 2032, solar credits for projects are 30% and apply to businesses and homeowners. After 2032, the credit decreases until it’s finally sunset. For utility-scale solar projects larger than 1MW, the tax credit is 6% but rises to 30% if several criteria are met.  

But what are the criteria, you ask? 

For starters, a project qualifies for the 30% credit if workers are paid prevailing wages. The project also requires a certain number of apprentices to perform the work. There are also rules for apprentice-to-journeyman worker ratios, as outlined by the Department of Labor. 

Accessing the 10% ITC Adder 

Qualifying for the 10% domestic production adder requires projects to satisfy three criteria: 

  • Must be in the United States or an associated territory  
  • Must use new or like new equipment (cannot exceed a certain threshold of used parts)  
  • Cannot be leased to a tax-except entity  

The first 10% Investment Tax Credit available is the domestic content adder. As the name implies, projects must use a certain percentage of U.S.-produced materials to qualify. In the case of steel and iron, 100% of those materials must be U.S.-made as outlined by American Iron and Steel (AIS) rules, meaning everything from sourcing to final finishing has to take place in the United States. 

With that said, the domestic content adder does not apply to subcomponents used for the project, including nuts, bolts, washers, etc. 

Meeting the Project Threshold 

As with any federal funding project, businesses must meet certain criteria before accessing the federal tax credit. 

For the 10% ITC adder, manufactured products must comprise at least 40% of the total project cost. Over time, the threshold will rise, meaning more domestic products are needed to receive funding. 

Offshore wind projects will follow a similar rising threshold schedule, but only 20% of the total cost-adjusted percentage needs to be tied to U.S. manufactured products for now. 

The percentages increase over time, as seen in the table below. 

Year Domestic Product Threshold – Solar Domestic Product Threshold – Offshore Wind 
Before 2025 40% 20% 
2025 45% 27.5% 
2026 50% 35% 
2027 55% 45% 

The threshold for offshore wind will eventually reach 55% after 2027 to match solar projects.

Of course, the rules aren’t as black-and-white as one would hope, and there are breakdowns for how products are classified as domestic or foreign-made. 

For example, only components mined or made in the U.S. count toward the total adjusted content rule. Let’s say you’re using a widget made with three components – two are domestically made, but the third was manufactured overseas. Although the widget was U.S.-made, you only get credit for the two domestically produced components. 

The cost of the foreign-made component would be subtracted from the total cost of the widget, leaving you with the cost of the U.S.-made parts. Whatever that percentage is counts toward the total cost. 

It’s a lot to manage, but the rule is simple: If a component, product, or material is made in the U.S., it counts! But besides the domestic manufacturing component associated with the adder, projects also need to meet one of several conditions, including: 

  • The project has an installed capacity of less than 1MW AC  
  • Construction began before Jan. 29, 2023  
  • It meets prevailing wage and apprenticeship requirements  

Projects meeting one of these conditions are eligible for the 10% credit. 

Concerns About the Threshold 

One common concern from solar EPCs is the difficulty of hitting the domestic product threshold due to a lack of U.S.-based manufacturers for solar products. 

Solar companies have had trouble getting ahold of critical solar power system parts, including solar panels, inverters, BOS components, and racking materials. As the threshold rises, some installers fear the 10% ITC will be too difficult to reach. 

In 2022, the government issued a moratorium on solar tariffs, opening the door for cheaper panels and parts from Asian countries. Though it brings an influx of cheap parts to help installers catch up on delayed projects, they also jeopardize the chances of their solar energy system receiving the renewable energy tax credit. 

Ramping Up Domestic Production 

The moratorium was offered, in part, to keep solar projects moving while domestic manufacturers got up to speed.  

While increased federal support is a boon for companies trying to take market share from foreign competitors, the investment is a long-term strategy that leaves current problems unsolved. 

First Solar is the major solar panel producer in the U.S., but the company does not have the size to meet current demand. Other solar manufacturers include, but are not limited to, Heliene, Mission Solar, JinkoSolar, SunPower, Silfab Solar, and Hanwha Qcells, which all produce different parts of the BOS, but have also struggled to meet U.S. demand in recent years. 

However, several brands, including Qcells, have announced expansion plans in the coming years to support increased demand. For example, Qcells’ expansion in Georgia will add 2,500 jobs and double production at the facility by 2024. 

Other Available Solar Project Credits 

It might seem too good to be true, but the 30% ITC credit can rise as high as 60% in certain situations. 

Energy Community Bonus 

Solar projects can earn an additional 10% credit for building in a former energy community. What’s an energy community? It’s a location that is either a former brownfield site or a facility where coal, oil, or natural gas are mined or converted into energy. 

If the site isn’t a brownfield, the project could still qualify if it satisfies one of several other criteria, including: 

  • Either .17% direct employment OR at least 25% of local tax revenue from coal, oil, or natural gas production or storage AND an unemployment rate higher than the national average 
  • Housed a coal mine that closed after 1999 OR a coal electric plant retired after 2009 

Although many parts of the country qualify under at least one of these conditions, some sections don’t, including much of the Midwest. 

Keep in mind that energy communities should NOT be confused with low-income areas. 

Low-Income Bonus 

This 10% credit is awarded to solar projects that sell electricity to lower-income areas and is for solar installations smaller than 5MW. 

What’s interesting about this clean energy adder is that it has two tiers. Projects receive a 10% ITC if they’re located in a low-income community or on Native American land. If the installation is a qualified low-income residential building project, which, according to the Office of Energy Efficiency and Renewable Energy, requires “financial benefits of the solar facility must be allocated equitably between the residents,” it receives a 20% ITC. 

The Credits Are Complicated, But They Have to Be 

When the government gets involved, it typically comes with heaps of regulatory red tape, but the complexity of this program is vital for a few reasons. 

Tying an ITC or PTC to the program encourages solar companies to buy American-made products, bolstering the economy and decreasing reliance on foreign-made goods like solar panels, racking, and PV wire. 

Programs like this also help with nearshoring and reshoring manufacturing efforts. When domestic goods are prioritized, installers benefit from lower shipping costs, including tariffs and duties, since the material has a shorter shipping distance. 

With higher demand, companies can hire and support additional jobs in emerging industries. These careers often pay well and offer room for advancement, making it possible to make a living in a burgeoning market. It’s also important to consider where the jobs are going. Establishing companies and projects in economically depressed areas and locations where fossil fuel plants once stood keeps jobs in those communities and even adds new ones. 

Credits Keep Solar Moving 

The U.S. is moving toward a sustainable future, but can solar tax credits work? 

Solar is surging in the United States, not just because it produces low-cost energy for communities alongside hundreds of thousands of jobs. Installations can stabilize the electrical grid using new technology, keeping the lights on in homes. As the technology improves, solar could be a low-cost alternative to fossil fuels, reliably producing clean, renewable energy. 

Renewable energy still has a long way to go to become the primary power source for the U.S., but a monumental shift is possible with a clear focus on solutions.