The novel coronavirus has presented the solar industry with an unsavory smorgasbord of problems all at the same time. Many it shares with other businesses, but one it has nearly all to itself: a funding model that puts it at heightened risk.
It is called the solar investment tax credit.
In good financial times, the ITC is a boon and has been essential to making solar the major energy player it is today. But in bad times, like right now, its convoluted rules could shove lots of promising projects into oblivion.
“If you come online after the ITC” deadline, said Sheldon Kimber, the CEO of solar developer Intersect Power, “you’re just dead.”
The litany of problems that solar faces are each difficult in and of themselves. Together they are creating the possibility of months or quarters of delays. And those delays, along with the wavering confidence of investors, could create a crisis centered on the tax credit.
The solar industry is, in the words of Guy Vanderhaegen, the CEO of solar developer Origis Energy, suffering “a lot of shocks that are coming together at the same time.”
The industry sought but did not get changes to the ITC in the $2 trillion coronavirus relief package that Congress is on the cusp of passing. With the Senate adjourning until April 20, any relief is at best a month away.
Meanwhile, supplies from China, which was hit first by COVID-19, are finally on the way but arriving with agonizing slowness. Companies in every part of the supply chain are warning they might not fulfill their contracts. Virtual work and shelter-in-place orders make it unclear whether projects can proceed. City and state officials are working from their own homes and can’t get permits out the door. And investors are worried.
It isn’t necessarily the biggest challenge ever for the solar industry, which has experienced so many vertiginous ups and downs that industry veterans call it the “solar coaster.” It could all be over in a few months. But no one remembers so many things going haywire at the same time.
“I just feel dizzy right now, because my mind is reeling trying to figure things out,” said Pete del Vecchio, an attorney who works on renewable energy projects at law firm Baker Botts LLP.
As the United States confronts twin health and economic crises, it is unclear just how serious the stakes are for the solar industry.
Most of the threats are for now just threats. Few companies are yet at the point of canceling projects or laying off workers, at least outside of the residential solar industry, which is suffering greatly. No one is clear whether the coronavirus is for solar an apocalypse or just a lot of sound and fury.
Shock after shock
The headaches created by the coronavirus have come in waves. The first was about supplies from Asia and in particular China, where the pandemic originated.
Factories that produced solar cells and modules, as well as many other pieces of crucial gear, were closed for weeks. Now factories are humming again and shipments are on the water, if not yet at solar sites.
“We seem to be getting past that,” said Jeff Kayes, also a clean energy attorney at Baker Botts. “As long as our president stops calling it the ‘China virus,’ we can put that all behind us.”
Those slowdowns begot a thicket of delays and snarls around the industry. Suppliers, engineering firms, contractors and even financiers have issued force majeure notices, which pin responsibility for a failure to meet the terms of a contract on forces beyond a company’s control.
Such notices have become a widespread phenomenon, but the delays themselves have not yet manifested, experts said.
Yet another problem is the economywide shift to virtual work for office workers, who in the early stages of the shutdown are as concerned about their children’s home schooling or whether there’s enough milk in the fridge as they are about their actual jobs.
And there are unanswered questions about workers in the field. Some workers are choosing to stay home, thinning the workforce. Meanwhile, projects in states with shelter-in-place orders are still unclear on whether solar projects are deemed by governors as “essential.” The answer varies state to state.
The biggest calamity, said Colin Smith, a solar analyst at research firm Wood Mackenzie, would be a worker becoming sick with the coronavirus, as that could temporarily shut a project down. As yet, that has not happened.
Another hindrance is permits, a great many of which are issued in the course of any solar project. Government offices at all levels have locked their doors, limiting officials’ access to their own records. City and county councils are learning on the fly how to hold virtual meetings.
“It’s extremely slow,” Carl Jackson, a founding partner of Glidepath Ventures, a solar developer active in Pennsylvania, said about the permits he seeks. “What would normally take a couple of days is taking a couple weeks.”
The most immediate and devastating impact in the industry has been in residential solar. There, a combination of social distancing and the economic downturn has sent some firms into a nosedive (Energywire, March 23).
The situation varies greatly by region and company. Ipsun Solar, an installer in the Washington area, has furloughed its staff of almost 40 people, according to a spokeswoman. But Golden Solar, an installer in Colorado, said no one’s been laid off and that the impacts are “minimal.”
“We’re beginning to see a drop off in sales,” wrote Don Parker, the owner, in an email. But he added, “We have a good backlog so we have some work for a few months.”
Wood Mackenzie said yesterday that the coronavirus would cause residential volumes for solar to decline by 16% to 34% this year.
Industry players interviewed for this story said that everyone in the various parts of the industry is doing their best to cut each other some slack during a difficult time. But the time may come where the economic pain breaks the chain.
“We’re going to operate as long as possible business as usual,” said Monica Dozier, a lawyer who arranges solar deals at the law firm Bradley Arant Boult Cummings LLP. “Though that isn’t going to last very long.”
A ‘bizarre’ tax credit?
For more than a decade, the dance of the solar business mostly has been set to the tune of the investment tax credit. Its year-end deadlines establish the tempo for everything else.
First established in the early 1960s as an economywide stimulus measure, it has been pared back to use in just a few cases. Today it creates a supply-side stimulus for historical buildings and low-income apartments. In energy, it applies to certain sectors like fuel cells, combined heat and power systems — and solar power.
The Solar Energy Industries Association, the industry’s main trade group, hails the ITC as “one of the most important federal policy mechanisms to incentivize clean energy in the United States” and credits it as a main reason that solar power has grown 10,000% since the solar ITC began in 2006.
It is also, as attorney del Vecchio said, “a really bizarre way of supporting an industry.”
The solar ITC discounts the value of solar equipment against the yearly tax bill. Because solar companies often don’t have much profit to tax, the tax credit has become an investment vehicle. Tax equity makes up typically 30% of the financing of solar projects today, del Vecchio said.
The investors who use it are large entities that could use a deduction on their taxes, such as banks, insurance companies, pension funds or other big corporations.
After years of partisan wrangling in Congress, the solar ITC is in the process of stepping down. Last year was its last to be set at 30%. This year it declines to 26%, and in 2021 to 22%. In 2022, it drops to 10% for commercial and utility-scale projects and phases out for residential projects.
Making changes to the solar tax credit is the top ask of the solar industry in Congress’ coronavirus aid packages.
SEIA is lobbying to get the ITC’s deadlines extended. It also wants to be able to have the money delivered as a direct payment that can be paid now, rather than a credit that appears during tax season. This would make it appealing to a much wider pool of investors.
There is a precedent for this. In 2008, at the outset of the Great Recession, Congress approved Section 1603 of the American Recovery and Reinvestment Act to provide those cash payments for a time.
That measure was taken then because the tax equity market dried up. It is uncertain if the same thing is happening now.
Vanderhaegen, the CEO of Origis Energy, said the biggest threat to the solar industry “is a slowdown of tax equity and uncertainty of the financial markets.”
But not all are fretting. One is John Marciano, an attorney who handles solar projects at law firm Akin, Gump, Strauss, Hauer & Feld LLP. “I have received five new term sheets this week,” he said, referring to deal drafts that include tax equity investors. “It makes me a lot more confident about where the market will be.”
The problem that the solar industry is having with the coronavirus and the ITC is twofold.
One is that the investors that fuel the tax credit are themselves suffering so much they might not be able to use it. And the coronavirus delays are making it harder and harder for developers to meet the ITC’s deadlines.
Projects that wanted to get last year’s 30% credit ordered equipment late last year. By law, they could take delivery on those goods by April 15 of this year — a few weeks from now. But now delays emanating from China are threatening those deliveries, causing anxiety.
“A lot of people have spent a lot of money, and they are not sure they are going to get their 30% ITC,” said Vanderhaegen.
The financing problem created by the worldwide financial crisis exists for solar ITC projects of any year.
The worry is that, with the entire economy tanking at once, no one will have profits to deduct from. Tax equity investors, as they’re called, have not yet pulled out of projects but are watching carefully.
“If you’re looking at a recession or a true depression, companies are going to be less eager to have tax credits they can’t use,” Dozier said.
Teetering on the edge
The stakes for some companies are extreme.
Intersect Power is one such company. It is a developer that has five solar projects underway for a total of 1.8 gigawatts of solar in California and Texas.
“Now we are just in the heart of grading and driving piles and doing electrical work,” said Kimber, the CEO. “Those are enormous checks just about to be written, and with a lack of clarity around the income.”
He is looking into personal loans and taking merciless looks at his cash flow in order to keep his people employed. “It’s a matter of weeks, not months,” he said.
That intensive construction phase is one problem. Another has to do with a deadline that seems much further away, in 2023. The solar ITC requires that projects start producing on the electric grid by that year. If they don’t, the tax refunds aren’t made and project financing falls apart.
Though 2023 may seem far off, it isn’t for Kimber. The calendar is filled with dozens of intermediate deadlines. All it takes is a few of them to slip and the overall project gets difficult to close by 2023. Bills are looming: He has several million dollars due to Southern California Edison in April to make interconnections to the grid.
“I think what people don’t understand is that it all ripples backwards,” Kimber said.
Meanwhile, he added, solar projects all over the country are all aiming for a 2023 deadline and are all experiencing the same coronavirus delays that put more pressure on the remaining calendar. All parts of the system, from solar panel shipments to contractors’ schedules to the bandwidth of utilities to the officials who issue permits, are limited. Things can only move so fast.
Meanwhile, investors are watching over Kimber’s shoulder and could ask him a question: “There’s no project here, so why should I continue to pay you?”
“The slip is day by day for a little while,” Kimber said, “but there are a lot of people who were planning on coming online in the last few months of 2023 that will just fall off that cliff.”
