In January, the US Government’s Energy Information Administration (EIA) was forecasting a record year for wind and solar in the US in 2020, with 18.5GW of wind and 13.5GW of utility-scale solar expected to begin commercial operations. COVID-19 will inevitably complicate or even delay some of these installations. However, the pandemic is likely to present a temporary – albeit significant – disruption to the trend of ever-growing penetration of renewable energy across US power markets, while the renewable energy ownership and investment landscape is set to be transformed.
Last year was the third-strongest for wind energy capacity additions in the US, at 9.1GW, according to the American Wind Energy Association (AWEA), bringing the total to 105.6GW. The Solar Energy Industry Association (SEIA) recorded 13.3GW of solar entering operation, the second-highest total after 2016, bringing total solar capacity to 77.7GW. Together, the two sources accounted for two-thirds of new US power-generating capacity in 2019, according to the SEIA, with natural gas making up most of the remainder.
The forecast surge in 2020 installations, particularly wind, is largely a result of projects that began construction in 2016 and need to be operational by year end to qualify for the full Production Tax Credit (PTC) under safe harbor rules. This key federal tax incentive is worth around $24/MWh for 10 years.
For solar, the Investment Tax Credit (ITC) began tapering for projects starting construction as of this year. A similar surge in solar installations is likely to occur in 2023, the last year in which projects must be placed in service to claim the credit’s full value (worth 30% of the project’s qualified costs) under similar safe harbor guidelines.
Near-term disruption, longer-term optimism
The shutdown of the economy in response to COVID-19 may not have a material impact on the long-term outlook for renewables in the US, but it is certainly causing disruption in the near term. In April, the EIA revised its 2020 forecasts for wind and utility-scale solar capacity additions downward by 5% and 10%, respectively.
As noted above, many wind projects are operating to tight timetables to qualify for the PTC. Difficulties caused by the pandemic, such as sourcing or moving equipment through battered supply chains and crew working issues, could hold up projects, potentially affecting their ability to qualify for PTC or ITC credits. The risks presented by a delayed installation that might put a project outside of these safe harbor rules are driving the sector to seek guidance from the Government on whether COVID-related delays could be an exception to the rule.
Looking ahead, some in the industry are concerned that an economic downturn triggered by the pandemic will reduce the appetite of tax equity investors for tax credits. These buyers – typically investment banks – are likely to have lower tax receipts in the near term against which to offset these credits. However, signals so far from investors are that they will remain in the market.
While the COVID-19 pandemic presents near-term headwinds to renewables, the longer-term prognosis remains favorable. One powerful driver for the sector is the clean or renewable energy targets set by a growing number of states. Thirteen states, including California, New York and New Jersey, have set 100% goals or mandates, typically to be reached between 2040 and 2050. In addition, the improved performance and falling costs of renewables, allied with growing sustainability concerns among ratepayers and corporate buyers, have encouraged utilities to favor renewables for new capacity.