This article was written by Jeff St. John and originally published in Canary Media on January 2, 2023.
It was the best of times, it was the worst of times. Observers of U.S. clean energy markets might be feeling like they’re trapped in a Dickens remake: A Tale of Two Diverging Market Trends.
Never have the long-term prospects for clean energy investment been stronger — and yet, it’s been half a decade since U.S. clean energy deployments have been as weak as they were this year.
Canary Media has been tracking the factors that have driven this confluence of enormous potential and lagging performance. On the downside, we’ve got the supply-chain disruptions and inflationary pressures from the Covid pandemic and the war in Ukraine. Trade restrictions on solar goods from China are mounting. And backlogs for utility-scale wind, solar and energy-storage projects to interconnect to the grid are becoming longer and increasingly costly.
On the upside, states are setting ever more aggressive clean energy mandates. Corporate customers are upping their demand for carbon-free energy. And the passage of last year’s infrastructure law and this year’s Inflation Reduction Act have brought a record-breaking amount of federal money to the table for clean energy.
In November, the American Clean Power Association trade group released its third-quarter 2022 report, highlighting the pent-up state of the market. This map of projects in development and construction pipelines shows just how much clean energy is being planned and built across the country.
And the following chart shows how actual capacity growth is undergoing a massive drop — from a high of about 30 gigawatts in 2021 to less than 15 gigawatts by the end of the third quarter of 2022. These trends put the country on track to end the year at the slowest pace of clean energy growth since 2018.
The big question going into 2023 is how clean energy’s tailwinds — federal tax credits and incentives, state clean energy mandates, utility expansion plans and corporate procurements — will counteract clean energy’s headwinds — rising costs, tight supplies, restrictive trade policies and interconnection bottlenecks. The answer will determine whether the country stands a chance of hitting its goal of halving U.S. carbon emissions by 2030.
The headwinds for clean energy growth have gathered intensity over the course of 2022. First were the compounding supply shortages and cost increases for equipment and materials caused by the broader global disruptions of the Covid pandemic. Russia’s invasion of Ukraine in February threw global energy markets into turmoil and increased inflationary pressures, delaying progress and driving up costs for a growing number of clean energy projects across the country.
Wind-turbine makers Siemens Gamesa, Vestas and General Electric have posted big losses and announced job cuts in the past few months, citing fast-rising costs and shortages of key materials. These conditions have contributed to U.S. onshore wind developments falling dramatically in 2022, although the slowdown this year is also partly due to a rush to commission projects last year before federal production tax credits expired at the end of 2021. This year’s Inflation Reduction Act restored those key federal incentives.
U.S. solar deployments have also dropped sharply from 2021 to 2022, with total installations down 23 percent and utility-scale solar down 40 percent, according to the latest U.S. Solar Market Insight report from trade group Solar Energy Industries Association and research firm Wood Mackenzie. Like the wind industry, the solar industry has suffered from supply shortages and rising costs for materials and equipment, plus its troubles have been compounded by U.S. trade policy against China.
The threat of new tariffs on Asian solar imports has been hanging over U.S. solar buyers and developers for the past year. In February, U.S. solar-panel maker Auxin Solar asked the Department of Commerce to investigate whether solar panels being made by Chinese companies in four Asian nations were circumventing U.S. tariffs against Chinese-made solar modules. In June, the Biden administration waived any new solar tariffs on panels from those countries for two years, offering temporary relief. But in December, the Department of Commerce proposed new tariffs against products from certain Chinese companies in those countries starting in June 2024, clouding the long-term picture.
A more immediate threat to U.S. solar supply comes from the U.S. ban on imports of solar panels linked to Chinese forced labor of the minority Uyghur populations in Xinjiang province. Reuters reported last month that U.S. customs officials have seized hundreds of millions of dollars of solar components at U.S. ports for inspection since the law went into effect in June. “It has proven more difficult and time-consuming to provide the proper evidence to comply” with the law, said Michelle Davis, principal solar analyst at Wood Mackenzie and lead author of the report on the U.S. solar market.
It’s unclear how these trade disputes and sanctions will shake out. Over time, the hefty incentives for solar and other types of clean energy in the Inflation Reduction Act are expected to counteract supply shortages, accelerating the pace of clean energy growth, the report finds.
But for now, all of these factors have driven up the cost of contracts, power-purchase agreements and other clean-energy transactions tracked by clean-energy marketplace provider LevelTen Energy. In an October report, LevelTen found that average U.S. long-term energy-contract prices in the third quarter of 2022 were 34 percent higher than in the same quarter last year.
“From a market-trend perspective, there’s a general need to price a little bit higher to cover that risk, whether it’s extreme weather or supply-chain challenges and traceability issues,” Gia Clark, LevelTen’s senior director of developer services, said in an October interview. “Each company will do it a little bit differently.”
Against all of these headwinds, U.S. clean-energy developers and investors do have an enormous gust at their backs in the form of the Inflation Reduction Act. Over the next 10 years, hundreds of billions of dollars of tax credits for clean energy projects will make low-cost solar and wind power even more cost-competitive against fossil fuels, driving a significantly faster pace of deployment.
This chart of four independent analyses of the Inflation Reduction Act’s impacts shows how it could spur the installation of enough clean energy to meet nearly three-quarters of the country’s electricity needs by decade’s end.
That expansion of low-cost wind, solar and battery storage will also create up to 1.7 million jobs and reduce electricity costs for individual utility customers by hundreds of dollars per year over the remaining decade, Mike O’Boyle, electricity director of think tank Energy Innovation, said during a December webinar. “In other words, the Inflation Reduction Act can actually reduce inflation,” he said.
Who’ll be buying all this new clean power? Part of the demand is coming from utilities, driven by the economics of cheap, clean energy and by the ratcheting up of state clean energy mandates.
Over the past two years, Colorado, Illinois, Maryland, Massachusetts, North Carolina, Oregon, Rhode Island and Washington state have passed laws putting them on track to supply a majority of their electricity from zero-carbon resources by 2030, many of them on the way to net-zero targets in the 2040s. State mandates are particularly important for offshore-wind development, led by East Coast states, and more recently California.
Yet the majority of new clean energy contracts today are being signed not by utilities but by companies looking to burnish their climate credentials. Corporate clean energy procurements have nearly quadrupled since 2015, and 2022 data through the third quarter collected by the Clean Energy Buyers Association trade group presages another record-breaking year.
Corporate buyers are also behind some of the more aggressive advocacy efforts in states that haven’t yet embraced clean-energy standards, including pushing utilities and regulators to offer more clean-energy purchasing options and expand competitive energy markets that allow them to procure clean energy on their own.
Companies are also pressing federal and state regulators hard on one of the biggest barriers to rapid clean-energy growth: the lack of adequate capacity on the country’s power grids. Over the past half-decade, the time it takes for projects to receive permission to plug into transmission grids has risen from about a year to more than three and a half years, and the grid-upgrade costs they’ve been asked to bear have risen from an average of 10 percent of a project’s total costs to 50 to 100 percent of those costs.
Clark of LevelTen said his company’s recent surveys of U.S. clean-energy developers and buyers found that most of them think lengthy grid-interconnection queues are more of a problem than supply-chain challenges.
These grid problems are also likely to take longer to fix than supply-chain problems. While state regulators, regional grid operators and federal regulators are taking steps to expand the grid’s capacity for clean energy, it can take up to a decade for major transmission extensions to move from the planning stage to completion. The Inflation Reduction Act provides relatively little policy support for transmission compared to its incentives for clean energy.
Clark said survey respondents are unsure how the law will affect the cost of developing wind and solar projects in the near future. “Will the IRA help with prices? We ask that specific question,” she said, “and two-thirds of the respondents to that survey said it’s just too soon to tell.”
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