Exploring New Solar Energy Solutions
Firms are asking questions about their clean energy strategy.
Solar power has become increasingly common over the last two decades, with commercial solar capacity in the United States growing almost tenfold from 1,877 megawatts in 2011 to 15,390 megawatts in 2021, according to the Solar Energy Industries Association (SEIA).
The growth in solar adoption has led to a boom in production of solar equipment around the world. Until recently, increased production has led to lower prices for the components related to solar energy, which has further accelerated the adoption and development of solar technology.
But solar power is facing new challenges. They include existing tariffs on solar components and equipment, coupled with the global logistic slowdowns that are affecting every business. These two factors have caused the cost of the materials, components and equipment related to solar power to increase substantially, leading some developers to pause or cancel projects. In an effort to reduce prices and increase availability of solar panels, President Joe Biden announced in June that he would allow tariff-free imports of solar equipment from four Asian producers and he invoked the Defense Production Act to spur domestic production.
To cope with the challenges of higher prices and parts shortages, businesses are asking a new set of questions about their solar energy projects—and their energy use as a whole.
The recent changes that have made solar equipment more expensive have also had the effect of significantly inflating the per-watt energy cost for solar power for the first time in more than a decade. That increase has been especially pronounced for commercial users of solar power, whose per-watt solar power costs were 12% higher in the last quarter of 2021 than they were a year before, according to SEIA.
"For developers, if the economics of solar installation don’t add up, then they are just going to wait," says Richard Butler, Group Head of Energy, Power and Renewables at Fifth Third Bank.
Indeed, the surge in solar equipment costs may lead to the postponement or cancellation of 56% of the 90 gigawatts of new solar developments planned for 2022, according to a study by Rystad Energy.
Tariffs, Restrictions, and Bottlenecks
Solar panel costs began to increase after President Donald Trump imposed tariffs on crystalline silicon cells and solar modules in 2018, as a way of supporting domestic manufacturers. By some estimates, the United States currently produces only 2% of the solar panel equipment in the world. In February 2022, President Biden extended the tariffs, with an exemption for certain components.
In December 2021, Washington, D.C., imposed a separate set of restrictions on imports from China’s Xinjiang province because of alleged forced labor practices. Those restrictions prevent solar panels containing polysilicon produced in that province from reaching U.S. soil. This had a major impact on supplies because Xinjiang produces half of China’s polysilicon and China produces 80% of the world’s polysilicon.
Polysilicon is essential to the manufacture of the photovoltaic arrays that convert sunlight to electricity. And as of late 2021, the price of polysilicon had risen by 300%, according to data from Rystad Energy.
In addition to the tariffs issue, the solar industry has had to contend with problems that are currently slowing or even shutting down global supply chains. These hindrances include a shortage of shipping containers, cargo ships, dock workers, and truck drivers at ports around the world. At the same time, the solar industry’s dependence on manufacturing in China has been affected by the country’s ongoing COVID-19-related lockdowns. The impact of those lockdowns is especially profound because China currently produces as much as two-thirds of the solar panels in the world, according to data firm IHS Markit.
All of those factors have been occurring against a backdrop of rising energy costs around the globe. This surge has been led by a sharp increase in oil and natural gas prices following the Russian invasion of Ukraine in February 2022. As a result, some energy firms are developing fossil fuel resources rather than investing in solar.
Solar Questions That Businesses Can Ask
The main forces that are driving up the costs of solar energy are global, mainly macroeconomic trends, which are hard to predict.
"The issues are more forward-looking for companies looking to install solar power for the first time, or to increase their use of solar power," says Butler. "For businesses that have an existing contract or solar panels, they have the option to take a wait-and-see approach, delay maintenance on existing equipment, or look at other power sources."
The appeal of solar power may have diminished for many businesses with the advent of higher costs and a shortage of equipment. But energy costs are on the rise across the board. The U.S. Energy Information Agency projects that the average nominal price of electricity will increase by 3.9% to 14.26 cents per kilowatt hour in 2022 alone. That projection comes after a 4.3% increase in 2021—the biggest jump since 2008.
"Given inflation, power purchase agreements that previously felt economical may no longer make sense," Fifth Third’s Butler notes.
When businesses develop ways to adapt to higher solar energy costs, the issue likely includes more than one core strategy and more than one question. One question is how solar fits into their strategy to reduce the impact of climate change as part of their commitment to improve environmental, social and governance (ESG) factors. Another is how renewable energy fits their brand and their reputation. Businesses also need to evaluate how important their energy sources and costs are to the overall mission of the company. In recent years, many businesses with an environmentally engaged customer base have set high-profile clean energy goals.
Business owners also need to consider the energy consumption profile of their operations. Energy-intensive businesses like manufacturing are wise to scrutinize every kilowatt hour, while electricity for a professional services firm may be relatively low on its list of expenses.
The Right Strategy and the Right Partner
The way businesses look at their solar costs also depends on the energy market in which they operate. There are parts of the country where it seems likely that the price of electricity will continue to rise in sizable increments for the foreseeable future due to population growth and infrastructure shortfalls. Companies operating in those areas may decide that it makes sense to charge ahead with a solar project, regardless of the increased equipment costs and lengthened construction timelines.
Businesses with high energy demands also have the ability to revisit their existing power purchasing agreements (PPAs). They may be able to adopt an energy strategy that allows them to create more predictable future energy costs through hedging their PPAs among different energy sources and energy providers.
"Our best recommendation is to work with your partners to ensure that you have enough runway to complete any construction installation," says Butler.
The right banking partner can help companies gain the flexibility they need for longer projects with fluctuating budgets through treasury services, such as receivables financing and other solutions.
Whether building new solar facilities or updating and maintaining existing equipment, the new reality of increased costs has to be taken into account. For companies with large solar investments, that may mean reviewing and rerunning their cost/benefit models.
"Have conversations with your partners early on about the contract terms and pricing to make sure they work for everyone and are reflective of the current environment," Butler notes.
The price increases affecting solar equipment are global and come at a time of high inflation and currency price swings. Managing those global factors can make all the difference. Hedging exposure to foreign currency markets can help cushion the price swings.
"We advise clients to make sure that they have an appropriate hedging strategy to manage the impact of fluctuating commodities, foreign currencies, interest rates," Butler says. "Controlling those costs can ensure the viability of their projects."
Because of the cost issues and lack of availability of key parts, firms need to reassess their solar strategy in terms of their overall energy picture. While a commitment to renewable energy is a fundamental part of many ESG programs, deployments of solar may require more time or more resources to bring about economically.