American Solar Needs Liquidity and Supply Security. Congress Can Help
- Mark Widmar
As Congress assesses the next round of responses designed to safeguard jobs and competitiveness, it has an opportunity to support an industry that has invested heavily in our nation’s energy independence, safeguarding billions of dollars in investments and tens of thousands of jobs.
America’s solar industry has not been immune to the impacts of COVID-19, and a fiscally responsible legislative response can deliver the access to cash liquidity and supply security it requires most, while also accelerating a much-needed transition to a sustainable energy future.
For context, the U.S. has ten times more solar installed today than it did a decade ago. This growth has been enabled by the solar Investment Tax Credit (ITC), which allows asset owners to claim a Federal tax credit against their overall tax liabilities. Unfortunately, in the wake of the pandemic, some of the mechanisms designed to enable growth now pose a significant challenge.
The largest of these is cash liquidity. Equity raised against solar ITCs, traditionally provided by financial institutions, is a vital source of cash liquidity for developers of large solar projects with long lead-times. Earlier this year, however, some financial institutions increased their credit loss reserves as a result of the pandemic. These reserves have the potential to reduce the profitability of banks, which in turn may have an impact on their ability to use solar ITCs in their current form.
The second, perhaps less obvious challenge is time. The solar ITC framework includes so-called Safe Harbor deadlines, allowing developers to freeze tax credits for projects by either beginning construction or making a cash investment by a pre-defined date to qualify. Developers are also bound by “placed-in-service” deadlines that define the outer timeframe for commissioning a project.
The most effective response to both challenges is for Congress to introduce a modification to existing laws, injecting liquidity into the financial markets during this time of economic uncertainty, while also extending placed-in-service deadlines for those utility-scale solar developers that have already complied with Safe Harbor obligations.
For the owners of projects that anticipated tax equity financing, this would translate into a refundable tax credit. While keeping projects on track, cash liquidity allows developers to pay their suppliers, which range from family-owned businesses to large manufacturers of PV modules and other components. Ultimately, cash would flow to American workers.
An extension to placed-in-service deadlines is wholly appropriate for solar projects that fulfilled their obligations before December 31, 2019, given the impact of the pandemic on capital markets, construction and supply chains. Extending it further, however, could unfairly penalize those that fulfilled their obligations before the outbreak.
Large-scale solar is backed by strong fundamentals: it is comprised of projects with long-term power purchase agreements with utilities, community choice aggregators, and corporations, protecting them from the volatility of consumer demand and making them desirable assets for investors. But, while large-scale solar is resilient enough to power through the present crisis, it isn’t yet out of the woods.
Congress can help while ensuring that the cost to the taxpayer when measured against the benefit, remains marginal.
Now, let’s examine the need for supply security. Buoyed by safeguard tariffs on imported crystalline-silicon cells and panels, the annual solar manufacturing capacity in the U.S. has doubled to approximately 7 gigawatts (GW) in the past 18 months. This translates into well over $1 billion in direct investment and significant job creation in states like Ohio and Georgia.
Congress has the power to galvanize this growth trajectory by ensuring the developers that benefit from legislative action, commit to sourcing domestically-manufactured content. Built into legislation, such a mandate would help boost supply security for developers and their 45.5 GW contracted pipeline. It would also help wean the country away from an over-reliance on imported panels from China. Today, the list of the world’s nine largest solar manufacturers includes only one American company, versus six headquartered in China.
The experience from the pandemic underscores the importance of onshore solar manufacturing: America’s largest solar manufacturers continued producing PV panels, thanks to their classification by the government as essential, even as shipments from China slowed down.
To conclude, solar isn’t “new” and it certainly isn’t “alternative” anymore. In fact, it is a strategic resource that will help diversify America’s energy generation mix and drive down the cost of electricity. A comprehensive legislative response would help safeguard billions of dollars in manufacturing and project investments and tens of thousands of jobs, allowing American solar to continue its growth trajectory and cleanly deliver the lifeblood of the economy: reliable electricity.
This article was originally published by Morning Consult.