Between rising interest rates and input costs, green-minded investors have a lot to worry about these days. Their biggest concern could end up being boring old red tape.
Wind and solar, which require heavy upfront investment, grew rapidly over the past decade in the U.S. while certain conditions were just right. Interest rates were closer to zero for nine out of the last 13 years, during which time wind and solar generation increased more than sixfold. Over that same period, the cost of installing solar has declined almost 90%, while for wind it has fallen 72%, according to Lazard. Tax credits helped bring costs down, too.
That is quickly changing this year as the Federal Reserve raises rates to cool inflation. Moreover, the trend of declining costs for solar and wind reversed last year as input costs are surging on everything ranging from steel for wind turbines to copper and polysilicon for solar installations. The cost of installing wind and solar are both expected to be above 2020 levels this year, according to estimates from BloombergNEF.
Despite those challenges, a parallel trend has been an unusually high streak of natural-gas prices, which are at 14-year highs. The futures market is expecting U.S. benchmark prices to be at $4.47 per million British thermal units in five years, a marked decline from today’s roughly $7 per MMBtu, but still a heightened level compared with the $3.25 average seen over the last decade. Volatile and high natural-gas prices are making it desirable for utilities and corporations to lock in electricity prices through long-term power purchase agreements with solar and wind farms.
For the first time in a while, companies are “opening up their books and wanting to sign power purchase agreements,”
chief executive officer at renewable developer Cordelio Power, said earlier this month at the Acore Finance Forum. In its most recent clean-energy market outlook, BloombergNEF noted that renewable energy developers have “strong bargaining power” given the “severe imbalance between demand for renewable electricity and the supply of projects” that can start supplying power in the next two years.
Cost challenges could end up being manageable. BloombergNEF’s forecasts still envision solar and wind installation costs declining in the coming years. And while a Commerce Department investigation into solar tariff circumvention put a pause on solar development earlier this year, President Biden took action recently by using emergency authority to allow solar parts from Southeast Asian countries to be imported duty-free for two years.
The thornier issue for wind and solar going forward could end up looking more logistical, whether that is the lack of resources to quickly work through interconnection requests or the painfully slow process of permitting and constructing transmission lines. “Developers say it’s not the PPA [power purchase agreement] that is the scarce resource, it is the interconnection,”
partner at Norton Rose Fulbright, said at the Acore Finance Forum.
PJM Interconnection, the largest electrical grid operator in the U.S., in February proposed a two-year moratorium on reviewing interconnection requests as it works through more than 1,200 projects—mostly renewable energy—submitted before 2021. After taking feedback from its members, the grid operator in April said it was considering ways to fast-track the process. PJM has said that the number of projects looking for interconnection has “nearly tripled over the past four years” largely because of rapid growth in renewables.
The backlog looks bad across the country. In a report published in April, the Lawrence Berkeley National Laboratory found that projects are spending longer in queues before reaching commercial operations. The typical time it took for a power plant—whether solar, wind or gas—to submit an interconnection request to commercial operations went from roughly 2.1 years for projects built in the decade leading up to 2010 to 3.7 years for those built between 2010 and 2021. Last Thursday, the Federal Energy Regulatory Commission proposed a rule to speed up some interconnection requests, which would be a good first step.
Meanwhile, even as wind and solar has proliferated, the build-out of transmission lines crucial to their growth hasn’t caught up. The number of miles of newly built high-voltage transmission lines has declined from an annual average of 2,000 miles from 2012 to 2016 to an annual average of 700 miles between 2017 and 2021, according to the U.S. Energy Department. Less than a quarter of projects that sought interconnection to the grid from 2000 to 2016 have been built, and the share of those making it to the finish line has declined since 2013, according to the Energy Department.
For years, the declining cost of inputs and capital helped the solar and wind industries reach new heights. Those are both areas that money and policy—especially tax credits—were able to rally behind and provide the means to tackle. Interconnection and transmission line constraints have always been crucial, but the red tape around permits and jurisdiction just isn’t as glamorous a target or one as easily resolved by throwing resources at it.
The coming bottlenecks for renewable energy seem banal—all the more reason for investors to fret about them.
Write to Jinjoo Lee at [email protected]
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