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Why Renewable Energy Prices May Spike After 2019

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Colin Neagle's picture
Marketing Manager Enel X North America

Colin Neagle is the content marketing manager for Enel X North America, a comprehensive energy solutions provider specializing in demand response, distributed energy resources, energy advisory...

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  • Jan 28, 2019 2:32 pm GMT
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This item is part of the Special Issue - 2019-01 - Predictions & Trends, click here for more

This article is an excerpt from Enel X North America’s new full-length report, What to Expect from Energy Markets in 2019.

Just as demand for renewables is escalating, restrictions on supply could exacerbate renewable power purchase agreement (PPA) pricing for corporate customers. While there are many obstacles to adding renewable generation to the grid, we are focusing on a couple of trends that will likely increase the prices of wind and solar generation and potentially restrict supply in the future. First, two key tax benefits, both the Production Tax Credit (PTC) and the Investment Tax Credit (ITC), are being reduced and/or phased out. Secondly, the tariffs on imported solar cells and modules that the Trump Administration implemented through Section 201 in 2018 could further complicate the economics of renewable projects.

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The PTC has been around since 1992 and provides an incentive on $/kWh produced pegged to inflation from 1993. The incentive has long been credited with assisting in the boom of wind energy across the United States. Beginning in 2021, however, the PTC will begin to step down by 20% per year. Similarly, the ITC is a tax credit for up to 30% of the project cost. Typically, solar developers use the credit, but it can also be applied to wind projects in lieu of the PTC. The incentive was implemented in 2005, and, like the PTC, has been credited with assisting the solar boom. The ITC steps down to 26% in 2020, 22% in 2021, and for commercial customers 10% permanently in 2022. As a result, there is a backlog of projects seeking to move forward to take advantage of the federal incentives. The phase-outs have been known for the past few years, but are important to bring up in the context of corporate purchases. Especially in the next year, timing will be key to securing a favorable rate.

On January 22, 2018, the Trump Administration implemented Section 201, which put a 30% tariff on imported solar cells and modules. The tariff is slated to decline by 5% for a four-year period, and increased costs on solar projects due to the tariffs are expected to be $0.12/watt in the first year, $0.10/watt in the second year, $0.07/watt in the third year, and $0.05/watt in the fourth year. Simply put, the tariff will result in increased prices for solar projects.

Fortunately, the cost of solar projects continues to decrease due to efficiency gains and technological improvements, while the emergence of state incentives will help offset the impact of the tariff in some markets. However, the tariff creates an added layer of complexity to projecting a renewable project’s cost and value. While project developers will see costs for panels decline as the tariff decreases every year, the ITC step down may counteract that decrease.

The credit phase-outs and solar tariffs indicate a trend of increased prices for renewables in the future. A poll conducted by the Rocky Mountain Institute indicated that half of responding buyers will speed up procurement for renewables as a result of the phase outs.

Pipeline for Renewable Projects

In 2018, the US renewable energy sector saw growth despite ambiguity about the effects of federal tax reform legislation and a series of new import tariffs. Some of the fundamentals that drove the growth in 2018 were declining costs of wind and solar generation, strong demand driven by state policy mandates, and corporate purchases. A favorable outlook for renewable growth is expected in 2019 and 2020 since developers may accelerate their project construction to benefit from the federal tax credits.

Data collected by the EIA reflects installed and proposed project additions for the next several years for both wind and solar projects in the United States. As expected, the figures for wind and solar projects reveal an increase in the next couple of years followed by a decline in capacity additions after 2020.

This information represents a pipeline of proposed projects, and is subject to change based on new proposed projects and delays to planned projects. Regardless, the general direction of the trend indicates less supply available to purchase once the ITC and PTC are stepped down.

As a result, conditions in the next couple of years appear to be favorable for renewable energy purchases. There is a strong pipeline of projects and a financial incentive to complete them before 2021.

After 2020, we expect PPA prices to rise as states, utilities, and corporations seek to fulfill renewable goals, increasing competition for the projects while the pipeline decreases. It is possible that demand may drive additional growth in projects, but time will tell.

Basic economics tells us that increased demand and flat-to-constrained supply mean prices will go up. However, supply may not become constrained for another couple of years, and developers will be looking to enter into offtaker agreements as soon as possible to secure the federal incentives.

Based on the increasing demand for renewable generation from corporations, utilities, and state policies, there will be continued appetite for renewable projects. However, federal incentives will not be much help in achieving those goals, and will force developers to accelerate plans for project development. Thus, the pipeline for renewable generation in wind and solar is expected to continue to increase over the next two years, but decline thereafter.

Corporate buyers have an opportunity to jump on projects at favorable rates in 2019 and 2020 to meet renewable goals and secure long-term hedges in energy costs. Generally, negotiation over PPA agreements takes months. Therefore, if you are in the market for purchasing renewables or have sustainability commitments, we suggest starting your renewable procurement as soon as possible.

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Matt Chester's picture
Matt Chester on Jan 28, 2019

In 2018, the US renewable energy sector saw growth despite ambiguity about the effects of federal tax reform legislation and a series of new import tariffs

I think this is an important point-- it wasn't just the idea of tariffs that made renewable projects difficult amid this debate, but the uncertainty is what really frustrates buyers/sellers. 

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