Is 2011 Solar’s Peak Year?

The last two years have brought about unprecedented growth for solar utility installations. The utility-scale solar market exploded in 2010 with 459 megawatts (MW) of photovoltaic (PV) and concentrating solar power (CSP) installations, according to the Interstate Renewable Energy Council (IREC). And it’s looking like 2011 has the potential to knock those numbers out of the ballpark. According to the Solar Electric Power Association (SEPA), as many as 50 utility-scale solar projects could be completed by the end of this year, totaling 831 MW.*

But what happens after 2011?

With the 1603 Treasury Cash Grant Program extension set to expire at year-end, developers are rushing to start projects. Under 1603, Treasury has agreed to make a payment equal to 30 percent of the basis of certain solar property that is placed in service by the end of 2011, or for which construction began by the end of 2011 and is placed in service by the end of 2016. In 2010, the 1603 grant provided $410 million and funded at least 40 percent of the non-residential PV installations during the year, according to the IREC. While the Solar Energy Industries Association (SEIA) is pushing for another extension of 1603, 2011 will likely be the “sunset” of the program, said Jeff Davis, co-head of the renewable energy practice at Mayer Brown.

So will the sunset of the 1603 grant put the bang of new solar projects to bed?

First, take into consideration that while the cash grant rushes project commencement, it does not rush completion. In order to qualify for the 1603 grant, a developer must do one of two things: commence construction or pass the “5 Percent Safe Harbor Test.” To qualify as a project that has commenced construction, a developer could do something as simple as putting a single foundation in place. However, “construction activity then needs to be continuous in order to qualify,” Davis said.

Many developers choose the 5 Percent Safe Harbor Test instead. Under this test, a developer must incur at least 5 percent of the total project costs upfront, but the project can then be completed non-continuously.

With the combination of 1603 projects being completed, continually falling PV module prices and a host of state-based incentives, it seems the market for solar projects could stay robust for at least a few more years.

“At the current price trend, the market will be able to continue beyond 2016 without 1603,” said Brian Lynch, senior vice president of development for Enfinity Corp. Lynch said the real effect of the removal of 1603 won’t be felt until mid-2012 when “capital becomes constrained and concentrated in the hands of relatively few tax equity investors.”

So what needs to happen on a federal and state level to encourage new solar developments in spite of this predicted capital crunch? State-level incentives in the form of Renewable Portfolio Standards can continue to help push developments along. Some states, like New Jersey, are also using Solar Renewable Energy Certificates (SRECs) to aid in project development costs. As a result of a robust SREC market, solar developments in New Jersey grew by 139 percent in 2010, according to SEIA. Last year, New Jersey also passed the Solar Advancement Act, which encourages utilities to buy more solar electricity from in-state sources.

State incentives are undoubtedly constructive. However, the lack of a national renewable energy standard will encourage a continuation of the stop-and-go flow that the solar industry has been experiencing over the last few years. For now, developers will reap the benefits of 1603, but what will the federal government do to ensure that solar and other renewable energy resources have the opportunity to grow steadily post-2011? The absence of a consistent federal policy has caused market uncertainty, fluctuation in technology costs and therefore, bottlenecking on the development side.

“Providing policy certainty for markets is critical to attract billions of dollars that are necessary to achieve solar goals,” said Rhone Resch, president of SEIA during the PV America Conference 2011.

Without more stability on a federal level, it’s likely that the solar industry will experience a dip in new project announcements post-2011. However, states that have vibrant state incentives, like New Jersey, will continue to lead in development and reap from the long-term benefits that solar power has to offer.

*As of Aug. 22, only half of the 50 projects had commenced construction.

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