As it is challenged by expectations of significant cost and price decreases, margin pressure, incentive risk and other problems, the solar industry is never a calm place to do business.
In the U.S., anxiety over upcoming changes to the 30 percent residential and business tax credits (ITC) is driving accelerated deployment and countless discussions about what will happen. Meanwhile, expectations that the EPA’s Clean Power Plan will lead to long-term accelerated growth for solar are premature.
Globally, the Volkswagen emissions cheating scandal may not seem to have anything to do with solar but, considering the faith many have in the transparency of public companies, it should encourage a little healthy skepticism and diligent scrutiny of public announcements, presentations and reports.
The U.S. Investment Tax Credit
It’s mid-2015 in the U.S., and the country is at the beginning of a presidential election cycle. Meanwhile, time marches on towards the sunset of the residential energy tax credit and the decrease to 10 percent from 30 percent of the business investment tax credit.
A recap of the facts – the only facts – is as follows:
- The Residential Renewable Energy Tax Credit (often referred to as the ITC) allows for a 30 percent deduction on homeowners’ taxes for systems installed and operational before Dec. 31, 2016. This incentive is set to sunset on Jan. 1, 2017.
- The Business Investment Tax Credit (referred to as the ITC) allows for a 30 percent deduction for commercial entities, including utility scale and agriculture, investing in solar installations.
- Systems must be installed and operational before Dec. 31, 2016. On Jan. 1, 2017, this incentive decreases to 10 percent.
To be clear, there is no uncertainty about the facts. The only uncertainty that exists is whether these facts will be altered by legislative action, how it could potentially be altered and who will benefit from the alteration. Any discussion about what people think will happen falls under the heading of conjecture.
Around the uncertainty as to whether the currently known facts will be changed swirl many theories as well as expected outcomes. These can be summed up as:
- Doom theory: A significant number of jobs will be lost (~80,000) and the U.S. solar industry as we know it will suffer a catastrophic decline. Those who do not subscribe to this view are often referred to as in denial.
- Soft landing theory: There will be a decline in demand in the near term while state incentives and requirements as well as business models take up the slack and the industry slowly returns to business as usual. Those who do not subscribe to this view are often referred to as in denial.
- The of-course-the-ITC-for-both-residential-and-commercial-PV-deployment-will-be-renewed theory: Life will go on as usual because the ITC will be extended for one to two to five years for everyone or for those who have started building. In the case of this theory, the amorphous point could be the word building, which could refer to any activity, including the building of a fence. Those who do not subscribe to this view are often referred to as in denial.
Currently the U.S. solar industry is in a high state of anxiety. This anxiety is driving accelerated deployment of all system sizes, including systems >250-MWp that are unlikely to be installed and operational by the end of 2016. Some developers of multi-megawatt (utility scale) installations have put the brakes on project development but in general project development is marching on.
Current lobbying efforts are focused on a one to two year deployment for systems on which building has begun by the end of December 2016. The concern here is timing. Should no positive action on the ITC be taken by early 2016, activity for systems <10-MWp will accelerate and developers of larger projects will need to make some hard choices. In sum, if an extension is going to happen it needs to happen soon to lower the risk of a slowdown in 2017.
Unfortunately political shenanigans during the run up to the election of a new president in November 2016, expected upheaval due to the retirement of House of Representatives Speaker John Boehner as well as the political business of getting things done in the U.S. indicate that the ITC is likely not top-of-mind to those in congress.
Meanwhile, the most likely Hail Mary Pass is that the ITC will be renewed for at least a year, perhaps two for projects where building has begun. This may not be the best outcome for the U.S. solar industry as it simply kicks-the-can forward for a short time without solving systemic problems such as the relatively all-or-nothing nature of incentives and the anxious behavior it drives.
With business models such as the solar lease that fund future development on debt and revenue from past development, building is highly likely to continue even under the doom theory. The table – U.S. Forecast by Application Sector to 2019 – offers a forecast under three scenarios – low, conservative and accelerated. The accelerated scenario looks highly likely for 2015 and 2016.
The U.S. Clean Power Plan
In the U.S., as a president enters the end of his or her second term and is no longer bound by the need to be re-elected, a flurry of activity often takes place and the exiting president’s true agenda comes to light. In the case of President Barack Obama, the environment has been in the forefront, most specifically in his Clean Power Plan.
Similar to country goals set by the EU a few years ago, the Clean Power Plan sets the goal of reducing carbon emissions from power plants by 32 percent by 2030 and calls on the states to submit plans to do so. By summer 2016, complete or initial state compliance plans are due, and states may get a one or two year extension. By summer 2017, plans from states with one year extensions are due. By summer 2018, plans from states with two year extensions are due. Compliance begins in 2020.
Presumably there will be significant penalties for states in non-compliance. Meanwhile, litigation has begun, some states are indicating they will not participate, members of congress (depending on the views of their electorate) are either overjoyed or enraged, and large consultancies and conference organizers everywhere are ramping up for a lot of business helping states, utilities and businesses with their compliance planning.
The outcome of the U.S. presidential election could derail or delay the Clean Power Plan should there be a change in administration. No matter what, the current deadlines are likely to be delayed by litigation.
The Myth of Public Company Transparency
Volkswagen’s emission cheating scandal should serve as an excellent example of what happens when public companies choose to alter facts to achieve a goal or to avoid close scrutiny. In this case the point was to avoid making changes to diesel engine cars so that the cars would meet U.S. emission standards. Presumably the cost of the change was not deemed worth the benefit and the cost of being caught was either not significant or not considered. In these cases apologies are made, hands are wrung, executives step down in shame and compliance is promised.
There will probably always be companies in all industries (even solar) that seek to mislead in order to continue operating, appear more profitable or for a variety of other reasons.
Presentations and statements from public companies are typically taken at face value based on the assumption that public companies do not mislead because there are penalties for doing so. Optimistic announcements of future growth in revenue, market share and road maps for cost and other metrics are assumed as facts even though the future has not happened and much can happen to derail plans.
Unfortunately, when public companies tell us what we want to hear we generally choose to believe and do little to uncover information that would refute the positive assertions. When companies fail to meet optimistic goals, or restate earnings based on new information, or behave badly, these announcements are met with momentary schadenfreude and a rapid return to optimism.
This is not to state that all public statements and presentations are purposely misleading. However, these statements and presentations are often crafted to deliver a message a certain way to garner a certain effect.
Using the solar industry as an example, there continues to be an industry-wide misunderstanding of the true size in terms of gigawatts of the solar industry. Shipment announcements are the most common way the industry is oversized. If a company ships 3-GWp and it only has 2-GWp of cell capacity, it can only ship 2-GWp of its own product. A simple clarification would be to simply state how many megawatts were acquired from another source. Instead, the solar industry has been consistently oversized for over a decade and this oversizing is accepted because it is what everyone wants to believe.
The solar industry is too young in its history and too vulnerable to economic and political shocks to consider expediency a viable path. Companies that justify bad behavior as the cost of getting more solar installed should re-evaluate before they are asked to explain their choices.
