US solar power purchase agreement (PPA) prices surged an average 48% last year and will likely remain elevated for “quite a while”, even though project developers have started to see some relief in the fourth quarter from wider energy market cost pressures, according to a new report from advisory firm Edison Energy.
The $57/MWh median price last quarter compared with $38.50/MWh a year earlier across regional electric power markets, said the analyst , a steep climb that has made solar less cost competitive with wind as well as fossil gas, which was at $2.60/MMBtu at start of trading yesterday (Tuesday), versus the most recent maximum spot price of $7.31/MMBtu last November.
More expensive 2022 off-take reversed a decade of steady declines and is raising procurement costs for corporates, which have increasingly favoured solar and are the fastest growing renewable energy market segment, Edison said in Q4 Renewables market report.
Edison argued that macroeconomic factors have been the major drivers of PPA cost increases led by rising interest rates and inflation, along with supply chain constraints.
The US federal reserve has raised its benchmark interest rate eight times since last March to bring down 40-year-high inflation, with the target range now 4.5%-4.75%, the highest since October 2007. It was near zero in 2021.
The federal funds rate, which represents the cost banks charge each other for overnight borrowing, “greatly influences” financing costs for projects, said the report.
The central bank’s policy has further challenged developers facing supply chain shortcomings, high labour costs, and strong demand from companies looking to reach their 2025 and 2030 clean energy and climate goals.
With developers limited in their ability to incur further expenses, “the higher cost of borrowing is passed through to buyers via higher PPA pricing”, said the report.
The US solar sector remains heavily dependent on China for solar raw materials and Southeast Asia for cells, components, and modules. Covid-induced supply shortfalls heightened in 2022 as the US toughened trade policy enforcement with China.
Chinese supply chain challenges
In December, the Department of Commerce (DoC) initially found that four Chinese solar manufacturers – BYD, Canadian Solar, Trina, and Vina – were circumventing tariffs by routing PV cells and modules to assembly plants in Southeast Asia for “minor processing” before delivery to the US.
DoC said 22 other Chinese firms in Malaysia, Thailand and Vietnam did not respond to its request for information in this probe and consistent with longstanding agency practice, will be found to be circumventing.
All 26 suppliers face potential stiff tariffs starting 6 June 2024 unless in-person audits at plants in southeast Asia do not verify the initial findings. US lobby groups claimed these findings risk having a chilling effect on the US sector and will strand billions of dollars’ worth of solar investments.
While US developers welcomed the “increased clarity”, domestic module-makers will work to fill in gaps in their supply chains before new tariffs take effect, and this will further push up PPA prices, according to the report.
DoC found that four other Chinese suppliers – Near East Solar in Cambodia, Hanwha and Jinko Solar in Malaysia, and Boviet Solar Technology in Vietnam – were compliant.
Before DoC announced its findings, many developers sought to secure panels from First Solar, the largest US supplier, as it was viewed as having the best combination of manufacturing capacity and protection from potential tariffs.
First Solar takes the sun
First Solar, which employs thin-film cadmium telluride technology where most of the industry uses conventional monocrystalline and polycrystalline silicon PV panesl, has sold out product through 2025.
“This demand sent the prices of First Solar modules soaring,” said Mary Kate Francis, director, energy sourcing, at Edison Energy, in an interview.
The same is now true for the four compliant Chinese suppliers. “This will send more developers to those manufacturers, which will have the same sort of impact,” she said, adding that while having more panel supply available is helpful, the pool is still limited.
“As long as this continues to be the case, it is likely that developers will be facing elevated prices for solar panels,” said Francis.
Also curbing supply and helping firm PPA prices here is the Uyghur Forced Labor Prevention Act (UFLPA) which addresses alleged human rights abuses in China’s Xinjiang region, a major supply source for polysilicon, cells, and other critical components in solar panels.
While the presumption that any product using inputs from Xinjiang benefited from forced labor is rebuttable, the process for presenting “clear and convincing evidence” can take weeks, even months. Hundreds of shipments have been reportedly detained.
“The enforcement has been slow, opaque, and confusing for manufacturers and project developers alike,” said the report. Industry officials are cautiously hopeful the situation will improve over the next several quarters to enable more supply of panels and wafers.
There are some glimmers of sunshine this year for solar energy buyers. PPA prices rose a modest 4% in the fourth quarter versus a whopping 17% in the prior period. A key reason for downward price pressure was falling material costs including aluminum, copper, and North American steel, down 10%, 15%, and 64%, respectively, from a year ago.
Francis cautions that one quarter is not a trend and the effects of these price improvements on PPAs will likely have a lag. Equipment manufacturers, in some cases, have absorbed losses due to rising material costs. It’s uncertain how significantly they could lower prices as input costs decrease.
More broadly, inflation appears to be subsiding. In December, consumer prices rose 6.5% on an annual basis, down from 7.1% the previous month, after peaking at 9.1% in June 2022. Cooling inflation should help stabilise manufacturing costs across the supply chain.
As the US tax authority clarifies guidance on implementation of the landmark August 2022 climate law’s provisions, this will help developers price PPAs more confidently, according to the report.
The law provides generous tax credits, if certain criteria are met, and the policy certainty from the 10-year extension will have a positive impact on PPA pricing in the medium-term and beyond.
