The fast-spreading coronavirus is already posing tough challenges for the $14bn US wind supply chain, with developers on edge as they try to bring a massive amount of project capacity into commercial operation in time for a subsidy deadline at the end of this year.
The pandemic is “now causing supply chain disruptions that have the potential to significantly delay construction timetables and hurt the ability to monetise time-sensitive tax credits,” Greg Wetstone, CEO of the American Council on Renewable Energy (ACORE), said in a statement to Recharge.
Projects that come online in 2020 can qualify for full value of the federal production tax credit (PTC), set at $24/MWh for electricity sent to the grid over their initial decade of operation.
On 1 January, 22.1GW of capacity was under construction, according to the American Wind Energy Association (AWEA), a national trade group. Analysts that month were forecasting record US installations of between 13.5GW and 15.2GW.
The breadth and speed of the pandemic here has alarmed suppliers who are grappling with myriad unknowns tied to its potential impact on employees’ health. Paramount is ensuring their safety in factories, job worksites and offices amid rapidly changing and sometimes confusing public health guidance at the local, state and federal levels.
Companies are racing to revise contingency plans to sustain operations even in worst-case scenarios that involve large number of staff getting sick. Among the difficulties would be finding construction, O&M and plant workers with hard-to-replace industry-specific skills.
Supply firms are also preparing for the virus’ financial impact, with the $21trn US economy likely to fall into recession in the first half of the year.
While multinational giants dominate, many of the 500-plus wind-related facilities across 42 US states are owned by smaller firms, with some employing 100 or fewer workers.
They operate with less cash on hand and slimmer margins than larger companies, and have less flexibility to add or restructure debt with lenders or find alternative materials sourcing. This could create result in a financial squeeze, particularly if banks tighten credit lines.
To what extent a recessionary economy would affect the wind industry’s pipeline is unclear but even with a 20% decline in forecast installations, this year would be robust by historical standards.
Warning signs
Coronavirus impact warning signs for the wind industry here started in early February. Some project developers began receiving force majeure notices from certain component and machinery providers and turbine OEMs, who cited supply chain disruption in China caused by Covid-19.
The notices lacked specifics and didn’t address impacts that occurred or mitigating actions being taken to address the situation, which apparently did not actually result in delivery delays for turbines in those particular cases. Less clear is whether main power transformers arrived on project sites as scheduled.
To qualify a project for the PTC in any given year, some developers spend 5% of its total cost on both transformers and turbines. They then have four full calendar years to reach completion.
The force majeure notices set off alarm bells among developers, as any delay that occurs at the supplier level has the potential to create a domino effect with the project contractor, other major suppliers and the power purchaser, according to J. Anthony Girolami, partner at Stoel Rives law firm in San Diego, who represents one European and four US wind developers.
Under most power off-take agreements, project developers must achieve commercial operations by a certain date or pay liquidated damages to the power buyer. If a force majeure event occurs because of Covid-19 at the supplier level, the project developer would be obligated to seek time relief from the buyer to avoid penalties, Girolami said.
As most wind projects have debt finance and tax equity in place, lenders would also have to be advised of any potential project delay per the terms of the credit agreement.
“You can see that the supplier force majeure ... has potential of affecting numerous other agreements and stakeholders,” he said.
Recharge queried several leading wind developers on whether they are now experiencing delivery delays for turbines or other critical components because of coronavirus-related supply chain interruptions in Asia. EDP Renewables and Invenergy declined comment while Avangrid Renewables and EDF Renewable Energy did not immediately respond.
The three dominant OEMs – GE Renewable Energy, Siemens Gamesa and Vestas – with about 94% share of the US market, the world’s second largest after China, did address the issue.
“We are assessing the impact the virus is causing on our supply chain, the movement of components/people and the operation of manufacturing facilities,” said senior communications specialist Kaile Gurney at Siemens Gamesa. When asked if US turbine deliveries were proceeding normally, she said: “These discussions are being held in confidence with customers.”
A GE spokesman said the vendor has robust continuity plans. “We are committed to taking all reasonable steps to mitigate disruption to our production and delivery schedules, while prioritising everyone’s health and safety,” he said. “We are taking steps to maximise our manufacturing capability and output while ensuring our plants can continue safe operations.”
Vestas provided Recharge with a statement that it restarted production operations in China on 15 February and received permission to return to full capacity as the conditions allow.
“While we are sill gaining a complete overview of the full extent of impact on business performance, we are working to mitigate the impact of lost production time through our global footprint,” it said.
