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Coronavirus can challenge the solar sector’s tax credit strategy

Solar energy developers working in the United States have spent years perfecting their plans to secure federal investment tax credit for as much of their pipeline as possible, securing projects before the decline. As long as developers meet certain criteria, projects put online after the start of the reduction can still guarantee a 30% tax credit.

But even the most accurate plans did not take COVID-19 into account. The spread of the disease has crushed the global economy and brought disruptions in supply chains, including to the solar industry.

As of March 10, most cases of viruses have been reported in China, the epicenter of solar production. Extensive factory shutdowns in February allowed the solar industry to achieve possible impacts.

For many U.S. solar power developers, spending 5% of the total cost of a project on modules and other equipment has become the safe harbor method. Now, some industry observers fear that the delays caused by COVID-19 may force companies to choose between reducing the supply of modules stowed in warehouses or making requests for force majeure on some projects.

“I think you will see a lot of force majeure claims under the coronavirus, up and down the supply chain,” said Sheldon Kimber, CEO and co-founder of the utility-scale developer Intersect Power.

Although production delays are already placing constraints on some projects, including the Invenergy and NextEra installations in Wisconsin, the impacts in the United States could eventually prove relatively small. The tariffs on Chinese solar modules mean that many U.S. developers already buy from Southeast Asia and the inverter supplies come from Europe, the Middle East and China.

But the virus has undoubtedly added another element of uncertainty in the complex undertaking of spreading the Investment Tax Credit beyond its established timeline.

At present, “the risk for projects with a 2020 [commercial operation date] is limited – delivery from February to April may be two weeks late, a month at most, “said Xiaojing Sun, a senior solar analyst at Wood Mackenzie Power & Renewables.” It should not cause material damage. “

However, there is no telling how widespread the coronavirus epidemic will be. This may require difficult decisions from developers if it places additional constraints on equipment delivery or the wider supply chain.

To qualify projects for the ITC, developers must keep track of all the equipment they purchased or produced as they move from storage to project sites. Those “magic modules”, as Kimber calls them, must be incorporated into each project to guarantee the 30% tax credit.

“They have to use magic modules in every project. So if they now use all 2 gigawatts because they can’t get the non-magical modules, it’s a negative result, “said Kimber.” This has a chain effect and indicates some [developers] I do not understand [the] ITC in the pipeline. “

Potential force majeure claims could cause “chain effects”, affecting engineering, procurement and construction companies, developers and ultimately energy contracts, Kimber said.

Different approaches to the storage of photovoltaic modules

Coronavirus can further complicate what was already a carefully calculated dance to extend the benefits of ITC for as long as possible. Developers in the United States have accumulated forms, signed contracts and equipment shipped before discharge. So they had to decide where to put it all.

Storing modules and other equipment is a “very real cost to developers,” said Jessie Robbins, senior director of structured finance at developer and financier Sol Systems. “It’s also a bit of a risk if you think about liability and equipment in transit for a long period of time.”

Vivint Solar, the country’s second largest residential solar installer, told Greentech Media that it is currently planning to store 115 megawatt modules (worth approximately $ 50 million) in a portion of a 160,000 square foot warehouse in Tempe , in Arizona. Neighboring California is Vivint’s largest market, but Tempe is a cheaper and less risky place to store forms.

“In Tempe, there is no real earthquake risk, no real flood risk or that kind of thing,” said Rob Kain, Vivint’s vice president of investor relations. “It has drastically reduced insurance costs.”

In addition, Tempe is a transit hub that simplifies moving modules from their storage depot to regional warehouses. The equipment stops in those positions before reaching its final destination on a project site.

SunPower told Greentech Media that it is storing its 172 megawatts protected in two warehouses in California: one in Riverside and the other in Fontana, both in an area of ​​the state known as Inland Empire, the unofficial capital of California. The developer selected those locations because they are close to the usual SunPower warehouse, a spokesman said, adding that insurance costs made up a small part of the overall storage price. The residential installer is also considering adding another storage location on the east coast.

Due to the tight supply of modules favored by ITC demand, Vivint has also chosen to enter into an inverter production contract. Contracts for the production of original components are designed to meet “significant work” tests for protected equipment. Vivint’s inverters will go directly to the company’s regional warehouses.

Intersect, which is building projects in Texas and California, also relied on the “significant construction” test for a 2 gigawatt pipeline. The company has invested in transformers, a strategy that the wind industry has been using for years to qualify for the federal production tax credit.

“It seemed strange to me that so many people had a hard time looking for modules,” said Kimber of last year’s rush to buy modules ahead of the ITC abandonment. “You are taking this big technological gamble, a lot of risks, it requires more money … and you have to enter a market of modules that was – at the moment – on fire, because everyone was trying to protect the modules”.

The company plans to store transformers for $ 25 million in Asia near their production site. Kimber declined to comment on the specific location of the warehouse.

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