By: Paul Belval and Alexander Judd from Day Pitney LLP
2020 Recap
As we look ahead to 2021 and the trends, challenges and opportunities for project finance, we can’t help but pause to take a look back at 2020 and the development of renewable resources. Notwithstanding the COVID-19 pandemic, renewable energy continues to be a rapidly growing segment of the economy. In first three quarters of 2020, 70% of all new U.S. power capacity came from renewable energy, almost entirely solar and wind.[1]
In November 2020, the U.S. Energy Information Administration projected that more than 23 GW of wind turbine capacity would come online in 2020, with 10 GW of that total coming online in December. The previous record was 13.2 GW in 2012 and, in 2019, less than 10 GW were installed.[2] Similarly, large scale solar saw growth in 2020, with 6 GW of installed capacity in the first six months. This was 200% more than the same period in 2019.[3]
2021 Development Trends, Challenges, and Opportunities
Notable technology trends in 2021 and beyond are expected to include:
- Offshore Wind: While there is currently only 30 MW of operational offshore wind (Deepwater Wind Block Island project), 10,000 MW of additional capacity is expected to be operational by 2026. Much of the push for offshore wind is driven by state renewable portfolio standard goals and procurement targets. Currently, there is a total combined target of 29,100 MW of offshore wind by 2035 across the various states, with six states having selected close to 6,300 MW through state procurements so far.[4]
- Utility-Scale Solar: The U.S. is estimated to have a pipeline of 85 GW of utility-scale solar from 2020 through 2024.[5] In Texas, utility-scale solar is projected to increase from 4.1 GW to 14.5 GW over next five years, which would make it second only to California in the amount of installed capacity.
- Energy Storage: The U.S. is setting records for energy storage installation. In the second quarter of 2020 alone, 168 MW of energy storage was deployed. This represents the second largest quarterly deployment of storage behind Q4 2019 and a 72% quarter-over-quarter increase.[6]
- Green Hydrogen: 17 states have set net zero carbon targets, either by statute or executive actions. As states push to decarbonize their resource mix, green hydrogen could be a key to achieving these goals. Green hydrogen uses renewably energy to produce hydrogen from water through electrolysis without CO2 emissions, making it ideal for fuel intensive industries, such as aviation, shipping, manufacturing and trucking.[7]
So with these technologies identified, what are some of the challenges and opportunities as we look to 2021 and beyond? Grid reliability is paramount to ensuring that there is enough power at any one time to keep the lights on. Renewable resources are dependent upon the energy source itself, and absent storage, the wind needs to blow for a turbine to operate and the sun needs to shine for the PV panel to generate electricity. Therefore, the grid operators will play a key role in ensuring the proper deployment of an increasing amount of intermittent renewable resources into the bulk power system. Battery storage and the use of green hydrogen as a back-up source can mitigate drops in energy generation.
Specific trending resources may offer their own challenges. For instance, offshore wind, due to its location, has interconnection challenges. There is a need for development of offshore transmission grids and/or upgrades to the existing onshore grid. However, it is often uneconomic for any single project to bear that cost. Offshore wind also faces supply chain issues, particularly with offshore wind vessels and turbines. While challenging for project completion, these create opportunities for investment in assets that are ancillary to renewable generation.
The Role of the Power Purchase Agreement.
State procurements and long-term power purchase agreements (PPAs), including corporate PPAs, continue to drive new renewable energy construction. Corporate PPAs are typically either for on-site renewable generation or a “virtual PPA”. A virtual PPA (also called a contract for differences) is a tool purchasers use to hedge against the changing energy market. The purchaser and project agree to set price (the “strike price”). If the market price is above the strike price, the project pays the purchaser; if market price is below strike price, the purchaser pays the project. In any event, the purchaser keeps the renewable energy credits the project generates and is able to claim the “green power” benefit.
At the same time, some participants in wholesale power markets are continuing to seek market mechanisms that will permit financing of projects without committing load to a 15 to 20 year PPA. Examples include carbon pricing in the wholesale markets[8] or forward clean energy markets in which load has to acquire clean energy attributes through a forward auction and on a multi-year basis[9] But market mechanisms create challenges, including “minimum offer price rule” mandated by the Federal Energy Regulatory Commission that creates an artificial floor to the price that state-subsidized resourced can bid in capacity markets, limiting access to those markets to certain renewable resources.[10]
Other Legal and Policy Developments Driving Investment
In addition to the development trends discussed above, several other timely developments may positively impact renewable energy investment in 2021 and beyond. First, the COVID-19 relief bill passed by Congress and signed by the President in December included a two-year extension of the solar investment tax credit (ITC), so that solar projects that begin construction in 2020, 2021 or 2022 are eligible for a 26% ITC; solar projects that begin construction after 2023 are only eligible for a 10% ITC. The ITC was also extended for other technologies, including fuel cells, combined heat and power and small wind energy property. That bill also included a separate 30% ITC for offshore wind if construction begins before 2026.[11] Finally, the bill extended the Production Tax Credit for one year, so that projects that begin construction in 2021 can get 60% of the original PTC or a 24% ITC.
Shortly after Congress extended and adjusted the renewable energy tax credits described above, the Internal Revenue Service revised its continuity of construction safe harbor rule for offshore wind projects and projects on federal land. Generally, in order to claim the federal tax credits, a qualifying project sponsor must demonstrate “continuous” efforts from the time construction began until the project is placed in service. The IRS had previously created a “safe harbor,” or presumption that the requirement was satisfied, if the project was completed within four years after construction began. In recognition that offshore wind projects and projects on federal land are often subject to significant delays (due in part to the National Environmental Policy Act process and, for offshore wind projects, shorter construction seasons and longer construction timelines), the IRS has extended that safe harbor period to ten years.
Also, the Biden administration will set its own administration policies in 2021, and renewable energy is expected to be a focus of those policies. Climate policy was a key part of Biden’s platform, including economy wide net zero emissions for 2050. The administration’s plan for a clean energy future includes a $400 billion public investment in clean energy and innovation over ten years.[12]
[1] Zachary Shahan, Clean Technica, Renewables = 70% of New US Power Capacity in 2020, Solar = 43% (Nov. 30, 2020), available at https://cleantechnica.com/2020/11/30/renewables-70-of-new-us-power-capacity-in-2020-solar-43/
[2] U.S. Energy Information Administration, 2020 could be a record year for U.S. wind turbine installations (Nov. 12, 2020), available at https://www.eia.gov/todayinenergy/detail.php?id=45856
[3] Eric Wesoff, PV Magazine, Solar 2020 year in review: Thriving markets despite a pandemic, import tariffs and expensive PV (Dec. 12, 2020), available at https://pv-magazine-usa.com/2020/12/12/solar-2020-in-review-spectacular-year-despite-import-tariffs-a-pandemic-and-the-worlds-most-expensive-pv/
[4] American Wind Energy Association, U.S. Offshore Wind Industry, Status Update – November 2020, available at https://www.awea.org/Awea/media/Resources/Fact%20Sheets/Offshore-Fact-Sheet.pdf.
[5] See supra fn. 3/
[6] Wood Mackenzie, US energy storage market sets Q2 record for deployments (Sep. 3, 2020), available at https://www.woodmac.com/press-releases/us-energy-storage-market-sets-q2-record-for-deployments/.
[7] Jim Robbins, Yale Environment 360, Green Hydrogen: Could It Be Key to a Carbon-Free Economy? (Nov. 5, 2020), available at https://e360.yale.edu/features/green-hydrogen-could-it-be-key-to-a-carbon-free-economy
[8] Gordon van Welie, ISO New England Inc., Carbon Pricing in Organized Wholesale Electricity Markets (Sep. 30, 2020), available at https://www.iso-ne.com/static-assets/documents/2020/09/van_welie_opening_statement_carbon_pricing_conf.pdf
[9] Frank Felder, NEPOOL Participants Committee, Future Pathways Round 1: Focus on Forward Clean Energy Market and Carbon Pricing: Preliminary Observations and Request for Input (Oct. 1, 2020), available at https://nepool.com/uploads/FGP_NPC_20201001_Felder_Future_Pathways_Round1_Focus_on_FCEM_CP.pdf
[10] Shannon Weigel, Edison Energy, PJM MOPR Ruling: Compliance Filing & Recent FERC Order Bode Well for Buyers (May 13, 2020), available at https://www.edisonenergy.com/blog/pjm-mopr-ruling-compliance-filing-recent-ferc-order-bode-well-for-buyers/.
[11] Heather Cooper and Philip Tingle, The National Law Review, COVID-19 Stimulus Bill Includes Key Renewable Energy Tax Credits (Dec. 28, 2020), available at https://www.natlawreview.com/article/covid-19-stimulus-bill-includes-key-renewable-energy-tax-credits.
[12] Joe Biden, 9 Key Elements of Joe Biden’s Plan for a Clean Energy Revolution, available at https://joebiden.com/9-key-elements-of-joe-bidens-plan-for-a-clean-energy-revolution/
