Reducing Solar Project Risk in a Supply Constraint Market
The federal solar Investment Tax Credit (ITC) has been driving solar energy technology adoption in the U.S. since it was enacted in 2006. The ITC has been modified and extended over the years, with the most recent extension in December 2020.
Per the most current guidance, projects starting construction in 2021 or 2022 will be eligible for a 26% ITC so long as they are placed in service prior to 2026. Projects starting construction in 2023 will be eligible for a 22% ITC and must be placed in service by the end of 2025, and projects starting construction in 2024 will be eligible for a 10% ITC. Additionally, to qualify for the 26% ITC, projects that started construction in 2019 and 2020 must be placed in service by the end of 2023 or 2024, respectively.
Two options exist for utilities to grandfather a project’s eligibility for the current year’s ITC:
- Physical Work Test: Physical project work of a significant nature must begin either off-site (manufacture of components, support structures, mounting equipment, etc.) or on-site (solar photovoltaic system structure installation, etc.). Any work performed by a contractor must be done under contract before physical work begins.
- Five Percent Safe Harbor: Solar energy property construction has incurred 5% or more of the total cost of the project and continuous effort is made to advance toward completion.
Solar Project Strategic Considerations
Even with an extension, time is still of the essence to secure the maximum ITC. Utilities should focus on strategically planning solar projects to minimize solar photovoltaic (PV) project risk and maximize project return.
- Begin at the Beginning
Utility-scale solar projects are not quick or always straightforward. As with any capital investment, take time to consider your utility strategy and portfolio to determine objectives, costs and schedule. Commit to undertaking a thorough project bid and design and contractor evaluation as early as possible.
- Partner for Progress
Given the increasing rates of solar adoption, many new module manufacturers and construction companies are entering the market. Take time to evaluate equipment, field-proven quality, client satisfaction, vendor and engineer-procure-construct (EPC) reputations before committing to solar PV projects.
- Procure PV
The current demand for solar PV modules is high, causing shortages and backlogs; however, PV panel purchases are a way to incur project cost. Evaluate established solar PV panel manufacturers and secure advice on what options exist to qualify the purchase. Use finalized project designs to explore opportunities for initial PV panel investments with fixed prices for future panel purchase commitment. Undertake or work with a contractor to evaluate panel production quality.
- More Than Modules
Carefully evaluate whether your project can incur cost with other necessary and qualifying equipment or if structural components can be ordered and installed. Understand what can be procured, constructed and installed this year that will achieve the ITC extension criteria.
- Leverage Experience
Solar PV projects require electrical, mechanical and structural construction complexity. Working with qualified personnel experienced in these areas, with first-hand knowledge of solar energy projects, enables efforts to get underway quickly and provides certainty of outcome.
Upfront planning, early integration of engineering and construction, stringent quality control programs and application of lessons learned can help minimize PV project risk and maximize project return.