Following the surprise extension of tax credits for wind and solar last December, growth in the clean power industry appears to be stalling… until you look past the surface.
In 2015, the number of long-term power-purchase agreements (PPAs) signed by corporations reached a record high for wind and solar.
Now prices agreed on in such agreements have fallen to all-time lows, according to Bloomberg New Energy Finance (BNEF).
But the clean power being slightly cheaper in 2015 than in 2013 doesn’t explain why the number of agreements spikes so violently in 2015. For that explanation we return to the tax credits and way that companies and developers handle such incentives.
First and foremost, the extension of the tax credits was unexpected. Without action by a Congress known for partisan deadlock, the tax credits were set to expire. Yet, a strong lobbying effort and support from red states benefiting from clean power like Texas made it possible. Developers and their clients had no idea that would happen; they treated 2015 as their last chance to get in at the full subsidy level.
“Many companies that signed those deals in 2015 were afraid that there wouldn’t be a tax credit again,” said Jacob Susman, vice president at EDF Renewable Energy. “That’s a big reason why 2015 was so big.”
It is not unusual for people to act at the last minute when it comes to spending money. Sometimes its procrastination, sometimes they want to hold onto their money as long as possible, and sometimes they just want to see if maybe prices will go down further.
Whatever the reason, the tax credit expiration date created a dam where demand could build up at the expense of later years. Without that blockage, the flow of orders would have spread out more evenly over time instead of coming out in force during 2015 and, to a lesser extent, 2014. Now the more sustainable flow looks slow in comparison as developers and customers pace themselves again.
“There was such a flurry that people may be taking a breather,” said Pete Dignan, CEO of Renewable Choice Energy. “But there’s significant activity ahead.”
Mr. Dignan was referring the fact that, even with the slowdown, demand for clean power is still relatively high. That demand is reflected in the scheduled electric generating capacity additions for 2016, illustrated by the EIA graph below that shows new wind and solar capacity will rival or surpass that of natural gas this year.
And, as the chart from BNEF suggests, the trend towards favoring renewables is expected to continue.
So the clean power industry will continue to grow based on strong fundamentals though likely not at the frenzied rate of 2015. Of course, with the tax credits extended another 5 years, a repeat of the current situation may be not be too far off.