April 28, 2020

How is COVID-19 Impacting the Renewable Industry? What you Need to Know as a Current or Prospective Buyer

This article is adapted from Edison Energy’s Quarterly Renewables Market Update, a comprehensive assessment of current power purchase agreement (PPA) pricing developments, policy updates, insights on PPA evaluation, and trends shaping the renewable energy market each quarter. The full Q2 2020 report will be released this week. To request a copy of the report, please sign up here.

 


 

The global pandemic has created unprecedented upheaval to energy markets and renewable project development. Edison’s Renewables Advisory team has been tracking the key impacts to projects in development and construction. We are assisting clients in adjusting strategies and contracts to address these changes.

Impact on Projects in Construction

  • Supply Chain: As global supply chains experience disruptions due to COVID-19, renewable developers may see delays in delivery of essential components necessary to complete their renewable projects on schedule. Edison has spoken with some developers who have received notices from manufacturers that there will be delays in delivering components, though many are still determining the exact impacts to their overall project schedules.
  • Workforce: Each project site is subject to local rules regarding travel and essential business. So far, the majority of Edison’s clients’ projects have been able to proceed with construction, but some are in areas where construction is not allowed to proceed at this time. One has issued a Force Majeure notice and three others have indicated they may need to do so.
  • Permitting: Government offices are not open and not able to perform on-site inspections or to issue construction permits. This will cause delays for projects in the permitting stage of the development process. There is uncertainty on when these offices will open and how delayed they will be in resuming activities.
  • Tax Incentive Qualification: This year is particularly critical for wind projects to stay on schedule because of the value of the federal production tax credit (PTC) will step down at the end of the year. Wind projects must achieve commercial operation by December 31st in order to qualify for the full value of the PTC. In some instances, supply chain delays, combined with the lack of labor resulting from extended stay-at-home orders, will threaten renewable projects’ ability to meet the U.S. federal tax incentive deadlines.

To combat these challenges brought on by COVID-19, the U.S. renewable industry is advocating for three immediate relief measures:

  1. An extension of the “start of construction” and “safe harbor” deadlines to ensure that renewable projects can qualify for the full value of the federal production tax credit (PTC) and investment tax credit (ITC);
  2. A direct pay provision equal to 100% of the PTC or ITC value to reduce the risk from a potential downturn in the availability of tax equity; and
  3. The formation of a direct pay tax credit for stand-alone energy storage.

Despite earlier reports that energy infrastructure measures will be included in the fourth stimulus package, the House and Senate agreed that the fourth relief package will be similar to the recently-enacted CARES Act. Congressional leaders are also focused on negotiating a smaller piece of legislation to provide support for small businesses. Without a near-term vehicle for renewable energy relief, the renewable industry is seeking clarity from the U.S. Treasury Department on whether COVID-19 related delays will be considered an “excusable disruption” under the ITC and PTC rules to maintain qualification for the tax credits. The renewable energy industry will continue to lobby Congress for legislative support while concurrently requesting guidance at the U.S. Treasury Department.  Through Edison’s industry association memberships and relationships across the industry, Edison is getting the most up-to-date information to share with clients on these issues and how they could affect their PPAs.

Impact on Projects in Development

Many of Edison’s clients are either in PPA negotiations with projects, have a short list of projects under consideration, or are gearing up to run RFPs to identify a renewable energy project that is the right fit for their company’s needs. Most of these projects would be slated to come online between 2022 and 2023 and the large majority are solar projects. Edison has spoken with developers – ranging from the largest players to smaller firms – over the past several weeks, and they all indicate that, other than the fact that they’re all working remotely, all of their work is continuing as normal.

These projects are facing short-term delays to project development including:

  • On-site environmental and cultural resource studies are limited by travel restrictions
  • Permitting, which is often subject to hearings from a board of County Commissioners, or subject to state approval, is delayed or slowed
  • Interconnection study timelines have slowed down due to remote working limitations

When it comes to project finance, in a down economy, banks are expected to be even more discerning when it comes to financing projects:

  • The pool of tax equity investors is expected to shrink, and those remaining will potentially seek higher returns, which could put upward pressure on PPA pricing
  • Debt financing may be harder to secure as investors may be more cautious with proceeding with investments during this time. This is another factor that could make project finance more expensive for developers, and again, put upward pressure on PPA pricing

Projects slated to come online in 2022 and 2023 are still actively seeking offtake and continuing with commercial negotiations:

  • Because COVID-19 may impact the development process in a number of ways, Parties should re-assess their commitments and protections under a PPA
  • During PPA negotiations, Buyers and Sellers are negotiating the outcomes if a Force Majeure does occur, including how long pre-COD delay damages are excused, and potentially contract termination for an event that renders performance impossible for a sustained period of time

The world, including the renewable energy industry, looks different today than it did a few months ago.  While delays and development issues will arise, developers continue to market project and corporations continue to find transactions that will meet their long-term energy and sustainability goals.  Robust analysis and detailed attention to commercial terms will ensure buyers are well positioned to continue procuring in this market.

 


 

For more insights on the renewable energy market, click here to sign up to receive our Renewables Quarterly Market Update, which we will be releasing later this week. 

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