Project developers across the country are seeing the ripple effects of supply chain constraints squeezing both the solar and storage sectors.
Multiple factors are contributing to the problem, experts say, from upstream shortages in labor and equipment parts to more intermediate issues like transportation backlogs and the unavailability of shipping containers. On the storage side, developers have been experiencing tight supply conditions that make it difficult for them to access lithium-ion batteries, as well as other equipment they need to build facilities. The solar sector, meanwhile, has witnessed labor crunches at ports, nautical shipping challenges and other constraints that have contributed to a demand-supply imbalance.
U.S. solar installations were lower than expected in 2021, with gigawatts’ worth of projects pushed into 2022 or later due in part to supply chain and logistics challenges, according to a March report from the Solar Energy Industries Association. About a third of solar capacity scheduled to come online in the fourth quarter of 2021 was delayed by at least one quarter, the report found. Furthermore, developers have postponed at least 8% of the planned capacity for 2022 to 2023 or later and canceled at least 5%, it said.
The project delays and cancellations are not only due to delays in getting products that go into developing a solar project, said Shawn Rumery, SEIA’s senior director of research — they're also because prices have been going up very quickly at the same time, thanks to those supply chain constraints and inflationary pressures.
"It’s putting a lot of price pressure on developers, and just the general uncertainty there is creating a difficult environment in terms of not only developing projects that you already have in your pipeline, but procuring new projects as well," he added.
COVID-19 aftereffects, raw material shortages and logistical challenges
The aftereffects of disruptions caused by COVID-19, and the resulting temporary shutdown of manufacturing in various countries, have likely had the most impact on the supply chain, said Adam Walters, a lawyer with Stoel Rives. In 2021, many U.S. renewables projects were pushed back because of delays in equipment supplied primarily from Asia, and some of these delays continue today, albeit at lower levels.
While supply has been constrained, demand has grown, Stoel Rives partner Morten Lund added. The big uptick in demand for solar panels and batteries over the last couple of years "makes it look like the supply problem is bigger than it is because demand is widening," he said.
"There was just an explosion of demand — a lot of that was led by the electric vehicle market."
Senior energy storage research analyst, Wood Mackenzie
The U.S. Department of Commerce's recent announcement that it will go forward with an anti-dumping circumvention investigation of solar cells from four Southeast Asian countries could also disrupt certain solar projects, industry advocates have warned.
On the battery side, the main supply-chain issue is the availability of raw materials, according to Vanessa Witte, senior energy storage research analyst with Wood Mackenzie. Lithium in particular has been in short supply, leading to skyrocketing prices, and the main issue the industry is facing overall at the moment is the supply and demand mismatch, Witte said. Spot prices for battery-grade lithium in China shot up from $11,000 per metric ton early last year to more than $50,000 this February, Morning Brew reported in February.
"There was just an explosion of demand [for lithium] — a lot of that was led by the electric vehicle market," Witte said. Building the manufacturing and raw-material capacity to meet that demand could take time, she added. A new mine, for instance, takes around five years to set up, while a battery manufacturing plant would require at least two years.
"These things just take time to catch up, and that’s really been the source of the issue," Witte said.
The storage industry is also facing logistical issues like transportation delays, which could affect when developers receive the products they need and, in turn, their ability to bring projects online in time. While these delays caught developers by surprise in 2021, many are now taking extended timelines into account when planning their projects, she said.
‘It increases project risk’
The repercussions of supply-chain problems largely depend on where individual projects are in their life cycle, experts said. Where projects already have contracts executed, for instance, equipment suppliers are responding to delays by asking for relief from schedule commitments and, in some cases, for contract adjustments. These negotiations play out under the force majeure clause of the project’s contract, Nate Galer, partner with law firm Mayer Brown, explained. A force majeure clause is a fairly typical clause in most contracts that would basically excuse a party to the contract if something unforeseeable and out of their control occurs.
"That’s really sort of the big legal issue that we’re grappling with a lot in those situations, is how are those delays viewed under the applicable contract’s force majeure [clause]," Galer said.
"[P]rices have actually gone up by a meaningful amount, and so many of these developers that have signed PPAs are now completely out of the money in terms of their economics."
Partner, Morgan Lewis
Potential projects and deals that aren’t yet under contract are trickier to deal with, Galer said.
"You see a lot of discussions at the commercial level about whether the contract price and the schedule that suppliers are bidding incorporate that anticipated delay or [not]. And you’re starting to see a movement, I think, in those negotiations to specifically address supply chain delays in the contract," he added.
Another issue that solar and storage developers are confronting is that because the industry has seen a declining cost curve for many years, many of them have been bidding for projects based on a forecasted decline in future costs.
"Well, not only is that not happening, it’s actually gone in the reverse — so prices have actually gone up by a meaningful amount, and so many of these developers that have signed [power purchase agreements] are now completely out of the money in terms of their economics," Morgan Lewis partner Neeraj Arora said.
Developers can also take a financial hit when supply chain constraints delay projects, according to Arora. Most PPAs require developers to make some sort of payment to the utility if they miss the project’s deadline. And delays that push back a facility’s operation date to the following year could shrink the level of the investment tax credit for which the project is eligible.
The biggest issues solar developers are facing due to supply chain constraints have to do with their contract terms, Stoel Rives’ Walters said. Suppliers now have a lot more leverage and are pushing more difficult terms than he has seen in the last several years. Historically, for instance, developers have been able to get by with paying fees of 10% or 20% of the purchase price to cancel an equipment order prior to shipment. Now suppliers are making it much more difficult to terminate orders.
"It increases project risk because there may be much greater penalties if you lose a project or [it] drops out of your pipeline for whatever reason," Walters said.
The storage sector is also facing supply-chain challenges related to plant equipment, like transformers, Alex Morris, executive director of the California Energy Storage Alliance, said.
Analysts are definitely seeing some battery storage facilities get delayed, Wood Mackenzie’s Witte said, with projects initially scheduled to come online in 2021 getting pushed into 2022 and 2023, in part because of supply-chain issues.
While Witte hasn’t seen a lot of announced storage projects get canceled, "what we’ve been hearing from developers is that they really had to reassess almost every project in their mid-term planning. So in that sense, there are probably a lot of projects that got canceled, or maybe just [put on the back burner]... that were never really announced," she said.
A flight toward quality developers
Solar and storage developers are addressing these challenges in multiple ways. Storage company Fluence, for instance, has secured additional shipping capacity and ramped up the size of its supply chain and manufacturing team, Carol Couch, the company’s senior vice president and chief supply chain and manufacturing officer, said in an email.
Fluence has also been transitioning to a more regionalized business model over the last couple of years, forging partnerships with manufacturers in North America and Europe as well as the Asia-Pacific region, Couch said.
"We have selected contract manufacturers for our North American and European locations and expect these facilities will alleviate the burden of a single manufacturing location by expanding production and reducing shipping and logistical costs," she added.
"What we’ve really started to see from the utilities is kind of a flight towards quality developers and in some cases, an increase in the amount of collateral that they’re requiring from the developers."
Partner, Morgan Lewis
Another near-term approach developers are employing is to push back on suppliers and try to get them to bear certain risks, such that projects are protected by delay liquidated damages if equipment is delivered late, Mayer Brown’s Galer said. Some are also taking a closer look at the exit options they might have if supply-chain issues arise with their chosen supplier, like a contract “termination for convenience” situation, and seeking another supplier so that the overall project schedule isn’t changed too much, he added.
Utilities, meanwhile, are facing their own concerns that although they’ve signed PPAs, those projects may not be completed, Arora said.
"What we’ve really started to see from the utilities is kind of a flight towards quality developers and, in some cases, an increase in the amount of collateral that they’re requiring from the developers," he said.
Potential longer-term implications
Experts say it’s difficult to estimate how long these supply-chain constraints are expected to last, although most agree that they will continue for the rest of 2022. Renewable energy equipment prices could be a little higher for the next couple of years because of supply and demand issues, but that’s unlikely to be a long-term trend, according to Walters. For battery storage, Wood Mackenzie anticipates that demand will be higher than supply in 2022, a trend that is unlikely to dissipate until 2023.
But even if it's only a short-term issue, today’s supply chain constraints could have larger implications for the energy sector.
"I do see it causing some problems in the short term for utilities and corporates and others to meet their near-term climate goals, just because projects won’t be coming online as quickly as they’d like to see," SEIA’s Rumery said.
Over the long term, however, the solar industry is still in a good position to be competitive and continue to provide the products needed to meet those goals, he added.
Another potential consequence, CESA’s Morris said, is that developers may pay closer attention to battery technologies other than lithium-ion that have different supply chains. Developers are "polyamorous" with storage technologies, he added: They view storage as a box that they have to put on a site, and while that box can have different skill sets and capabilities, the decision frequently comes down to the cost.
One challenge they’ll face in this regard, though, is that when states and utilities are looking to build storage at an aggressive pace, developers don’t always have a lot of time to put together their bid. In that event, lithium-ion technologies have enough data, insurance apparatus and financing apparatus available already for developers to put together a bid pretty quickly, Morris said, whereas that might not be the case with newer, less-deployed technologies.
There is still a lot of optimism that storage prices will continue to go down as new technologies emerge, supplies become less tight, and more manufacturing capacity comes online, Witte said.
"So I think we’re going to have a dent in the market for the next three to five years, just because we lost some of those gains, but I think after that, we’re going to continue to build that momentum," she added.
What can policymakers do?
The Biden administration has already taken some steps that will help alleviate supply chain challenges, according to Couch. The Infrastructure Investment and Jobs Act, for instance, has provisions that will support the manufacturing, deployment, and research and development of energy storage technologies.
"The Build Back Better Act would also support the industry with targeted incentives to spur new domestic supply chains and technologies, like solar, batteries, and advanced materials, while incentivizing clean energy projects that utilize domestic inputs like steel, cement and aluminum," Couch added.
In February, the Department of Energy released a plan outlining 40 strategies to improve the clean energy supply chain. The agency also plans to provide nearly $3 billion in funding to two programs aimed at expanding domestic production of advanced batteries.
In a press release announcing SEIA’s recent report, CEO and President Abigail Ross Hopper said the U.S. needs to ramp up clean energy production and eliminate its energy dependence on hostile nations in the face of global supply uncertainty.
"[I]f we pass a long-term extension of the solar Investment Tax Credit and invest in U.S. manufacturing, solar installations will increase by 66% over the next decade, and our nation will be safer because of it," she added.