The U.S. renewable energy industry is creating a true and integrated green economy with the help of the IRA and other incentives. While capacity installation forecasts are necessary and useful as we charge forward, be careful about taking them at face value.
Realities on the Ground and in the Sea Demand a Deeper Dive
by Lars Moller
The Inflation Reduction Act (IRA) and other incentives offered by the U.S. government for manufacturing, development and deployment in the renewable energy sector are propelling the industry forward. There is little doubt of that.
At the same time, they’re driving a host of aggressive forecasts for renewables.
We applaud the enthusiasm these optimistic projections represent, and by no means do we want to dampen the positive energy they are injecting into the acceleration of renewables expansion which is so desperately needed in the USA and around the world.
Certainly achieving some of them is possible. But then, anything’s possible. The question is, given actual market conditions and what are at times bare-knuckled realities on the ground, are they probable?
When we look into the potential for business acquisitions, equipment purchases, new facilities, technology innovations and other opportunities for our clients, we have a responsibility to dig deeper and advise them based on how those realities dovetail into their prospects and projects.
Given our decades of experience in this industry, we know they easily can be, and often are, delayed or derailed entirely by unforeseen issues. To put it bluntly, it’s not a matter of IF things will happen, but WHEN.
Optimistic Renewable Energy Forecasts
We’ve seen several examples of these highly optimistic projections in the 15 months since the IRA became law. For example:
- BloombergNEF (BNEF) recently issued an outlook for U.S. clean energy that predicts an increase of 619GW of installed renewable energy capacity from 2023 to 2030. That seems like a staggeringly high number given that, over the course of just seven years, it would be triple what the industry has been able to install over the past three decades.
- The Solar Energy Industries Association (SEIA) issued a report, dated Dec. 13, 2022, that forecasts 45-50GW of photovoltaic (PV) installation in 2027. That’s up from roughly 30GW of installations expected in 2023. A lot will have to happen for this to become a reality. As an example, and as SEIA also mentions this in its report, the expected ruling in early 2024 by the Department of Commerce related to the antidumping and anti-circumvention ruling could negatively impact this forecast. As a reminder for those of us in the trenches, building out the industry with our customers, this issue caused several of the major construction companies in 2022 to retract nearly half their activities for that year. Again, while we hope this does not happen again, we need to recognize the possibility as a major variable to any forecast.
- Just a few short months ago the U.S. Department of Energy’s Office of Energy Efficiency & Renewable Energy (EERE) referred to over 40GW in the U.S. offshore wind development pipeline and an “unprecedented expansion” on the near horizon. Let’s be fair to EERE and mention that the report refers to data collected from Jan.2, 2021 through the summer of 2022; who could have known in the summer of ’22 what we know now? However, in retrospect, there were extraordinary circumstances that at least could have pointed to early indicators of trouble for the wind industry, including offshore. As examples, during the same period of the EERE report, the top four global original equipment manufacturers (OEMs) were reporting billions in losses, as well as industries in general (including wind) were experiencing strong increases in inflation and interest rates. All in all, these and other strong indicators provided insight into an industry – offshore in this case – that perhaps should not been referred to as having an “unprecedented expansion.” Yes, it’s easy to point to the early indicators now, but that’s the point; for those reading the tea leaves during summer of ’22, they would at least have raised an eyebrow or two, certainly enough to make any business owner ask, “How might these possibly impact our business?”
We are by no means attempting to discredit the great work done by these agencies and organizations in highlighting what might be possible. In fact, we sincerely hope their renewables forecasts come true and that the levels they’re talking about will actually be installed.
In truth, as this Reuters piece points out so well, forecasts are tough to make with so many significant variables at play, where we have merely pointed to a few above. And, as the saying goes, Rome wasn’t built in one day; it will take time for the industry to establish the entire infrastructure of the supply chain (which was one of the objectives of the IRA of 2022, by the way).
The fact is, the U.S. renewables industry as a whole is, for the first time, creating a true and integrated green economy, including jobs in the millions and resurrection of the USA as a technology driver on the level of the best in the world.
In many ways we’re learning as we go, and part of that is figuring out how to read, interpret and apply these renewable energy capacity forecasts in our planning processes while also closely understanding the shifts in energy policies, evolution in technologies and overall significant global events impacting it all.
The Clean Energy Path
Clearly the road through the green transition contains potholes and obstacles. That’s why, when reviewing forecasts, whether they’re aggressive or conservative, we need to be reasonable and realistic.
As we travel the projected growth market with our clients, we keep an eye out for harbingers we’ve seen before, account for risk factors we know exist and plan alternate routes in anticipation of contingencies.
The following are examples of what we all need to see clearly.
Capital
Growth requires investment.
Yet the major OEMs that account for most if not all of the technology installed in the USA have been losing billions over the past couple of years.
As Allianz Research recently reported, “The whole sector is grappling with rising construction and financing costs, quality-control problems (that are leading to expensive warranty claims) and supply-chain issues. Inflation and global energy-price fluctuations have also led to increased costs for wind-power projects, casting doubt over the feasibility of many ventures.”
Meanwhile, to achieve the levels of capacity expansion many forecasts are calling for, the major players in the renewable energy industry need capital at reasonable rates. To get it, they need to be profitable.
We believe that, realistically, it will take the OEMs at least two to three years to gain the necessary momentum and increased earnings to get to the levels where they can again pursue plant expansions, technology transfers and the training of personnel for the latest turbine technologies.
The projected growth also would require massive investments by current suppliers up and down the supply chain, but in some cases those companies are not able or willing to make them. There also are issues related to raw materials such as cobalt, graphite, iron, limestone, lithium and nickel. We don’t have enough to meet demand now, and even if we started today we would not be able to increase production capacity by 2030. As we noted in a previous piece, “Renewable Capacity Projections Overlook Critical Elements,” getting a mine up and running can take up to 16 years.
Renewable Energy Transmission
We don’t have enough.
There are significant challenges to building enough as quickly as its needed, such as permitting requirements within the U.S. states, the lack of consistency between states and the difficulties of interstate permitting. We discussed the obstacles to building out the U.S. transmission capacity at length in “United States of Transmission” a few months ago. Even if the USA overcomes those complications tomorrow, it will take years to construct the infrastructure.
And sometimes, even when it seems everything is in order on a transmission project, something comes up and delays it. A SunZia project in Arizona is a perfect example.
Construction on 550 miles of transmission line was well underway in the San Pedro River Valley when, on November 9, the U.S. Bureau of Land Management suddenly halted the project in its tracks due to concerns raised by area Native American tribes regarding sacred sites the project could impact.
That issue should have been addressed early in project development and necessary adjustments made but, for whatever reason, it wasn’t. Now the project is up in the air, and the delay is not only impacting the company, the tribes and the federal government agency, but also the overall potential for meeting renewable energy forecasts.
Obviously the impact of this one project will be minimal if all other projects proceed to plan, but when we multiply it by dozens if not hundreds of projects of similar or greater scale, the glow of optimistic projections begins to dim.
Regulatory & Trade Issues
New and evolving U.S. regulations and trade disputes between nations can yet again disrupt renewable projects at just about any time, as well.
As noted above, the USA banned imports of utility-scale solar panels that included raw materials or components from the Xinjiang Uyghur Autonomous Region (XUAR) of China, where, according to the U.S. State Department, the Chinese government has been overseeing forced labor.
Up to that point, U.S. companies had been installing solar panels as fast as they could get them. Suddenly the supply dried up and projects that seemed obviously profitable became drags on companies’ balance sheets. Some even had to pay penalties for lack of performance.
The solar module manufacturing companies that were circumventing the antidumping rules were given two years, until summer 2024, “… to demonstrate either that their products are not sourced in whole or in part from the XUAR, or that their goods, although sourced from the XUAR, were not produced with forced labor.”. To date, not all of those companies have met that condition. So what happens to aggressive solar installation forecasts if, ultimately, they can’t? We will need to either replace them with domestic suppliers that currently do not exist and/or find other global suppliers to backfill a sudden gap. And what will the costs, delivery terms, etc. be for that?
Geopolitical Unrest
Wars, terrorism and ethnic and religious conflicts threaten supply chains around the world. We’re currently dealing with interruptions from Russia’s invasion of Ukraine, the conflict in Gaza and the potential for wider hostilities in the Middle East. In fact, the Geneva Academy is currently tracking 110 armed conflicts around the world, with 45 of them raging in the most “active” regions, the Middle East and North Africa.
Domestic Politics
The full implications of the IRA have not even taken hold yet. Even so, the renewable energy renaissance it’s already driving in the USA could pay dividends for years to come.d
Or maybe not.
The nation will hold an election for president and members of Congress in November 2024. If the administration remains the same and the power balance in Congress remains similar, the IRA will likely remain in place. However, if there is an administration change or the makeup of Congress is altered significantly, the full IRA or sections that provide incentives for renewable energy manufacturing, development and deployment could be severely restricted or rolled back entirely.
The Detailed Picture
These are just a handful of examples of the kinds of things that companies need to evaluate in addition to forecasts. They differ from company to company, project to project and year to year.
To be sure, projections by reliable and respected agencies and organizations are valuable and necessary. We use them and we help our clients use them.
However, the point is that it’s crucial to understand exactly what goes into each one:
- What makes the aggressive projections possible?
- What might happen – factors you can influence directly and others you can’t – to skew them?
- Are you watching those key elements?
Renewable energy companies either need to have the personnel, resources and time internally to answer and track these questions or engage external experts who can help illuminate them, quantify potential impacts and rationalize a forecast that better fits your circumstances.
Because, again, it’s not if events occur but when.
When you’ve identified the key elements, planned for them and formulated contingency plans, you’ll be able to detect issues early and make informed decisions about whether your company should retract a little, proceed as planned because the impacts are not as bad as you thought they might be or accelerate your efforts.
Whatever the decisions need to be, your company will be better positioned to successfully navigate the years ahead.
Photo Credits
- Andrey Metelev via unspash.com
- Borderpolar Photographer via unsplash.com
- Made From the Sky via unsplash.com
- Grist
