Solar, Wind Industries Disrupted by COVID-19 Pandemic, Would Benefit from Legislative Action
While the COVID-19 pandemic continues to severely affect the nation’s health care and economy, among the many markets experiencing negative effects are the wind and solar industries. The Solar Energy Industry Association (SEIA) and the American Wind Energy Association (AWEA) have been releasing reports and statements describing these effects and attempting to answer the overarching question: How can Congress protect these vulnerable industries during this time?
Damage Already Done to Wind and Solar Industries
According to SEIA and AWEA, wind and solar power are some of the fastest growing industries. The COVID-19 pandemic has put this growth at risk. The wind and solar industries are suffering because all aspects of their business operations and financing are being affected in the form of delivery delays, absences of necessary employees, financing concerns, and projects cancellations or postponements. SEIA surveyed solar companies to gauge how the industry is faring and respondents have raised significant concerns. Out of the respondents:
- 86 percent were very or moderately concerned about construction delays,
- 84 percent were very or moderately concerned about supply chain and equipment delays, and
- 81 percent were moderately or very concerned about customer acquisition.
There is some evidence to validate these concerns; SEIA found that job postponement rates (the rate at which projects have been postponed) for residential solar systems are now extremely high at 53 percent, and cancellation rates are also worryingly high at 19 percent. However, there seems to be some commercial interest still intact. While some industry stakeholders have noted that the virus allows investors to call force majeure (a legal term that allows individuals to break a contract if an “act of god” occurs – in this case, the pandemic), other industry leaders have reported they have not seen much of this happening in their commercial contracts.
SEIA’s second survey found that 40 percent of respondents have already reported staffing reductions, which is higher than the 22 percent of respondents who reported staffing reductions in the first survey. This increase in reporting of staffing reductions illustrates that the longer the pandemic continues, the more of a strain the solar industry is facing, as construction stalls because of missing necessary personnel.
Recent documentation from SEIA estimates that the pandemic has already knocked down the U.S. solar market by 18 percent in 2020 – initial forecasts sat at 19.6 GW, but due to the COVID-19 pandemic, those estimates are down to 16 GW. As the virus continues to affect the economy, these estimates could lower still. In terms of employment, SEIA has found that up to half of the 250,000 workers in the solar industry could lose their jobs over the upcoming weeks, and nearly 34,000 jobs have already been lost.
The wind industry is facing similar obstacles. According to estimates from AWEA, an estimated 25 GW of current wind projects are at risk; this represents $35 billion in investment. The wind industry was scheduled to have more than $62 billion in wind projects (totaling more than 44 GW) to be online through 2022. However, delays in supply chain leads to uncertainty about project completion, which puts this investment at risk.
AWEA estimates that the COVID-19 pandemic has put more than 35,000 wind industry jobs are at risk, including construction and factory jobs as well as wind turbine technician positions. Rural communities are at a risk of losing more than $8 billion in the form of land-lease payments to private landowners and state and local taxes, which would be devastating for those rural areas that typically struggle to attract investment. This loss of investment would be disastrous to the overall wind industry, because 99 percent of wind projects are located in rural areas.
Many small businesses have been destroyed by the COVID-19 pandemic, and renewable energy businesses are not immune. SEIA found that most solar companies (75 percent) are small businesses (fewer than 50 employees). One of the larger companies (with 350 employees) reported to SEIA that it already had to completely shut down because of the impacts of COVID-19.
Construction Delays, Absences, and Tariffs All Expound Supply Chain Issues
While the renewable energy industry has a global supply chain, this diversity has not protected it from current events because the COVID-19 virus grew to a global pandemic. In a recent webinar, Nigel Cockroft of Jinkosolar and Johnnie Taul of Depcom Power described their anecdotal experiences with COVID-19 and the effects seen on renewable energy to date, including disruption in the supply chain, particularly the downstream portion of the supply chain. The disruption was first seen in China, where the outbreak began, and it resulted in developers receiving products from China past deadlines. Delays expounded as the virus spread globally, and construction began to also be affected. The global supply chain for solar was already strained by various solar tariffs, and the COVID-19 disruptions have led to higher costs and longer wait times. During the webinar Cockroft and Taul suggestions for how the renewable industry could cope with COVID-19 implications included:
- focus on safety and health of employees,
- virtual site inspections,
- implementation of COVID-19 task forces, and
- continued communication with clients about potential impacts on projects.
How Congress Can Help
As noted by AWEA and SEIA, the COVID-19 pandemic threatens the jobs of 364,000 workers who are currently working in the wind or solar industries, and tens of billions of dollars in investment. The wind and solar energy industries were showing signs of tremendous growth before this pandemic, and protection from Congress is needed to ensure that the industries emerge from this crisis suffering as little damage as possible. To protect these industries, SEIA and AWEA argue that Congress must focus on two main factors: protecting the jobs and current investments from COVID-19 pandemic impacts, and including these industries in future economic stimulus packages.
To protect jobs and investments, the AWEA and SEIA recommends that the production tax credit (PTC) and the investment tax credit (ITC) be prioritized in two different ways. First, extending the PTC/ITC continuity safe harbor from four to six years for projects that qualified for the credit in 2016 and 2017 would provide investors the time needed to account for any issues that arise from the pandemic. On the solar side, extending the safe harbor provisions outlined in IRS Notice 2018-59 to automatically accommodate all equipment delivered by the end of the years in 2020 and 2021, as long as the respective projects were placed in service by the end of the ITC phase-down period and equipment was ordered and paid for in the previous year, would allow investors to receive the credit. In other words, SEIA and AWEA are requesting more flexibility in the safe harbor provisions because many participants currently rely on the 3.5 month rule under the 5 percent safe harbor which requires cash payment coupled with a “reasonable expectation” that the goods will be delivered within a 3.5 months of the date of cash payment. This is under the guidance of Treasury Regulation 1.461-4(d)(6)(ii). SEIA and AWEA are making this request because the pandemic may cause ongoing logistical issues that will pose a risk to participants achieving the 3.5 month rule’s reasonable expectation requirement and accordingly solar and wind projects may have a tougher time satisfying begun construction criteria. Because the pandemic is already disrupting supply chains, this concern is valid.
Second, to protect jobs and investments, SEIA and AWEA recommend that Congress address the potential decrease in the availability of tax equity by implementing a program during the economic crisis to provide a choice between the existing ITC/PTC, or direct cash payments in lieu of the ITC/PTC, for all Section 48 and 25D qualified renewable energy projects for the length of the ITC/PTC period equal to 100 percent of the PTC/ITC value. Congress first established a program to exchange tax credits for cash for renewable energy in section 1603 of the American Recovery and Reinvestment Act of 2009 (ARRA). Other provisions suggested by SEIA to protect the solar industry include:
- allowing local jurisdictions to conduct solar permitting remotely,
- delaying the annual deadlines for the Section 48 and Section 25D ITC, and
- postponing the corresponding placed-in-service deadlines.
AWEA and SEIA also advocate for the wind and solar industries to be included in economic stimulus packages. AWEA estimates that extending the PTC/ITC as described above could not only preserve planned activity, but possibly also lead to an additional 20 GW of wind power development by 2029, and create tens of thousands of jobs in wind development. In light of the record-breaking number of unemployment claims filed as a result of the economic implications of the coronavirus pandemic –16 million individuals and counting– creating new jobs is of the upmost importance. AWEA and SEIA have expressed support for provisions that would support the maintenance of existing jobs too – such as the elimination of tariffs on materials like steel and aluminum (which are crucial wind components for the wind industry) that have put 21,000 American jobs at risk and have increased the costs of wind development up to 5 percent.
Legislation recommended by the AWEA and SEIA to protect and stimulate the ITC and PTC include:
- H.R. 2096/S. 1142 "The Energy Storage Tax Incentive and Deployment Act of 2019", which would provide tax credits for energy storage technologies
- H.R. 3961 and S. 2289, "The Renewable Energy Extension Act", which would extend the energy and residential energy efficient property credit
- H.R. 4887/S. 1988, "The Offshore Wind Power Act," and S. 1957/H.R. 3473, "The Incentivizing Offshore Wind Power Act", which would extend the tax credit for offshore wind energy facilities
- H.R. 2256/S. 1094, "The Driving America Forward Act", which would modify limitations on the credit for plug-in electric drive motor vehicles
- H.R. 4506/S. 2588, "Home Energy Savings Act"; H.R. 4646/S. 2595, "New Home Energy Efficiency Act," which would extend and update the credit for nonbusiness energy property
- H.R. 2704, "The Renewable Energy Transferability Act," which would allow for the transfers of the renewable electricity production credit and the energy credit.
Other ideas to stimulate renewables to help support economic recovery include:
- CRA reform (the CRA is currently undergoing regulatory reform, and it presents an opportunity for renewable energy advocates to include renewable energy investment in the scope of a public welfare investment and qualifying renewable energy investment as a CRA activity)
- Allowing for tax credit carryback. The economic fallout from the COVID-19 pandemic could mean that many tax credit investors may not have sufficient tax liability to make full use of tax credits this year. Increasing the ability for taxpayers to carry back ITC, PTC, and general business tax credits to previous tax years when they were profitable and had robust tax liability would enable investors to claim them now rather than having to wait to carry them forward to future profitable tax years. This would help sustain ITC and PTC equity pricing during the economic downturn.
- Allowing for ITC, PTC and other general business tax credits to be claimed against 100 percent of regular tax liability rather than the current law limitation of 75 percent. Doing so would also help sustain tax credit appetite, ITC and PTC equity pricing during the market disruption.
- Relaxation of the active/passive loss rules to allow high net worth and private equity investors to claim PTC/ITC against active income without having to satisfy material participation rules
- Removal of the requirement to reduce the basis by 50 percent for ITC to enhance the economics and make the overall accounting and structuring easier
The recent CARES Act contains $2.2 trillion of relief. However, none of the SEIA and AWEA proposals were included. It is important for supporters of clean energy to consider some of these proposals for the next relief package, and to be educated on how these changes could influence the solar and wind industries. Beyond wind and solar companies themselves, environmental groups have called for renewable energy to be included in future relief and stimulus acts. With more COVID-19 relief legislation likely to be considered by Congress in the coming weeks, now is the time to emphasize both the benefits of wind and solar energy and the vulnerabilities they face during this time.