When the Inflation Reduction Act (IRA) was signed into law last August, projections for solar adoption soared. In spite of the sunny predictions, since the fourth quarter of 2022, project starts have been lackluster. With all the incentives in place for switching to clean energy, what’s going on? And when can we expect things to ramp up again? Keep reading for a rundown on the factors at play as well as our educated opinion on what to expect next.
Factors affecting the pace of solar installations
The pace of new projects has slowed significantly over the past few months, putting pressure on distributors to reduce orders and manufacturers to decrease output. The IRA is expected to usher in a new era for the US solar industry, but several factors in the here and now are causing a slowdown across every solar segment.
Inflation and Rising Interest Rates
Inflation is negatively impacting demand across many industries and solar is no exception. Soaring interest rates have drastically changed the math for new projects. With the federal interest rate more than tripling since Q1 2022, it’s no surprise fewer homeowners and businesses are eager to take out loans for new solar projects. As a result, the residential market has slowed significantly, leading Barclay’s to downgrade solar stocks for several US companies in January2, citing concerns over the growth of the market. Commercial and utility-scale solar, already plagued in 2022 by supply chain constraints, saw 40% fewer installs than in 2021.3
The Federal Reserve’s actions to bring down inflation by raising interest rates are having the desired effect – inflation is slowing down4. Still, it’s anyone’s guess how long this tug of war between inflation and interest rate increases will last, especially with more rate hikes anticipated in the coming months. The Fed is aiming for a “soft landing” but there are plenty who believe a recession is inevitable. In either case, inflation and high interest rates are likely to be the biggest drag on solar’s growth throughout 2023.
Equipment Sourcing Delays
Commercial and utility projects have been delayed since last year due to transformer sourcing issues. The cost of large transformers is up 20 to 50% since 20205 and we’re seeing purchasing lead times of more than a year. The electric utility sector has asked the federal government to address labor shortages and material availability6 and a group of lawmakers is advocating for $2.1 billion of disaster supplemental funding to address the shortage of electrical transformers and grid security technologies through the Defense Production Act.7
The microchip shortage that started at the beginning of the pandemic is still affecting inverter sourcing times, but the situation is starting to improve. As the chip shortage begins to level out,8 so will inverter availability. On the bright side, this is one supply constraint where we haven’t seen a significant price increase. Just long wait times for components hampering project starts. We’re also starting to see solar imports from Asian countries unfreeze as regulatory compliance is verified; more on that below.
UFLPA Regulatory Compliance and Tariff Concerns
Since the Uyghur Forced Labor Protection Act (UFLPA) went into effect in June 2022, thousands of shipments of solar energy equipment have been detained at US ports or diverted to other markets.9 The UFLPA places the burden on buyers to prove that no goods coming into the US have been made using forced labor: they must provide comprehensive supply chain mapping as well as lists of facility workers and proof that workers are not subject to conditions typical of forced labor.
Significant releases of detained equipment began in December,10 as major manufacturers were cleared for compliance to the UFLPA. Wood Mackenzie expects total module shipments will normalize by the end of Q2 2023.11 Opening up this supply avenue will help ease solar supply constraints.
The other significant regulatory constraint has been concern about new tariffs from the anti-dumping circumvention investigation. The Biden administration’s moratorium on any new tariffs resulting from the investigation is set to expire mid-2024, but a new congressional challenge to repeal the moratorium immediately is likely to renew industry worries12. A preliminary report indicated the investigation has found confirmed violations, but unease at those findings was initially coupled with SEIA’s forecast that domestic manufacturing would be ramping up by the time the moratorium expired and guidance to avoid UFLPA-related violations would be solidified. With the tariff timeline now in question, the short-term ramifications remain to be seen.
IRS Guidelines On IRA Requirements
Several commercial and utility projects have been put on hold as developers wait for IRS guidance on the IRA requirements. The 30% Investment Tax Credit (ITC) for new solar projects has been extended another decade, and power producers can now claim an additional 10% by using US-made components. The guidelines to qualify for that additional credit have not yet been finalized by the IRS, so many projects are on hold as developers wait to see how to get the biggest tax credits (and hopefully offset inflation-related prices on equipment). We expect the guidelines from the IRS to be released sometime late Q1 or Q2 this year.
While our hope is that having clear guidelines for the new ITC incentives will get more projects moving, we may see another barrier in the form of limited US supply. In other words, once developers identify how much they need to source from the US, they may find there is not enough supply to meet the increased demand for domestic equipment. More on this below.
US Manufacturing Capacity
Right now, there is simply not a lot of solar equipment being manufactured in the US (we have to give kudos to First Solar, Mission Solar, and Qcells, who did have domestic production prior to the IRA). The AMAZING news is: that’s rapidly changing. In the wake of the IRA, we’ve seen a cascade of announcements for new solar module manufacturing facilities planned in the US: First Solar, JA Solar, Qcells, Cubic PV, Adion Solar, Enel, Philadelphia Solar, and others have announced plans for new domestic module production. There have been even more announcements of expanded production at existing plants, as well as announcements about increased inverter and energy storage manufacturing.
Once a company breaks ground on a manufacturing facility, it typically takes 12 – 18 months for it to be up and running. That means the supply of US-manufactured solar equipment should be seriously gearing up starting mid-2024. If the IRS adopts a tiered ramp-up to the full domestic manufacturing requirements, supply and demand might be able to ramp up in tandem, which would help to level out supply-and-demand issues. In short, we don’t know exactly how this will play out yet, but the pain point we’re feeling right now is temporary.
Ocean Rates
One bright spot in this current market – ocean shipping rates have dropped precipitously over the past few months, nearly returning to pre-pandemic levels14. By the second half of 2023, we expect this to translate to an overall reduction on the price of imported solar goods (barring any unforeseen changes, of course).
What to expect going forward
Ohm Analytics predicts the tightening credit market, diminished net metering benefits in California, and the challenging economy will outweigh momentum from the IRA in the short term, keeping year-over-year residential solar growth flat in 2023.15 Higher interest rates will force homeowners to pivot away from cash purchases and loan financing to PPAs and leases. This is a silver lining for companies like Sunrun that are able to offer third-party ownership (TPO) options to customers.
While we do expect a slow first half of 2023, growth will vary a lot by state due to regional policies16. For example, though solar giant California is projected to see negative residential growth in 2023, Massachusetts and New Jersey are both projected to see double-digit year-over-year growth.17 And we expect to see increased growth across the board in the second half of 2023. It’s also important to remember that “negative” growth is still growth. California is projected to install 1,727 MW of new residential solar projects in 2023, which is more than any other year except 2022 (which saw a record-breaking 1,891 MW).
Power and renewables construction company MasTec Inc also predicts an uptick in solar projects of all kinds by late 2023 or 2024, citing holdover projects from 2022 as the main renewable power projects happening early in 2023.18 For commercial and utility projects, it remains to be seen how efficiently today’s interconnection challenges can be solved.
In short, while we (like many of you) are not thrilled about the current pace of the solar industry, we think the industry is just taking a breath before kicking it into high gear. In fact, we’re just as optimistic about the long-term projections for exponential growth in the solar industry as we were at the IRA signing in August. The trick in the solar industry is to hold on during the dips and enjoy the ride – and of course leverage every tool in your box to make the best of the current situation.
How Kinect Solar Can Help
The secondary solar market can be your secret weapon when prices are high and equipment is backordered. We have plenty of modules in stock and ready to ship, always at the best prices we can get you. We also stock legacy equipment, which can help you save significantly on project costs. Check out our available inventory.
We also offer scalable procurement and logistics services. Take advantage of our size and expertise to get the best deals and most efficient routes when you move equipment. Learn more.
Our procurement services let all-sized solar businesses get high-volume pricing and we can help you source tough-to-find inventory. Learn more.
Helping your solar business thrive during the industry highs and lows is what we’re in business for. Reach out to one of our solar experts today to find out what we can do for you.
1 Dieter Holger (December 29, 2022). “After a bumpy year, renewable energy looks poised for boom times”. Wall Street Journal
2 David Moadel (January 25, 2023). “Why Are Solar Stocks RUN, SPWR, ENPH Down Today?”. Business Insider
3 Retrieved January 30, 2023. “Solar Market Insight Report 2022 Q4”. SEIA
4 Kate Davidson, Craig Stirling (January 28, 2023). “Fed Set to Shrink Rate Hikes Again as Inflation Slows”. Bloomberg
5 Robert Walton (December 19, 2022). “Utilities sound alarm over distribution transformer shortage as procurement times surpass 1 year and costs triple”. Utility Dive
6 Nichola Groom (November 11, 2022). “Exclusive: U.S. blocks more than 1,000 solar shipments over Chinese slave labor concerns”. Reuters
7 Robert Walton (December 19, 2022). “Utilities sound alarm over distribution transformer shortage as procurement times surpass 1 year and costs triple”. Utility Dive
8 James Morra (December 1, 2022). “The Chip Boom? It’s Over. The Chip Shortage? Not Yet.”. Electronic Design
9 Nichola Groom (November 11, 2022). “Exclusive: U.S. blocks more than 1,000 solar shipments over Chinese slave labor concerns”. Reuters
10 Ryan Kennedy (December 1, 2022). “U.S. Customs releases UFLPA detained solar panels, said ROTH note”. PV Magazine
11 Diana DiGangi (January 19, 2023). “Solar expected to see demand boom from Inflation Reduction Act in 2023 as supply chain remains uncertain”. Utility Dive
12 Ryan Kennedy (January 27, 2023). “Bipartisan group files to repeal solar tariff moratorium”. PV Magazine
13 Diana DiGangi (January 19, 2023). “Solar expected to see demand boom from Inflation Reduction Act in 2023 as supply chain remains uncertain”. Utility Dive
14 Ben Ames (January 19, 2023). “Ocean container rates cool slightly from historic highs”. DC Velocity
15 Report: Ohm Analytics Preliminary December Data Update & 2023 Forecast (January 19, 2023). Ohm Analytics
16 Kelsey Misbrener (January 30, 2023). “Almost every state took some solar policy action in 2022”. Solar Power World
17 Report: Ohm Analytics Preliminary December Data Update & 2023 Forecast (January 19, 2023). Ohm Analytics
18 Laila Kearney (January 5, 2023). “Power projects driven by new U.S. law not seen until late 2023 or 2024 – MasTec CEO”. Reuters
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