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For many of us active in the energy industry, when we think about solar, we think about the vast arrays of panels covering acres and acres of land. Unsurprisingly, the growth of the US solar industry is - and will continue to be - mainly driven by the utility-scale segment. In our latest US Solar Market Insight Report, we estimate that the utility-scale segment will lead the solar industry, with almost 70% of the capacity built in the US over the next 10 years.
However, many markets follow a very different dynamic. Regions with weak transmission infrastructure and an ageing generation fleet tend to advance distributed generation (DG) resources. These factors, in addition to favorable DG policy by local utilities, contribute to higher penetration of behind-the-meter solar resources. One of these markets with high expected DG penetration is Puerto Rico.
While the utility-scale market has gained some traction over the past few years, the distributed segment will largely drive solar growth in Puerto Rico. We forecast that more than 5. GW of solar capacity will be installed in Puerto Rico over the next 10 years. Yet, only 440 MW will come from the utility-scale segment. Low investment in transmission infrastructure, slow permitting processes, challenged site availability, and limited grid resiliency limit the expected growth of the utility-scale segment.
The distributed generation segment, conversely, is in a much brighter place, as there are tools and incentives to drive installations on the island. From a policy standpoint, Laws 17, 57, and 114 of 2014 govern and protect distributed generation in Puerto Rico. These policies allow behind-the-meter (BTM) renewable projects up to 1 MW to be connected to the grid, establish a net metering mechanism, and regulate interconnection tariffs and timeframes.
The local utility, LUMA, has a robust net metering program, allowing all clients to submit an interconnection request online. By law, any requests must be finalized in 30 business days, a very competitive timeframe compared to many areas in the US. Moreover, strong federal incentives will continue to enable DG installations, with up to $1 billion destined to increase residential solar + storage installations by companies like Sunnova and nonprofits like Let’s Share the Sun.
Distributed generation is an excellent mechanism on its own to help reduce load and increase the penetration of clean energy resources. In Puerto Rico, DG is a multi-pronged solution to many of the citizens’ issues with energy security and the environmental impact of its generation fleet.
This week, six Woodmackers will be in Adjuntas, Puerto Rico installing solar panels and energy storage systems on homes affected by natural disasters. The group will be part of a broader delegation coordinated by Let’s Share the Sun.
Click here to learn more about Wood Mackenzie’s work with Let’s Share the Sun. To support Let’s Share the Sun''s mission of providing energy to those most in need, you can donate here.
US residential solar companies Sunrun, Sunnova and power product supplier Generac have been selected by the US Department of Energy (DOE) to install rooftop solar and battery storage systems for vulnerable households in Puerto Rico.
DOE expected the first installations will begin in spring 2024, adding that these companies will enter award negotiations and may be awarded a total of US$400 million in funding, part of the first tranche of Puerto Rico Energy Resilience Fund (PR-ERF) announced last year, to deploy residential solar and battery systems for up to 40,000 vulnerable households across Puerto Rico.
The latest selection was the first round from the 2023 PR-ERF Funding Opportunity Announcement. Eligible beneficiaries will include very low-income, single-family households that are either located in areas that have a high percentage of very low-income households and experience frequent and prolonged power outages; or include a resident with an energy-dependent disability, such as an electric wheelchair user or individual who uses at-home dialysis machines.
"With this announcement, we take a critical step forward in our efforts to ensure that all Puerto Rico residents have reliable electricity, especially the most vulnerable families and communities for whom a lack of power can be life or death," said US secretary of energy Jennifer Granholm.
In July, the DOE announced that it hadallocated US$453.5 millionfrom the PR-ERF.
Apart from two residential solar companies and a supplier, the DOE has also selected five non-profits and cooperatives in Puerto Rico for residential solar installations, including Barrio Eléctrico, Comunidad Solar Toro Negro, Environmental Defense Fund, Let’s Share the Sun Foundation and Solar United Neighbors. They may be awarded a total of US$40 million in funding.
Recently,PV Tech PremiumexaminedPuerto Rico''s residential market. Microgrids, upgrading the grid or building a virtual power plant could be the solutions to Puerto Rico’s energy transition.
According to Chris Rauscher, head of grid services of virtual power plants (VPPs) at Sunrun, the lack of available land to build utility-scale projects and solar-plus-storage in Puerto Rico opens the possibility of having dispatchable power to help alleviate the issues of the grid.
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The Inflation Reduction Act (IRA) has spurred a wave of interest in the renewables space in the US. The development project pipeline has reached 438 gigawatts (GW)ac across wind, solar and storage. For solar alone, more than 3.0 GWdc of new projects were contracted in Q1 2023, 25% more than Q1 2022.
However, despite this momentum in the renewables space, the recently proposed IRS guidance for the Domestic Content Requirement (DCR) makes it difficult for developers to qualify.
The domestic content adder has captured significant interest from developers, as a solar project can obtain an additional 10% tax credit if the project meets the DCR. Based on our understanding of the guidance, to qualify for the bonus adder, the equipment used for the development of a utility-scale solar project is placed into two broad categories:
A construction good is classified as anything primarily made of iron or steel and is structural, such as module racking, pile or ground screw, and rebar. All iron and steel used in this component category must be 100% from the US (including Puerto Rico, Guam, American Samoa, US Virgin Islands and the Commonwealth of the Northern Mariana Islands). The guideline does state that any metallurgical refinement process for the steel and iron used in these components can take place outside the US.
This is classified as equipment that is manufactured (altered to add value and not mere assembly) and then incorporated into the utility-scale solar facility. Examples include PV modules, inverters and trackers. To meet this requirement, 40% of the total cost of the manufactured products must be domestic (including direct manufacturing labor) for projects starting construction before 2024. This will progressively increase by 5% each year till it reaches 55%.
Despite this new incentive, our preliminary analysis shows that importing modules will continue to be the most economic option through 2025. This is for three key reasons:
One of the main business cases for using a domestically-made module is to leverage the 10% domestic content adder. Our analysis indicates that to meet the DCR, the cell in a US-made module must be made in the US, which represents both a cost and a price uplift.
Tier 1 manufacturers are currently quoting prices ranging from 50-60 cents per watt (c/W) for a US-made module with a US-made cell that would start being delivered in 2025. In our latest PV Supply Chain Pulse, we estimate that modules imported from Southeast Asia and delivered by 2025 will be priced at 33-35 c/W. To make economic sense to procure domestic, the benefit obtained from the 10% ITC must be higher than the price delta between an imported and domestic module.
Manufacturers have announced more than 52 GW of module manufacturing capacity and 20 GW of cell manufacturing capacity since the passage of the IRA. The new guidance this month shows that for modules to meet the DCR, cells must be US-made.
While this is expected to drive the development of a US supply chain further upstream than just supply of the module, cell manufacturing would be a new industry in the US. Ramping up to full production will take anywhere between 24-36 months.
The guidance provided by the IRS is challenging to implement. Since the calculation for domestic content is cost-based, manufacturers must provide full transparency on their cost stack and margin levels, which is impractical and inconvenient for manufacturers.
The guidance is unclear as specific components (such as torque tubes) could be considered a construction good or a manufactured product. Implementing the guidance will require an intricate dynamic between manufacturers and developers.
Assuming US manufacturers are able to offer domestically manufactured modules and cells at more competitive prices than are currently being offered, the guidance should result in increased US cell manufacturing capacity over the next two or three years. However, if modules with US-made cells are 4-5 c/W higher than imported modules, the upside from the domestic content adder is lower than the savings from using imported modules.
If more cell capacity comes online, the industry can reach a critical volume in which both cells and modules become commoditized and prices lower. During this period, manufacturers and developers can work together to develop a methodology to comply with the IRS guidance and streamline the administrative process with an adequate balance of cost transparency and IRS compliance.
We track changes in the US solar segment closely. Find out more about our solar research.
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