Solar Panel Manufacturing

Paul Smith analyzes the solar panel manufacturing industry’s market trends and pricing and provides advice for lenders based on the short- and long-term outlook.

CURRENT TRENDS

  • Homeowner tax credits drove the highest volume of U.S. residential solar installations in industry history with 1.2 gigawatts of direct current power installed in the first quarter of 2022, which is a 30% increase over the same period in 2021 and a 5% increase over the fourth quarter of 2021.
  • The first quarter of 2022 was the lowest for utility-scale solar installations since 2019 with 2,173 megawatt defined conditions installed, which is a 64% decrease from the fourth quarter of 2021.
  • The Biden administration extended key federal tax credits set to expire at the end of 2020 through 2024, bolstering the industry’s favorable economics.
  • Additionally, the Biden administration issued an emergency authorization in June 2022 initiating a two-year tariff exemption on inexpensive panel imports from Cambodia, Malaysia, Thailand and Vietnam to help ease ongoing supply chain challenges.

MARKET OUTLOOK

Increased manufacturing costs and ongoing supply chain constraints are driving higher solar panel prices compared with pre-pandemic levels; however, cost-competitive markets and tax incentives for using solar panels manufactured in the U.S. have expanded domestic manufacturing capacity.

Supply Chain Constraints

Solar accounted for 50% of all new electricity-generating capacity added to the U.S. grid in the first quarter of 2022, but segment performance varied. Overall, solar installations fell 24% in the first quarter compared with the same period in 2021 and 64% from the fourth quarter of 2021.

Utility-scale solar installations hit their lowest quarterly volume since 2019 in the first quarter of 2022 with 2,173 megawatt defined conditions installed, which is a 64% decrease from the fourth quarter of 2021.[1] Supply chain constraints, shipment delays and trade policy changes in the second half of 2021 contributed to this decrease.

Residential solar installations hit their highest quarterly volume in history in the first quarter of 2022 with 1.2 gigawatts of direct current power installed, which is a 30% increase over the same period in 2021 and a 5% increase over the fourth quarter of 2021. Commercial solar installations decreased 11% year over year and 28% from the fourth quarter of 2021 to the first quarter of 2022.

In June 2022, the Biden administration announced the Declaration of Emergency and Authorization for Temporary Extensions of Time and Duty-Free Importation of Solar Cells and Modules from Southeast Asia to ease supply chain challenges that drove the decline. The emergency authorization initiated a two-year tariff exemption on inexpensive panel imports from Cambodia, Malaysia, Thailand and Vietnam.[2] In 2020, 89% of solar modules employed in the U.S. were imported, and Cambodia, Malaysia, Thailand and Vietnam supplied about 80% of these deliveries.[3]

The emergency measure went into effect following a Department of Commerce inquiry into whether solar panels from these countries use components made in China, circumventing existing U.S. duties.  Domestic installers ceased imports to avoid potential retroactive tariffs related to inquiry findings, resulting in a severe supply shortage for projects in construction and under development.[4]

Tax Credit Extension

The Federal Solar Investment Tax Credit (ITC) offers a tax credit worth 26% of total solar installation cost, including all parts and labor.[5] In late 2020, Congress passed a two-year extension of the ITC through 2022 and postponed credit reductions to 22% in 2023 and 10% thereafter.[6] The tax credit is a dollar-for-dollar reduction in the income taxes a person or company would otherwise pay the federal government.

The ITC is based on solar property investment volume and a commence construction standard determines eligibility. The IRS issued guidance on the requirements taxpayers must meet to establish when solar facility construction has begun to claim this credit, which varies for residential and commercial projects.

Pricing on Slight Downward Trend

U.S. solar photovoltaic module pricing has stabilized since decreasing in 2017. Module prices increased to approximately $0.43 per watt in the first quarter of 2022 after dipping to $0.33 per watt in early 2021. For comparison, module prices hit $0.69 per watt in early 2016.[7] Inflation and supply chain constraints will likely keep pricing steady through 2022 and may increase the average selling price.

Q1 Annual Residential Photovoltaic Cost Benchmarks

Source: http://www.nrel.gov/

Not All Solar Panels Subject to Tariff

Most solar panels are constructed using specially processed silicon, which generates direct current when exposed to sunlight. The recently extended Section 201 tariff will impose a duty of 14% to 15% on imported crystalline silicon solar products.[8] Notable exclusions to the current tariff include but are not limited to double-sided or bifacial solar panels, solar panels manufactured using thin-film technology, solar panels imported from Canada and Mexico, and the first five gigawatts of solar cells imported to the U.S. each year, which doubles the previous duty-free limit.

VALUATION CONSIDERATIONS

Solar panels and inverters, which convert electricity from direct current to alternating current and connect to the public utility grid, are used in both residential and commercial and utility applications, and typically account for most inventory cost and value.

Solar modules are largely generic across top-tier manufacturers and brands, so even minor price differences per watt may influence purchasing decisions. Most current photovoltaic modules range from about 400 to 670 watts. Older photovoltaic modules with lower wattages are salable at liquidation, but at a lower value than current modules.

The Biden administration’s two-year tariff exemption on solar panels imported from Cambodia, Malaysia, Thailand and Vietnam added a measure of stability for solar panel manufacturers. Increased manufacturing costs, ongoing supply chain constraints and increased demand will likely continue to elevate pricing compared with pre-pandemic levels. Additionally, cost-competitive markets and tax incentives for using U.S.-manufactured solar panels should expand domestic manufacturing capacity.

Most appraised solar panel values will likely remain relatively high as a percentage of cost because of current supply chain constraints expected to continue through 2022, increased demand driven by tariff stability, and the residential and utility solar industries’ continued growth.

[1] https://www.seia.org/research-resources/solar-market-insight-report-2022-q2

[2] https://www.whitehouse.gov/briefing-room/statements-releases/2022/06/06/declaration-of-emergency-and-authorization-for-temporary-extensions-of-time-and-duty-free-importation-of-solar-cells-and-modules-from-southeast-asia/

[3] https://www.rechargenews.com/solar/us-solar-build-out-collapses-as-biden-invokes-emergency-power-to-pause-new-tariffs/2-1-1233059

[4] https://www.rechargenews.com/solar/us-solar-build-out-collapses-as-biden-invokes-emergency-power-to-pause-new-tariffs/2-1-1233059

[5] https://enphase.com/solar-articles/federal-solar-tax-credit-2022

[6] https://www.ny-engineers.com/blog/us-congress-extends-the-26-solar-tax-credit-by-two-years#:~:text=After%20the%20new%20Congress%20bill,jobs%20in%20the%20US%20economy.

[7] https://www.statista.com/statistics/748972/gcc-average-solar-pv-module-selling-price/#:~:text=It%20is%20projected%20that%20the,U.S.%20dollars%20per%20watt%20peak.

[8] https://www.nytimes.com/2022/02/04/business/economy/solar-tariffs-caveats.html

 

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