This is an extract from the summary of the quarterly report “U.S. Solar Market Insight Q4 2022” by Solar Energy Industries Association and Wood Mackenzie Power & Renewables which shows the major trends in the U.S. solar industry.
The US solar industry installed 4.6 gigawatts-direct current (GWdc) of capacity in the third quarter of 2022, a 17% decrease from Q3 2021 and a 2% decrease from Q2 2022.
Commercial, community, and utility-scale solar were all down quarter-over-quarter – an unsurprising outcome given the nearly ubiquitous project delays from supply chain constraints. These segments installed 340 MWdc, 212 MWdc, and 2.5 GWdc, respectively.
The trend for residential solar looks quite different. Quarterly installs set another record at 1,568 MWdc. The fundamentals for residential solar are strong – customers crave energy independence and savings from a solar system, particularly as retail power prices increase. Record volumes in California are also driving this growth, as the industry rushes to capture sales before the state shifts to a new net metering policy.
Overall, solar PV accounted for 45% of all new electricity-generating capacity additions through the third quarter.
An industry waits
After a year of starts and stops, the US solar industry once again finds itself waiting on the outcomes of several key policy issues. The first, and most pressing, is how US Customs and Border Protection (CBP) will manage the approval process under the UFLPA and the release of hundreds of solar equipment shipments still being detained. The UFLPA took effect on June 21st, with detentions beginning shortly thereafter, but even after several months, CBP has not made major releases of equipment. It is proving more difficult than expected to provide traceability for the sourcing of quartzite used in solar equipment. There are many questions around the required documentation that is needed to demonstrate compliance with the UFLPA. Furthermore, the CBP is still releasing detentions from last fall’s WRO, a sign that UFLPA releases could take just as long.
The solar industry is also waiting on guidance from the US Department of Treasury on how to qualify for the various tax credits and adders within the Inflation Reduction Act (IRA). These incentives will undoubtedly provide upside for solar project development, but without more specifics from the US government, it’s difficult to assess which projects will qualify for various adders.
California moves to net billing for distributed solar
The California Public Utilities Commission (CPUC) issued the highly anticipated revision of its Proposed Decision (PD) for the next generation of net metering tariffs (“NEM 3.0”). November’s PD makes several substantial changes to the first proposal from December 2021. The November PD maintains several elements of the previous proposal (a shift to a “net billing” structure instead of “net metering” and compensating exports at the avoided cost rate) but eliminates others (the Grid Participation Charge and Market Transition Credit).
On balance, the new PD certainly elongates current payback periods for solar and solar- plus-storage, but not by as much as the previous proposal. Therefore, market contraction is expected in both the residential and non-residential markets. Importantly, if the November PD is finalized in its current form, the largest distributed solar market will no longer compensate solar exports at a customer’s retail rate.
Market segment outlooks
More than 1,500 MWdc were installed in the residential solar market in one quarter for the first time in Q3 2022. Nineteen states set quarterly records in Q3, with California (571 MWdc), Florida (150 MWdc), and Texas (130 MWdc) again installing the most capacity. California alone surpassed 500 MWdc for the first time. Although some installers continue to face challenges (supply constraints, interest rate increases, permitting and utility interconnection delays), recent retail rate inflation is a significant driver of growth.
Many installers indicate that module supply normalized in Q3 and they were able to secure modules for Q4 installations. However, as a result of supply chain issues from early 2022, coupled with strong demand, installers are still working through lingering customer backlogs. Permitting and utility interconnection delays in certain markets exacerbated these backlogs, with reports of some inspection times exceeding six months.
As a result of these trends, the residential outlook is increased for 2022 to 37% year-over-year growth. High retail rates and California demand pull-in will result in record installations as installers make progress on their backlogs. The release of the Revised PD in California and implementation expected in April of next year, high levels of installations are expected through Q3 2023. 2024 will be the first full year of impacts from the new NEM 3.0 policy, contracting the California market by 39% and causing a 3% contraction in the national market. The residential solar industry also awaits guidance on implementation of the ITC adders, which may shake up the product landscape and provide a boost to third-party owned (TPO) projects.
Commercial solar volumes fell quarter-over-quarter as project delays from earlier in the year manifested. However, installation volumes did not contract as much as originally anticipated. Surprisingly, installations through the third quarter roughly match those of 2021. While there are some state-specific dynamics that partially explain this, it is still clear that 2022 volumes have been suppressed due to the supply chain constraints of the last year.
Next year will be a better year for the sector, with 17% growth expected. However, this represents a lower growth forecast than expected last quarter, due to both the increase in projects expected to come online before the end of 2022, as well as reductions to a few states, including New Jersey and New York.
The forecasts do not incorporate any impacts from the ITC or PTC adders. The adders provide upside to the outlook, with commercial solar growing at an average annual rate of 7% through 2027. While there are still many challenges to commercial solar project execution, the IRA tailwinds should help sustain modest growth.
Community solar PV
Community solar installations declined in Q3 2022 for the second consecutive quarter. Low installation volumes in three key states—Maine, Massachusetts, and Maryland— contributed to most of the national decline. Interconnection backlogs and siting constraints continue to be the major obstacles hindering growth in these states.
Additionally, the last several quarters of nation-wide supply chain constraints are extending project timelines into 2023 and beyond, limiting near-term installations. Despite these challenges, the expectations for community solar in 2022 have increased by 8% compared to our previous outlook. This increase is driven primarily by significant growth in New York. The project pipeline in the state continues to come online at a very healthy pace, and increases the forecast for 2022 by 21% compared to the previous outlook.
Beginning this quarter, a community solar forecast has been added for California due to the passage of legislation requiring a state-wide community solar program. Although policy makers have not finalized many details of the program, its estimated that it will result in an additional 570 MWdc between 2024 and 2027.
Supply chain issues continued to constrain utility-scale deployments in Q3 2022. 2.5 GWdc were installed during the third quarter, bringing the 2022 total to 7.4 GWdc – barely two- thirds of the volume installed at this time last year. Another 4.5 GWdc of newly contracted capacity was signed this quarter, the majority of which will come online between 2024- 2025. This brings the total pipeline to 90 GWdc, a slight increase compared to last quarter.
There are currently 30 GWdc of projects under construction, though module shipment delays are stalling progress. Industry players are cautiously optimistic as they begin to navigate newly available tax credit adders and financing options included in the IRA. Due to uncertainty around specific adder requirements, Wood Mackenzie assumes that utility-scale projects will earn the 30% ITC or the $26/MWh PTC, with most opting for the latter. The IRA’s impacts are not expected to fully materialize until 2024-2025, while the near-term pipeline remains vulnerable to delays and cancellations.
The complete summary report can be accessed here