Renewable Energy

The Solar Sector Faces Supply Chain Issues Head-On

Demand for solar power has never been stronger.

Last year broke records for renewable energy. There are now more than 100 gigawatts of solar arrays generating pollution-free power in the U.S.

And more than half of this capacity – 63% – is utility-scale. These massive installations should see double-digit growth for years to come.

Additionally, almost 18 gigawatts of new utility-scale solar will come online this year. That’s 26% more than last year. Many companies and utilities are scrambling to decarbonize. And solar arrays are a quick, inexpensive way to do so.

But utility-scale solar isn’t renewable energy’s only growth area. Residential and commercial solar also had big first quarters. Florida, Arizona and Texas all saw record installations.

So it’s no question that solar has a bright future (pun intended).

But the industry is no stranger to obstacles getting in the way of its success…

A Fly in the Ointment

As most of us are painfully aware, the pandemic has affected global supply chains. And solar hasn’t escaped that problem.

Solar cells are made from polysilicon. They are kind of like huge semiconductor chips. Groups of cells are arranged in a rectangular format, connected in an electric circuit and sandwiched in a sheet of glass. Steel or aluminum frames are added for ease of handling and installation.

Those are the essential elements in a solar panel (often called a “module”). They’re all becoming harder to get and more expensive.

Solar module prices had been in decline for decades. But during the first quarter of 2021, prices started to rise.

So far, those price increases haven’t affected home installations. However, solar-plus-storage systems are seeing residential battery shortages. That’s causing monthslong delays.

Unlike home systems, utility-scale arrays are much more price-sensitive.

These rising prices are putting developers who won bids for utility-scale projects between a rock and a hard place. With profit margins squeezed, some are renegotiating start-up dates and power purchase agreements.

Like solar module prices, power purchase agreement prices have also started to rise. They rose an average of 2.6% between the fourth quarter of 2020 and the first quarter of 2021. During the second quarter, though, prices eased slightly, rising just 0.3%.

Roughly 73% of solar developers surveyed said they plan to increase power purchase agreement pricing. And it’s all because of more expensive solar modules.

The third quarter could see even higher power purchase agreement prices if module prices continue to increase. But even higher costs won’t stop the pace of utility-scale development.

And commercial projects, such as roofs and carports, are getting hit with a double whammy. On top of rising module prices, commercial solar developers are also seeing rising steel prices, adding a further hurdle.

Decadeslong Investment

In spite of the challenging supply chain dynamics, all solar projects will continue to be installed at record rates. And they should have plenty of momentum.

Just yesterday, a bipartisan $1 trillion infrastructure bill cleared the Senate. Now it goes back to the House of Representatives to be approved.

Additionally, President Biden has already publicly committed to the U.S. having a carbon pollution-free energy sector by 2035.

To do that, annual solar installations will have to hit 50 gigawatts. That’s a big jump from where we are today.

The supply chain tide is already shifting. And new suppliers are emerging to fill the gaps.

Solar is a decadeslong investment that will pay off handsomely. Smart investors will have heavy exposure to this sector in their portfolios.

Good investing,

Dave

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