Business is booming at the New Mexico Solar Group, which enjoyed double-digit expansion in system installations and company revenue over the past two years, despite the pandemic.
The firm’s workload grew so much since 2020 that the company moved from an 8,000-square-foot facility in Rio Rancho to a new, 16,000-square-foot headquarters in Albuquerque in February, said Nick Kadlec, president and CEO of the statewide installation firm, which also has satellite offices in Roswell, Alamogordo, Las Cruces and El Paso.
“We moved into the Rio Rancho facility in February 2020, but we rapidly outgrew that space,” Kadlec told the Journal. “We managed alright there during the pandemic, because many employees worked from home. But when people started coming back last spring, it got really cramped.”
The company’s new digs in the north Interstate 25 industrial corridor will help NM Solar better manage future growth. But its business expansion could slow significantly this year, and possibly beyond, thanks to an array of market issues that are clouding the industry’s short- and medium-term outlook in New Mexico and nationwide, Kadlec said.
Like most economic sectors, pandemic-induced supply chain problems and record inflation are hammering the industry, significantly raising prices for solar systems and forcing many larger-scale utility and commercial projects to postpone development, or even cancel plans. And, with President Joe Biden’s “Build Back Better” legislation now stalled in Congress, uncertainty reigns over clean-energy tax incentives included in the bill, which could mean the 26% federal solar tax credit now in effect could start ratcheting down again, to 22% next year and 10% in 2024, before disappearing altogether in 2025.
That would deal a significant blow to all solar companies.
“That would impact us a lot,” Kadlec said. “If we had certainty that the federal tax credit would continue as is, we’d look at expanding a lot more into new markets. But we don’t know what will happen, so we’re only planning to continue within our existing markets without aggressively pursuing new ones to not overextend ourselves.”
Like NM Solar, companies across the state and nation are facing the same industry ups and downs, with outstanding growth as demand for solar generation expands, but significant uncertainty going forward given today’s market challenges.
During the pandemic, the industry in general reported nonstop record expansion. Solar developers installed a total of 23.6 gigawatts of residential, commercial and utility-scale systems nationwide in 2021. That’s an all-time high, up 19% from the 19.2 GW installed in 2020, according to the national Solar Energy Industries Association annual report, released in March.
But the rate of growth last year slowed significantly compared with 2020, when total solar installations grew by 43% compared with 2019.
The slower growth reflects supply-chain problems and inflation that began pounding the industry in spring 2021, according to the SEIA. Utility-scale solar projects were hit hardest, with prices overall for that sector increasing by 18% in 2021 – the first such price hike since solar deployment began accelerating more than a decade ago.
The industry did install 17 GW of utility-scale solar in 2021, an annual installation record that’s more than double the level of utility-scale development reported before the pandemic. But that’s about 3 GW less than the SEIA had projected to come online last year, reflecting project postponements and cancellations due to supply-chain and inflation issues.
And with those challenges expected to persist well into 2023, the SEIA has scaled back its growth estimates for this year. It projects utility solar installation expansion to fall by 14% in 2022, and overall installations for utility, commercial and residential sectors combined to decline 11% compared with previous projections.
To be sure, growth is expected to continue in nearly all sectors, but at decreasing rates. Residential installations, for example – which grew by a record 30% last year, reaching a half million new home rooftop systems – are expected to expand by only 13% this year, according to SEIA.
And while supply-chain problems and inflation will eventually subside, uncertainty over the future of today’s federal tax incentives casts a long shadow over industry growth from 2023 onward.
Under Build Back Better, today’s 26% solar investment tax credit, or ITC, would ramp back up to 30% – where it was in 2019 before ratcheting down in 2020 – and then extended out for a decade. It would also be converted from a credit, which goes back to solar developers on their tax bills after completing installations, into a refundable rebate that developers could immediately receive when they finish projects, providing more financial stability.
In addition, the legislation would create a new tax incentive for battery storage systems.
Without the ITC extension, total installed solar capacity in the U.S. is expected to climb from 120 GW today to 464 GW by 2032, according to SEIA. But with the proposed 10-year extension under Build Back Better, growth would accelerate, reaching about 700 GW by 2032.
Still, while Biden’s overall $2 trillion spending request contained in the Build Back Better legislation appears doomed – given staunch Republican opposition and upcoming mid-term elections – the bill’s $550 billion allocation for clean-energy initiatives could still move forward even if Republicans regain control over Congress in the fall. That’s because there is some bipartisan support for the energy investments, including solar and other tax incentives.
Indeed, when the 30% ITC ratcheted down to 26% in 2020, it was supposed to keep declining to zero by 2023. But before Biden took office in December 2020, a bipartisan majority froze the decline for two years, starting in January 2021.
Now, local industry leaders remain cautiously optimistic.
“I was disappointed to see the legislation stall in the Senate,” said Ryan Centerwall, CEO of Albuquerque-based Affordable Solar, the state’s largest installation company. “But I’m hopeful that some provisions can still come back later this year.”
Given the uncertainty, NM Solar is planning a more conservative approach to business expansion going forward. But the ITC extension is still very possible, Kadlec said.
“The climate provisions in Build Back Better have the most support versus others things in the legislation,” Kadlec said. “I don’t see a lot of opposition. I’m somewhat optimistic that something will get passed.”
Even without the ITC extension, state incentives for solar development will help buffer the impact on local industry. In 2020, the State Legislature reinstated a 10% tax credit for solar installations, which had expired in 2016. And in this year’s session, lawmakers expanded the incentive, raising the annual cap on state spending for the credit from $8 million to $12 million.
The Legislature also converted the credit into a refundable rebate, which will allow lower-income homeowners without tax liabilities to take advantage of it.
“That’s a big perk,” Kadlec said. “By making it refundable, a lot more people will be eligible.”
For now, most companies are focused on managing supply-chain challenges and inflation, which could take a significant bite out of industry growth this year.
Over the past two years, NM Solar reported robust revenue expansion, climbing 42% between 2019 and 2020 – from $19 million to $27 million – and another 29% in 2021 to $35 million. But this year, Kadlec projects $40 million in revenue, or just 14% growth.
“We’ve seen a lot of costs go up, although so far we’ve been able to keep from changing our customer prices,” Kadlec said. “But our margins have gotten smaller, and it’s impacted our gross profit. I’m anticipating prices will come back down, but it could take time.”
Affordable CEO Centerwall said 2021 was the most challenging year he’s seen in the solar industry, primarily because of supply-chain problems.
“We saw supply problems and price shortages for everything from solar panels and components to materials like wire,” Centerwall told the Journal. “All of that led to the first increase in prices for installed solar systems in industry history.”
As a result, companies are struggling to meet growing demand.
“There are thousands of components from all over the world that go into large solar projects, so supply and shipping delays stall projects, and then they start stacking up,” Centerwall said. “Many projects planned for 2021 have been postponed out to later this year and into 2023.”
It takes up to 30 extra days now to receive most needed components, and twice that to get basic things like piping or electrical materials, said Adam Harper, CEO of Albuquerque-based OE Solar. That’s because the construction industry in general is fighting over access to basic supplies.
“We don’t anticipate any supply-chain relief for at least another 12 to 18 months,” Harper told the Journal.
Labor shortages have also impacted companies. Santa Fe-based Positive Solar, which employs about 100 people in New Mexico, has had to recruit from out of state, said company founder and CEO Taiyoko Sadewic.
“We’ve had difficulty hiring locally, so we’ve had to compensate by contracting remote workers,” Sadewic told the Journal. “We’ve also spent more on internal training to skill-up employees.”
Still, like other companies, Positive Solar has continued to grow, expanding by 15% to 20% annually despite the challenges. That reflects growing demand at all levels for solar generation.
“We have lots of challenges, and we’ll face more ahead, but the industry is kind of unstoppable,” Sadewic said.
Indeed, given solar’s growing popularity, most companies remain optimistic about the future.
“Solar has kind of a contagion effect,” Kadlec said. “It’s become much more common, and as people see it on the homes of friends and neighbors, they become more confident about going solar themselves. There’s still a lot of market demand to tap into.”