After a decade of dramatic ups and downs, 2020 was supposed to be a peak year for U.S. wind farm construction. Instead, with the coronavirus pandemic rattling supply chains and thinning workforces, things could get messy for an industry that should be taking a victory lap.
Developers are poring over force majeure provisions in their contracts. Investors are nervous. Without political relief, projects could get canceled outright, industry figures say — and relief in Washington, D.C. looks anything but certain.
Every industry has been affected by the outbreak and its economic shock. The special problem for the American renewables market is its attachment to the wind and solar tax credits, which come with project deadlines. In the grand scheme, it shouldn’t matter whether a wind farm that will operate for decades is finished in December or a few weeks later. In the U.S. market, it’s often a make-or-break distinction.
The solar sector faces its own coronavirus challenges, most immediately in the residential rooftop market, which relies on close human interaction. But the wind industry — which recently surpassed hydroelectric plants as the nation’s leading source of renewable power — may be in an especially tough spot because of the way its tax-credit incentives are scheduled.
Developers that qualified wind projects for the full federal Production Tax Credit (PTC) back in 2016 are supposed to finish construction this year. As a result, the market was expected to notch record installations in 2020 — perhaps 15 gigawatts or more, up from around 9 gigawatts last year — straining the supply chain to its limits as hard-hatted laborers swing cranes across the Central Plains.
More than 20 gigawatts' worth of wind farms are under construction across the U.S., according to the American Wind Energy Association, including 6 gigawatts in Texas alone — many with contracts to sell clean power to corporations such as Facebook, McDonald’s and ExxonMobil.
The PTC deadline has not changed, and offtakers are still expecting their power to begin to be delivered on time. But the reality of building big projects of any kind has shifted with nauseating speed.
Some equipment deliveries have been delayed; this week saw turbine maker Siemens Gamesa confirming plans to furlough factory workers in the Midwest, while rival Vestas pulled its 2020 financial guidance. Permitting is taking longer in some places as government offices clear out. Even where workers are considered “essential,” keeping construction sites fully staffed is no sure thing.
Just a month ago, many developers were still busy flying across the country. “Every day almost feels like a week,” said Chris LeWand, co-leader of the clean energy practice at FTI Consulting, a financial advisory firm involved with several U.S. wind projects under construction.
“We’re moving toward the PTC cliff, and there were already bottlenecks in the supply chain that were creating problems,” LeWand told GTM. “There’s no doubt that if this continues for months, there are projects that will be canceled because they won’t be able to preserve their tax credits.”
Cascading force majeure effects
What started with a few force majeure notices from wind turbine suppliers due to manufacturing disruptions in China has coalesced into an industrywide pool of uncertainty about what happens — and who gets blamed — if projects are delayed.
Force majeure provisions are common in contracts and give companies legal wiggle room if they are delayed by unforeseen circumstances. When used, the details are usually very specific, explained Ashley Wald, a partner at law firm Holland & Hart, who represents clients in the renewables field. “Here’s what happened; here’s why we’re going to be delayed; and here’s how we’re trying to mitigate it.”
“The problem now is people are sending out notices because they know they have to, but no one can offer any specifics. So we’re in a little bit of a limbo,” Wald said in an interview.
Joshua Pearson, associate general counsel at EDF Renewables North America, said turbine suppliers' force majeure notifications are “typically speculative.”
“They’ll say…'[COVID-19] is a pandemic, it could affect our delivery timelines, we’ll get back to you when we have more details.’”
“Being prudent on our side, what that leads us to do is then tell our [balance-of-plant] contractor, ‘Hey, we got this notice, and this schedule delay on components could affect the timeline on the construction contract,’” Pearson said recently on a webinar organized by law firm K&L Gates.
“Similarly, we think about our offtakers and our guaranteed [commercial operation dates] under a power-purchase agreement, and what potential impacts force majeure could have there," Pearson said. "Construction financing agreements are potentially impacted.”
Despite the potential financial implications of delayed projects, developers want to maintain good relationships with their suppliers in an ever-consolidating industry. “It’s in all our best interests to come up with solutions to these problems,” Pearson said.
Everyone is sympathetic to COVID-19’s disruptions, Wald said. “This is not a scenario where people are saying, ‘No, we don’t believe it’ — everyone gets how real this is.” Still, developers have deadlines to answer to, and power offtakers like utilities may have their own clean-energy mandates to meet.
“Where the rubber meets the road is going to be in a couple of months’ time," Wald said, if behind-schedule projects result in "delayed milestones and delayed commercial operation."
All eyes on Washington, D.C.
There’s still room for optimism, as nearly everyone in the industry points out.
At this point, most supply-chain delays are no longer than a month or so, said Jeremy Tchou, director of due diligence services for North American renewables at UL, a certification body. For most wind projects, that’s manageable “without too much heartache,” Tchou said on the K&L Gates webinar.
Helpfully, the wind market is concentrated in the country’s vast central region, where the impact of the coronavirus has so far been relatively modest. Big oil-producing states like Texas face a sharp economic downturn, giving them all the more reason to protect their wind jobs.
2020 still looks likely to be the high-water mark for U.S. wind farm construction (previous record: 13 gigawatts, set in 2012). Meanwhile, the renewables industry is taking no chances: Having been shut out of the $2.2 trillion stimulus package passed in late March, wind and solar groups are pushing for relief in any “phase-four” stimulus package.
But if it's not a time for panic, it's certainly a time of "nervousness," FTI's LeWand said. Despite recent signs that the outbreak may be peaking in some places, it is far from contained, and the potential economic damage is only just coming into view.
Project construction may continue "but there's absolutely disruption," LeWand said.
As ever for an industry that still marches to the beat of federal subsidies, many of the wind market's immediate concerns could be alleviated by action in Washington, D.C. Congress could pass legislation extending the renewable tax credits; tax officials could issue clear guidance deeming coronavirus an "excusable disruption" for projects missing deadlines.
So far, however, such guidance has not been forthcoming. And the current political tea leaves do not make for reassuring reading.
After initial Republican reluctance, leaders in both political parties and the White House now appear open to another big stimulus package, offering the renewables industry another chance at legislative relief. But in recent days, Speaker of the House Nancy Pelosi has backed away from insisting that any new stimulus bill include broader Democratic priorities like an infrastructure plan, smoothing the path toward common ground with Republicans.
In the meantime, the clock is ticking. Congress is not set to return to work until April 20. Political analysts say that if a narrowly focused "phase-four" stimulus bill passes, it's likely to happen sometime between late April and mid-May.
"The problem is, the longer they go without granting relief, the more everyone has to assume it's not coming," said Wald of Holland & Hart.
"The later it happens, the less help it will actually be," she said.