While the Inflation Reduction Act will likely stimulate the renewable energy industry, its impacts are yet to be seen and North American solar and wind power purchase agreement prices continue to rise at a significant clip, according to LevelTen Energy.
LevelTen released its third quarter analysis of the power purchase agreement (PPA) market and finds prices have increased 9.6% and are up 34% from the same period in 2021. The renewable energy company says it continues a steady rise that began in 2020 with supply chain issues and remains impacted by regulatory, economic, and permitting challenges that have resulted in an imbalance between PPA supply and demand.
Still, the implementation of the Inflation Reduction Act (IRA) is seen as a potential positive that will give an additional boost to the renewable energy industry. LevelTen says those development challenges will remain, which could keep PPA prices high.
Gia Clark, senior director of developer services for LevelTen, says three impacts remain for the PPA market while IRA incentives get off the ground. The first is supply chain constraints that will stall buildouts will remain and it will take time for incentives from the legislation to boost renewable production. The second is development costs, including the price of products and current inflation. Finally, demand will remain strong from corporations and utilities, increasing competition for limited renewable capacity.
The IRA was passed in August and includes nearly $370 billion in energy incentives. Included in the bill are tax credits and other benefits to encourage domestic manufacturing and commercial deployment of renewable energy sources, including wind and solar power, over the next 10 years.
The goal of the legislation is to increase areas like solar production in the country. While solar shipments increased by 33% in 2020, according to a report from the Center for Strategic and International Studies, 89% of them were imported, most of them from Southeast Asia.
Overall, American Clean Power estimates the IRA could more than triple annual wind, solar, and energy storage installations by 2030.
LevelTen surveyed developers for its third-quarter report and nearly two-thirds say it’s too soon to determine the IRA’s pricing impact. One-third of the respondents say PPA prices have not been impacted at this point by the IRA.
The report evaluates prices and trends in the PPA market from six US independent system operator markets, including those from California, Texas, and New York, and one from Canada. The report data is produced from PPA price offers uploaded to the LevelTen Energy Marketplace.
Solar prices are up 7.5% to $42.21 per megawatt-hour, according to the report, while wind prices in the third quarter are up 11.4% to 49.66 per MWh. The year-over-year blended market price is up $11.66 per MWh.
LevelTen says supply chain issues are a significant cause of price increases, and that one key solar panel input called polysilicon is seeing its highest price in 10 years. That is due to high demand, low supply, and a US ban on the product from Xinjiang Province in China. According to the Solar Energy Industries Association, supply chain constraints have resulted in utility-scale solar installation costs increasing almost 13% since last year.
Weather events such as extreme heat in Texas have likely contributed to higher prices there. ERCOT saw a 20% increase in solar and wind PPA prices in the state, according to the report.
LevelTen says wind prices were steeper than usual in part because of transmission limitations for operators like Midcontinent Independent System Operator, which serves 15 states and parts of Canada. The ISO approved 18 new transmission lines which will add 53 gigawatts of capacity but could impact neighboring operators and take more than six years before they become operational. That could limit additional renewable capacity in the region until then, LevelTen says.
Even with these impacts and rising prices, LevelTen says PPAs should continue to hold value.
“The IRA will fuel investment in renewable energy and provide developers with additional revenue that could blunt the impact of rising costs, but it’s going to take time to see how that impacts PPA prices,” says Clark.