Photo credit: John Macdougall / AFP via Getty Images)
A new analysis from investment bank Carbon Reduction Capital reveals that the market cost of energy rose during the second half of 2023.
The report measured the cost of energy in dollars per megawatt in the first year of utility-scale purchase agreements that bundle energy, capacity, and renewable energy credits. (The analysis accounts for a 4% increase in capital expenses and assumes higher tax equity return requirements across the board, compared to the first half of 2023.)
The offtake rate for solar investment tax credit projects increased over the first half of 2023 by between 4% (in the Southeast) and 10% (in the Southwest and MISO). For solar production tax credit projects, which make up a much smaller proportion of the market, energy prices increased by up to 14% (in California, the Southwest, and MISO).
However, while the price per megawatt for clean energy was up across the board at the end of last year, the wind sector’s very bad year pushed up the average. Wind prices increased by up to 21% in the Southwest and Texas.
PPA prices for solar are expected to come down over the next few years — and particularly in the Southeast — as inflation and interest rates stabilize, CAPEX costs come down, and battery attachment rates rise.
But there’s another key element: the Inflation Reduction Act.
The report found that tax credit adders — additional incentives the IRA allows to be added to investment tax and production tax credits, such as a “domestic content” bonus — could bring down energy prices for all sectors.
A 10% adder, for example, has the potential to decrease PPA price by up to 16%, with solar ITC standing to benefit the most. In California, that would result in a PPA price reduction of $7.53 per megawatt.
While CRC forecasts that tax equity will hold relatively steady in the longer-term, an increase in debt financing could force the industry to reckon with the potential to lose mid-stage companies in the so-called “valley of death.”
The name CRC-IB represents the rebrand of CohnReznick Capital, a long-time player in renewable energy investment. When the company announced the change last November, partner and senior managing director Nick Knapp said it marks a pivot in strategy.
“As the broader industry has hit an inflection point, evolving beyond pure-play renewables to embrace emerging carbon reduction sectors, so too have we as a firm,” he said.