LOS ANGELES, July 19 (Reuters) - America’s biggest solar power developers are stockpiling panels to lock in a 30% federal tax credit set to start phasing out next year, a strategy that could backfire if projects do not materialize or panel prices slide substantially.
Duke Energy, 8minute Solar Energy and Shell-backed Silicon Ranch are among those working to claim the full subsidy, which is available to firms that either start construction or spend 5% of a project’s capital cost by the end of 2019. Consumers who purchase residential solar this year are eligible for the full tax credit, but the rules that allow the subsidy to be locked in now for systems installed much later apply only to companies.
North Carolina-based Duke, for example, plans to claim the maximum credit on as much as 2 gigawatts worth of panels. That is enough to power 380,000 homes, even though some of those projects might not go online for years.
Clean-energy mandates in many states and a push by companies to go green have given Duke confidence it can recoup its investment, said Chris Fallon, vice president of the company's renewable energy arm.
"We know there will be customers out there, we just don't know who those customers are yet," Fallon said.
China's Trina Solar estimated about 20% of current U.S. demand for solar panels is being fueled by tax considerations. That heavy up-front spending has been good news for global panel manufacturers, including Trina, which is sold out through the first quarter of next year.
Consultancy Wood Mackenzie projects developers will “safe harbor” roughly 31.2 gigawatts of U.S. solar installations, representing nearly $30 billion of investment in coming years to maximize their tax credits.
The strategy carries risks.
Installers could get stuck with inventory if U.S. solar demand weakens or if current technologies rapidly become outdated.
They are also paying a premium for panels amid the rush to beat the year-end tax-credit deadline. Modules prices are up by more than 10% from earlier in the year, according to Wood Mackenzie.
It is a major departure for an industry that has seen steady declines in panel prices, thanks to improvements in efficiency and low-cost Asian imports.
(For a graphic on solar-panel prices, see: tmsnrt.rs/2SgfxfR )
"There is a definite risk" but it is "still worth doing," said Tom Buttgenbach, chief executive of Los Angeles-based 8minute Solar, which builds large solar power plants in the southwestern United Sates.
The phase-out of the Investment Tax Credit is a major change for an industry that has relied on it to fuel growth. Since the tax credit was implemented in 2006, U.S. solar installations have expanded by more than 50% a year, according to the Solar Energy Industries Association.
Falling costs have enabled solar to compete with fossil fuel-generated power. The solar industry trade group this week kicked off a lobbying push to preserve the ITC with a letter to Congress. Democratic lawmakers in both the House and Senate support extending the subsidy.
But an extension is opposed by Chuck Grassley, the Republican chairman of the Senate Finance Committee, which oversees tax issues. A longtime supporter of credits for both wind and solar, Grassley promised subsidy critics in 2015 - the last time it was extended - that there would be no repeat. The extension would need Republican support to pass.
If allowed to sunset, the tax credit would drop to 26% in 2020, with an annual step-down until 2022. It would then settle at a permanent 10% for utility and commercial projects and be eliminated for residential systems.
"The message really is 'act now,'" said TJ Kanczuzewski, CEO of Inovateus Solar. Based in South Bend, Indiana, the solar developer expects to safe harbor 15 projects this year.
8minute Solar plans to build 6 gigawatts of projects in the United States over the next five years, all while maximizing tax benefits. Its 200 MW Eland solar and battery project in Southern California, for instance, is not slated to begin operating until 2023. But the company began building a substation for the project this year for an undisclosed price, allowing it to claim the 30% tax credit.
CEO Buttgenbach said even a modest decline in the ITC to 26% next year makes a huge difference.
"In terms of project economics it's equivalent to the entire profit margin," he said.
Silicon Ranch, a Nashville, Tennessee-based developer, is taking a cautious approach, accumulating panels only for projects for which it has signed contracts. As a result, “we perceive the risk to be extremely low," CEO Reagan Farr said.
Residential solar company SunPower Corp has said it will hoard at least 200 MW of panels this year, enough for more than 25,000 homes.
The safe-harbor practice does not apply to the federal tax credit for residential projects, which also begins to step down next year and expires completely in 2022. But homeowners who decide to lease a solar system, rather than own it themselves, could benefit indirectly if the owner of the panels has locked in a higher tax credit than they might qualify for by owning the project outright.
The stockpiling has been a boon for panel makers.
Trina, one of the world's largest manufacturers, is sold out through the first quarter of 2020, according to Steven Zhu, head of the company's operations in the Americas.
Rival First Solar Inc said on a conference call with analysts in May that its supplies were completely committed through the end of 2020, prompting the U.S. panel maker to consider extending production of a panel technology it had been planning to phase out.
Some industry veterans expect panel demand to cool in 2020 following this year's tax-driven buying frenzy, while planned expansions by several manufacturers should help boost supply.
For now, panel makers are enjoying their seller's market, a rare ocurrence in an industry accustomed to sliding prices and razor-thin margins.
First Solar CEO Mark Widmar expressed optimism on the May call, along with a reminder that the unique conditions now benefitting the industry are temporary.
“As we look across the horizon, we feel very comfortable," Widmar said. "But we know this will continue to be a very challenging and demanding market.”
Reporting by Nichola Groom; Editing by Richard Valdmanis and Marla Dickerson