INTERVIEW: Developers weigh in on 2023 DG trends and provide a glimpse into 2024

The distributed generation space saw major advancements in 2023, including increased incentives to build community solar and C&I solar projects at both the local and federal level, under the Inflation Reduction Act. Still certain Midwestern states failed to pass community solar legislation, despite efforts to do so, while California failed to implement a community solar program despite passing legislation.

While 2024 brings renewed optimism that those states will advance, it has not stopped the march of progress in different technologies such as agrivoltaics which is forecasted to trend upward in 2024, according to several developers interviewed by NPM.

There was a major focus on energy equity as community solar programs in New Jersey, Minnesota and other states increased incentives to develop projects in low-to-moderate income (LMI) communities, when paired with tax credit adders in the Inflation Reduction Act (IRA) made it viable to increase development in these areas.

“With specific incentives for developing community solar in underserved communities, the IRA has helped push developers towards a greater focus on energy equity," said UGE International CEO Nick Blitterswyk.

"Incentives for building energy communities are similarly shaping siting priorities. Brownfields, which qualify as energy communities and are disproportionately located in low-income communities, often meet the requirements for both sets of incentives, and as such we anticipate a greater emphasis on brownfield solar development in the coming year," Blitterswyk added.

There still needs to be a lot of work done, though, as people figure out the exact rules for the Investment Tax Credit (ITC) and its adders, added Eric Paul, Vice President of Partner Development at Nautilus Solar.

"Many folks will be disappointed in getting the economic benefit (LMI) ITC adder," Paul predicted.

Paul also noted that module costs have started to decline but labors costs remain high offsetting the module costs declines.

"IRA requires prevailing wage on all projects and some markets going beyond that with equity requirements such as Illinois," Paul said. "We'd expect cost of labor to remain high."

Green Lantern Solar president, Scott Buckley also wonders if tax equity could serve as a bottleneck in long term project deployment.

“Will tax equity credits price compress, and thus become less valuable to the project, because there are more market participants looking for tax equity than there is tax equity available? I hope the transferability and direct pay provisions under the IRA will expand the tax equity market beyond the traditional stalwart, the banks. The IRA should increase tax equity supply and soak up project demand so tax credit costs are minimized," Buckley said.

The good news is that the IRA allows for credit stacking, previously not available, so projects can see upwards of 50 percent or more of ITCs. An additional 20 percent of ITCs increases the value to the investor and developer, allowing projects to pencil that before would have been cancelled.

On the financing side, Buckley said interest rates remained at a 22 year high, but the fed is signaling a 75bps decrease in 2024.

“The speed of the rate increase hit our industry particularly hard,” Buckley said, adding that in many cases about 50 percent of the capital stack in traditional tax equity financing is permanent debt. The industry, like others, experienced a cost doubling on 50 percent of the cap stack as compared to 18 months ago.

“There wasn’t a compensatory increase in PPA rates, so a good number of projects across the US no longer penciled,” Buckley said. “In fact, some of our core markets had a 35 percent decrease in PPA rates going into 2024, and you can imagine what happens to project economics given inverted cost and revenue drivers.”

2024

Looking to the new year, Blitterswyk anticipates that states like Michigan, Ohio, and Pennsylvania will finalize community solar legislation and implement.

Dan O'Brien, Vice President of Direct Origination, DSD Renewables (DSD) predicts the corporate space will focus further on projects in which they can receive sustainability benefits, and likewise look to deploy projects that they can claim additionality from those benefits.

"Those already sophisticated corporates will further look to find projects and methodology that will help them meet the “community” pillar of their sustainability goals," O'Brien said.

"From a financing perspective, the market continues to look for bespoke deal structures that allow a customer to capture the value that is most meaningful to them – energy security, energy hedging, receipt of sustainability benefits, ITC tax transfer, or combinations of multiple," O'Brien said.

Industry experts also expect a surge in parking lot canopies and agrivoltaic projects to continue, with certain caveats.

’Structurally sound, large rooftops near load continue to be highly sought after despite the complexities of leasing and building those arrays,” added Green Lantern’s VP of Development and Chief Legal Officer Dave Carpenter.

Agrivoltaic projects, being developed by the likes of BlueWave, Alliant Energy, Lightstar Renewables and others, was a common trend in 2023 that will likely continue into 2024, however many of them wish to see the year bring a clearer definition of the term and convey how the projects should be incentivized.

“Is it only crops or grazing? Is it ecosystem benefits like pollinator plantings? Will there be scaled incentives? These federal decisions will likely be mirrored in many state policies,” said Carpenter, who would also like to see an increase in states allowing dual-use taxation, whereby the real property under an agrivoltaics project is permitted to retain favorable agricultural tax treatment.

“We will continue to see friction at the intersection of agriculture and renewables, and my hope is that the issues surrounding utility-scale projects requiring thousands of acres will not be reflected in DG-scale deployments of a few dozen acres,” Carpenter said. “Developers will need to be thoughtful in their approaches and sensitive to local concerns, but I continue to believe that common sense will prevail.”

“Agrivoltaics is still more hype than reality,” said Nautilus Solar's Paul, adding that, “Not all systems are created equal. There are definitely some projects that are doing sheep grazing and/or pollinators but does that really count? All depends on program rules. There is no clear definition of exactly what counts as agrivoltaics."

*This story was originally published exclusively for NPM subscribers last month.


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