Ep. 5: Sylvia Leyva Martinez, of Wood Mackenzie, on the challenges and complexities of the solar industry’s current astronomical growth

SEASON 1 EPISODE 5

[INTRODUCTION]

[0:00:07] ANNOUNCER: This is Financial Climate. Can innovations in finance help the world decarbonize? How can trillions of dollars of assets be redirected to catalyze a net zero economy? We explore these questions through conversations with innovators, experts and investors from around the world. Here's your host, Alex Roth.

[OVERVIEW]

[0:00:34] AR: Most people understand that solar energy has to be a critical part of any plan to decarbonize our economy. But as recently as 10 or 15 years ago, the percentage of American electricity generated from solar power was basically a rounding error away from zero. Since then, solar has been increasing from that low level at an astronomical rate. We've also seen a jaw dropping reduction in its cost. That's part of why it's a no-brainer that solar panels should and will continue to proliferate rapidly.

The problem is that the explosion in solar deployment is happening in the real world and the real world is complicated. We have to find places to put the solar panels and get permits to install them, we have to finance them, which often involves the use of tax credits and complicated financing structures. We have to integrate new solar installations with the existing power grid. Solar modules require a lot of raw materials and they depend on manufacturing by foreign companies on the other side of the world. So I was looking for ways to see beyond the obvious need for more solar power to better understand what constrains its expansion in the real world. 

Sylvia Leyva Martinez is someone who lives and breathes this stuff every day. She's an expert on utility scale solar at the global energy consulting and data firm, Wood Mackenzie. I sat down with her to learn about the opportunities and challenges of the transformative changes occurring so quickly and with such urgency in this industry. Here's our conversation.

[INTERVIEW]

[0:02:12] AR: Sylvia Leyva Martinez, welcome to Financial Climate.

[0:02:16] SLM: Thank you. I'm thrilled to be here. Thank you so much for the invitation, Alex.

[0:02:20] AR: For people who are unfamiliar with Wood Mackenzie and what it does. Can you just explain basically what Wood Mackenzie is and what is your role there?

[0:02:28] SLM: Yeah, sure. Wood Mackenzie is a global firm focused on energy research and consulting. We cover both traditional energy like oil, and gas, coal, but also with the acquisition of MAKE, Genscape and DTM, we have expanded to power and renewables. I'm actually part of the solar research team in the Americas. But we have offices all across the globe. So we cover everything energy related. I would just like to disclaim that all the opinions that I express here are my own, so I'm not representing WoodMac or Verisk.

[0:03:05] AR: Even listeners who aren't very involved with the solar industry understand that over the last 25 years, the cost of solar has dropped very far and very fast. At the same time, the amount of solar power and use has increased enormously. So can you just tell us a little bit about what has caused the transformation of the industry over that last 25 years plus or minus?

[0:03:26] SLM: Sure. I think the first thing that has affected is all the technological advancements that have happened, particularly on the solar module space, and that has driven to decrease the total cost of the project and also increase the output of that same panel. So a single panel, 20 years ago, I don't know, the maximum amount, but I'll say something random, like 100 watts per module, and now that has tripled. So that definitely helps with project economics. And in general, lower costs that is making solar even more competitive than traditional sources, such as gas or coal. That's the first thing and the main driver.

The second thing is in general, more awareness of everything related to climate change, emissions. We have seen more and more corporate off takers, more utilities that are setting these very ambitious and very high-carbon emissions reduction targets. So yeah, like that. It's driving a lot of the investment, particularly in the US, and we're also seeing that same trend in Europe. Like this transition towards less emitting technologies that in general is driving higher buildup of solar.

[0:04:38] AR: Yeah, very interesting. What about just the scale of manufacturing and lowering of per unit cost of manufacturing? Has that played a role as well or not some much compared to those others that you mentioned?

[0:04:47] SLM: Yeah. Actually, I think that's the root cause of the higher efficiencies and lower costs, because there is definitely an economies of scale factor in the manufacturing aspect. And actually, we have seen that most of the capacity is focusing in China, although most of the imports targeted towards the US come from Southeast Asia, but still, like the production of modules is heavily concentrated in that region. Not only the modules, but also all the – we call it upstream components. So all the elements that are needed to build those modules.

[0:05:20] AR: I see. You are particularly involved quite a bit in utility scale solar. So can you just generally define what do you mean, when you say utility scale solar? And help us to visualize maybe a typical project in terms of what would be its range in terms of size, in terms of power output, cost, land area, just to kind of get a visual idea of what that would be like.

[0:05:41] SLM: Yeah, sure. You have two broad definitions on the project, depending on where these things are connected to and where the load is located. Typically, utility scale are the large solar assets that you can see on fields. In-house, at Wood Mac, our definition, is any installation that is connected front of the meter, so that is not collocated with load, and that is a pure generator connected to the grid, and is just injecting that power into the grid. The other definition is distributed generation. I know that different people have different definitions of that, but how we consider it is everything that is DG is located on the side of the load, so that's behind the meter. 

In broad terms, I think, typically, the installations that we see are larger than one megawatt. So just to have a reference in in-house, you can have around six kilowatts in a single house. I think that that's the range. And you compare it to one megawatt, you see that the area, the cost, the power output changes dramatically. So yeah, I focus on large installations and the dynamics on supply, on installation, permitting, development. The stakeholders are vastly different compared to DG. That's why at Wood Mac, we have two different teams that analyze the dynamics for utility scale, which is what I cover, but also we have a separate team covering all the market dynamics for DG.

[0:07:07] AR: I see. Well, that makes sense. So even if you were relatively large, like you had a retail store like a Walmart or something that had a solar panel on their roof, you'd call that, would be part of distributed generation because it would be behind the meter of that Walmart store, for example?

[0:07:22] SLM: Correct. You can think about it like if it's installed in a building like a rooftop of a house or a building that is considered DG, just because it's located where the load is.

[0:07:34] AR: Yeah. DG, distributed generation you're talking about? 

[0:07:36] SLM: Yes.

[0:07:37] AR: What type of companies would typically develop a project like this? Is it developers who are specifically specializing in that or is it often an investor-owned utility? Or who are the typical developers these kinds of projects?

[0:07:50] SLM: Yes. Actually, we have seen recently, and I'm talking about starting three, four years ago. First, the typical players that you would see are all [inaudible 0:07:59] power producers. So you would see large utility, or even developers that are just like building the project and sell it. They were the main ones working on that side of renewables. But now, we see actually more and more corporates that are developing their own renewables branch, like they are the ones actually developing those projects. When we take a look at the procurement trends, like who is actually procuring solar or utility scale solar, you could see that 70% is still utilities, either driven by renewable portfolio standard targets in their particular state, or fully voluntary. The rest is pretty much corporates that are having this need for renewable power. 

One trend that we do see is that typically, like large developers tend to focus in a single technology, although we have giant players like NextEra, EDF that do have a variety of technologies within the portfolio.

[0:09:01] AR: Wow, really interesting. So when you say the 70% that are utilities, are you talking about those are traditional investor-owned utilities or are you talking about that that would also include companies that specialize in development of energy resources who don't necessarily own a transmission grid or are in some deregulated context where they're not a traditional utility?

[0:09:20] SLM: Yeah, that includes both. So we're seeing like a lot of interest in all across the board.

[0:09:25] AR: I see. Then, you're saying that this growing segment of 30%, that includes corporations, this is primarily corporations that are driven by an interest in sustainability or want to meet certain greenhouse gas reduction targets of their own operations. So they're just saying, "Hey, we want to switch to a larger percentage of renewable power. The way we're going to do that is by literally building it our own selves." Is that what you're saying?

[0:09:49] SLM: Yeah. Yeah, exactly. I think there are two factors. The first one is the one that you mentioned. You have all this drive towards a cleaner world, having less emitting sources for their power. But the second one is also – building solar is a very good deal, depending on the market, the type. If you have large installations, you can greatly reduce the costs. From an economic perspective, it also makes a lot of sense to start investing in these types of assets compared to, I don't know, gas or coal, where there are most emitting. But also, the off taker, or the person who buys the power has way less control on how that unit is dispatches or even the capex is larger. So I think there's also a very important economic component in that decision.

[0:10:37] AR: I think people understand that in order for the grid to remain in balance, the supply of power always needs to be matched with the load or demand at any particular moment. So say one of these corporations installs a utility scale solar facility like you've described, then when the sun shines, the actual electrons that flow out of their solar facility, are not necessarily at all powering their operations. Instead, they're just being contributed to the grid generally. So I want to acknowledge that this kind of solar generation is both really beneficial and necessary. But that being said, there could be a situation where a corporation like this is supplying a lot of green power to the grid. But if they're not supplying it at the same time they're consuming power, they still might be creating the need to burn fossil fuels to accommodate their electricity use. Is that right?

[0:11:29] SLM: Yes, that is how is typically being done. It's like, I would need to double check how the exact trend has evolved. But first, this was evolution of net zero, like net zero is, we're going to have zero emissions. The dynamic that would work is the one that you just mentioned on. I inject green electrons into the grid, but my load is covered with whatever is on the grid in that particular moment in time. That's like how traditionally it's been used. I think even carbon offsets is also a thing in order to meet those emissions reduction goals. But now, what we're seeing more and more is this time component being factored in the production of electricity and trying to match the load pattern towards the generation pattern. That's why we're seeing more and more installations that are hybrid, particularly on the behind the meter side to make sure that all that green generation is going to actively be serving that load. We see companies – I think one of the cases that have been the most discussed is Google. They are committing to match their load fully with renewables. That considers that time component. 

There is also like something very innovative, like this concept of timestamp RECs. RECs are renewable energy credits. What people can buy, like any off taker can buy those renewable energy credits right now. But the ones that I timestamp are to make sure that, "Oh, you're buying green energy that was produced at this specific point in time that are required." This adds this extra complexity in the transaction. But also, it helps off takers make sure that their load is exactly fulfill with green energy at the time that they require it. I find that extra level of complexity extremely interesting.

[0:13:26] AR: Yeah, that is really interesting. For situations where a company is able to exactly match the timing of renewable generation with the timing of their power use, can you explain a bit more about how that actually works?

[0:13:39] SLM: I mean, there are different options there. I think the most technically complex, but also the most direct option is you have storage on site. So you have more generation than the one that you need, like on average throughout the day. But you store that additional generation in your battery, so you can be using it and then you can manage the load to a certain extent, but not change it too much, because it's actually the battery that is working. So that is like the first most obvious option. Depending on the company and depending on the type of industry, you can manage load. For example, we've seen more and more data centers, are the ones that can relatively easily manage their load. It's easier for them to maybe work the other way around or not having to include that much storage, and manage their operations and their load, depending on the generation at that specific point in time. 

The third one, actually, I don't know, like that's why I find it so complex. How can you be 100% sure that you're procuring electricity from solar from any other renewable source at the time that you need it. I think that's actually why it has not been developed in mass, just because of how complex it would become. It's definitely easier to manage load and to manage generation, when you have everything behind the meter.

[0:15:08] AR: In general, how are these utility scale solar projects or deals financed, and how are they structured?

[0:15:14] SLM: Yeah, the typical deal is going to be a PPA.

[0:15:18] AR: A power purchase agreement.

[0:15:19] SLM: Yeah. So you have the power purchase agreement. This is a contract in which you have someone that is selling energy, like you have the solar asset, and someone that is going to be using it. It can be based on volume, let's say like, "Oh, I commit to buy these many megawatt hours at this price." And it can be settled physically or virtually. Physically, like you have the installation close to the load, and the actual electrode – like literally, those electrodes are transacted between the generator and the off taker. The most typical one is actually a virtual PPA. So maybe you have an asset in Texas, and the load is in – I'm going to exaggerate, like California. It is completely possible to do that, but that needs to be factored in, in the negotiation of the transactions. But in general, very high-level power purchase agreement is the most like the type of business model that is the most used right now.

[0:16:22] AR: Then, I guess I understood that a number of these transactions, at least in the past, under the regime that existed with tax credits, have had some complicated structures, because they require that there are some entities that might create one of these projects, but doesn't have the tax liability to take advantage of the tax credits. So they bring in a partner that might be a bank or some other company that has sufficient tax liability to take advantage of the credits. So is that something you see a lot of in these or not so much?

[0:16:52] SLM: Yes. Typically, as of right now, tax equity, and that's how it's called. [Inaudible [0:16:58] including these external investor or sponsor of the project that is going to be able to use those tax credits. That participant is the one that has enough tax liability, in order to benefit from those assets. Because typically, developers, large developers even, their tax liability is not as big, so that's where banks – we have seen even like pension funds recently that are participating in these types of transactions are going to be interested in working with developers to benefit from this. I have to reckon that I'm not an expert in tax equity transactions and they're very, very complex. I think that's one of the main challenges of anyone entering to the renewable space in the US, because of the complexity on all the stakeholders that are involved. Even like, there are different types of tax equity transactions that juggle who's the owner at a specific point in time, who gets the benefits of the tax credits at a specific point in time. So yeah, in general, it's a very, very complex environment.

[0:18:02] AR: Interesting. Do you think that that complexity will go away with the changes in the Inflation Reduction Act that allow greater freedom and flexibility in the use of the tax credits, that they make some of those very complex transactions unnecessary?

[0:18:14] SLM: I think in terms of how the market in general is going to change, it's still TBD. Because like talking to large developers, they need to balance up. Like, is it worth it to reduce the complexity of the transaction, because they're already familiar with it. It's a very mature market. There is also this risk profile component to consider for both the developer but also the investors. So the tax equity is well known for everyone. Well, not everyone, but the typical larger developers, they already know how to navigate the market. But what the Inflation Reduction Act brings is the opportunity to transfer those tax credits to a third-party in exchange of cash. My view is that that is going to help expand the financing opportunities for a lot of new players like smaller, medium developers, developers that typically have not had success obtaining financing from tax equity. Certainly, that can help just increase accessibility of projects just because of higher access to financing.

[0:19:22] AR: So in the last few years, widely accepted strategy has emerged for dealing with our energy system and climate change. Basically, to electrify everything we possibly can, and at the same time, make the grid as green as possible as quickly as possible. But obviously, in the real world, these things are quite complicated and take a lot of time. Over the next few years, I know you've done a lot of work on forecasting solar industry. How fast do you think the industry can grow over the next few years?

[0:19:54] SLM: Yes. We just launched our most recent solar marketing side report. There, you can see a bit more detail on what I'm discussing right now. But we're forecasting for the utility scale segment. No. Actually, no. Let's talk about like more general approach. For the entire US, we're expecting that they're going to be about 200 gigawatts of total solar buildup in the US in the next five years. That is considering like some of the hiccup, like there has been a lot of constraints in the past year, two years. The growth may not be as extreme during the first two years of the forecast, but definitely, there is interest from utilities and corporates. We're seeing higher renewable penetration or higher solar penetration on the residential, non-residential space. More development of community solar as well. Certainly, utility scale drives the bulk of this growth. One hundred and fifty gigawatts out of the 200 are going to come from the utility scale sector.

[0:20:58] AR: Okay. Just for context, about how big is that 200 gigawatts? How does that compare with let's say, the last five years or how does that compare with the total size of the installed amount of solar that exists now?

[0:21:12] SLM: Okay. Let's say, last year, in the entire US, there were 17 gigawatts installed. Typically, before that, it grew from six gigawatts up until the 17 that I just mentioned. This year, we're expecting 10 and we can talk about the constraints in the market in a minute.

[0:21:31] AR: That's of how much is being produced during the year. But the total stock, the total stock of what exists is larger than that.

[0:21:39] SLM: Yeah. Then, we're seeing – when you take a look at the project pipeline, like just all the projects that have been announced, or that are currently in development that have a PPA signed, the number just increases exponentially. Like next year, about 20 gigawatts the following 123. Actually, we think that after 2024, starting 2024, we're going to see more than 20 gigawatts being installed per year on the utility segment. We're expecting nothing but growth. But as 2022 demonstrated, anything can happen with changes in supply chain and trade policy. So it's a very, very dynamic market. We even call it the solar coaster, just because of all the changes that happen in the market, and just how the industry reacts towards those changes.

[0:22:27] AR: On that subject, you talk about how there are these constraints that sometimes prevent the increase from being as rapid as it would otherwise be. What are some of those major constraints that are limiting?

[0:22:38] SLM: Yep. The most recent one, or the two most recent ones. Our first one is, there's some teaser convention investigation going on. This is all related to trade policy. So the utility skills segment relies heavily on imported modules. About 90% of the utility scale projects use imported modules. So with this anti-circumvention investigation, there is a threat on applying tariffs to the modules that are imported from the four main countries that source these modules to the US: Thailand, Cambodia, Malaysia and Vietnam. So just the threat of having additional tariffs froze the industry completely, like people stopped sourcing modules, manufacturers stopped producing the modules in that region. 

PPAs were impossible to negotiate because the tariff range that was discussed was anywhere between 18% to 250%. How can you negotiate a PPA when you don't even know how much a module is going to cost? Even if you place the order now, you don't know how much it's going to cost in three months, or six months or a year because of all the changes in the tariff. So this is the first item that has hit the industry the most. The latest news on that is at the Department of Commerce announced what they call a preliminary affirmative determination. So they think that they're going to impose those new tariffs to modules. So right now, everyone has their procurement hat on and he's thinking on, where am I going to get my modules from? Is there enough supply outside of these for Southeast Asian countries? How do I get modules that are not subject to tariffs? Because changing like the capex of a project, one-two cents per watt, typically, our utility scale project is like $1.10 per watt. So if you change the price for that little bit, can make or break the project economics. So it relies a lot on any changes in pricing and in this case, in the application of tariffs. So that was only one factor.

[0:24:47] AR: Well, yeah. Before we get to the next one, though. For people who are unfamiliar with tariffs, that seems counterintuitive. Why is it that so close to the importation of an item, there would still be so much uncertainty? 

[0:24:59] SLM: Because the threat in the industry was – the start of the investigation in March. So when the investigation starts, we don't know if we're going to apply tariffs, but if the tariffs are applied, they could be up to 250%. There was no news about the potential outcome of the investigation. It just happened. So you had this – what was it? Nine months, eight months of just going blind. You don't have any information to negotiate the price and no one was willing to take the risk. If the tariffs are imposed, who is going to be paying those tariffs? Is it going to be the buyer? Is it going to be the exporter? That was a very tricky situation to be in, because you don't have any information to guide your decision on whether you should procure or produce modules during this time.

[0:25:53] AR: Sure, yes. I could see how the certainty would be really important. I don't want to get too far into the weeds, but just because it's such an important point, it's holding up such an important part of the industry. But when you say it's an anti-circumvention investigation, what does that mean and what are they potentially circumventing?

[0:26:10] SLM: Yeah. Well, they're potentially circumventing tariffs that are already applied in China. So China, since 2010, 2014, something like that, the US applied tariffs to module imports, or solar product imports from China. This policy tries to protect the country from unfair subsidies or unfair help from external governments that make their products. It can be any product unfairly priced. That makes that same product uncompetitive to produce in the US. So there was an anti-circumvention investigation for China that resulted in a final affirmative determination. Now, there are tariffs applied to solar modules and solar cells from China.

[0:27:02] Now, this new investigation, what it says is that these four countries, like most of the module was actually – most of the cell and the module because it includes both. Most of these components were actually producing China, and just a very little part of the process and of the inputs is made in these four countries in Southeast Asia. So actively, like they are trying to leverage the low prices in China and just continue selling to the US without those tariffs. So that was pretty much the investigation was about, to show if these companies are circumventing or hiding those Chinese tariffs within their price. And yeah, the preliminary determination on that wasn't for a minute.

[0:27:46] AR: Oh, that makes a huge amount of sense and relates to my next question, which is, why are these four countries: Thailand, Cambodia, Malaysia, and Vietnam, so important for solar production, when common conventional wisdom is that it's China that's producing so many of these? It sounds like what you're saying is, China was producing a lot, if I'm understanding this right. China was producing a lot of these things, but then the United States imposed tariffs on China. So now, maybe their Chinese companies, or Chinese affiliated companies that have moved the manufacturing or some part of the process to neighboring countries to impart, so that they're not subject to those tariffs. Now, what the US is investigating to determine whether that's considered legitimate or not, is that right?

[0:28:26] SLM: Yes. It's like, according to what the Department of Commerce announced in their determination, yes, that is exactly right.

[0:28:34] AR: Okay. Now, you said that was one of the big constraints and there's another one that has come up recently.

[0:28:39] SLM: Oh, there are several, but I'll focus on the main ones. Second one –

[0:28:42] AR: That you're going to mention, yeah.

[0:28:45] SLM: – it's trade policy. Like we already talked about an element that would affect price. The second one is affecting volume, like actively how many modules can arrive to the US or to the construction site. This is tied to supply chain traceability, customs borders and protection. In 2021, they started what they call a withhold release order. So that any modules that specifically were containing polysilicon from Hoshine Silicon industries were going to be banned from entering the US. So in 2021, this effort to increase the transparency of modular supply chain started, but it is also a very complex process, because that involved the manufacturers or even like the buyers to discuss with the manufacturers, like, "Hey, where are you sourcing your polysilicon from?" Most of the polysilicon is produced in China.

That involves getting like that cooperation from different Chinese entities to give that documentation required to prove the traceability of the raw materials. That was a journey. We estimate that it took about five months for the first shipment that was detained to actively be released. So it was a long journey to be able to develop these traceability protocol and to develop the documentation that was acceptable for CBP. But now, talking about 2022, there was like the reloaded version of these WRO that I mentioned before. That is called the Uyghur First Labor Prevention Act. In this Act, there are several goods, not only solar modules that are under scrutiny of CVP. What the buyers need to prove is that, they are not sourcing any of those goods from regions that are tied to forced labor. In the case of modules, there was this initial expectation like, "Oh, we're already past the 2021 WRO, so we should be fine with this new act. But actively, it proved to be more complex, because with the WRO, the buyers needed to prove polysilicon, which is like one of the components to build the crystal silicon modules.

[0:31:00] AR: Can you say it again one more time? What does WRO stand for? 

[0:31:02] SLM: Withhold Release Order.

[0:31:04] AR: Okay, which is the conventional trade policy. Then, in addition, on top of that, the Congress, if I understand right passed this Uyghur First Labor Prevention Act that's an additional restriction on top of that.

[0:31:15] SLM: Yes, yes, exactly. That happened in June 2022, the enforcement of that act. So the added complexity is that the WRO was asking for polysilicon traceability. Now, the Uyghur Forced Labor Prevention Act, UFLPA is requiring to prove the traceability of quartzite. Quartzite is a raw material for polysilicon production. So it's going even further in the supply chain and that has proven to be extremely, extremely difficult. Again, most of the sourcing comes from China. There is this element of how cooperative these entities are to comply with the US regulation. Also, just like the supply chain itself is so complex that it's difficult to prove that you're not using quartzite from that specific region. So yeah, it just added complexity. What that has produced is at the beginning, orders were shipped to the US, but they are at port waiting to be released by CBP and waiting for CBP to tell them like, "Oh, this is acceptable." They call it clear and concise evidence that the module imports don't have any links to forced labor. So this process has been extremely complex, and there were indications that some shipments were released, but nothing material as of right now.

[0:32:49] AR: Wow, that's so interesting. Because I'm thinking that over the last couple of decades, we've heard a lot of public discussion about how the United States should be a leader in clean energy. And there's all this talk about how we should pioneer new technologies, and build these industries of the future, and create green jobs and things like that. Probably, a lot of people at that time thought that was political rhetoric that was designed to push through a green agenda. But now, here we are, where clean energy has become an enormous part of so many major industries. But now the US has fallen behind in producing solar modules, and in a lot of other areas. So it seems like if we were further ahead, we wouldn't have the supply chain that was so complex, and that relies on countries where we have these concerns about human rights, and a lot of other critical issues like we do now.

[0:33:41] SLM: Yeah, that's fully right. Actually, in 2010, the US produced polysilicon, produce cells, like there was some degree of development of the solar domestic supply chain. But trade tension started. Actually, at that point in time, polysilicon was exported to China to produce the rest of the components, and then the module was built in the US. So then, I think China also applied their own anti-US imports policy, and the polysilicon industry in the US died, or at least the solar one. There's still a little bit of polysilicon production here for electronic grade purposes, not solar purposes. So yeah, I think that was the start of the decline of the domestic solar industry. But with the IRA, aside from the generation tax credits arts are tied to the prediction of green electricity. We also have the advanced manufacturing tax credits, and there are very good incentive to produce the entire module supply chain in the US. I think it's just a matter of time to see how many of the various announcements that we have seen are going to materialize.

But certainly, right now, the US relies heavily on imports not only in solar, like wind as well. They rely on the inputs for materializing projects. I think that one of the elements that the IRA wants to do is help develop these energies sovereignty perspective. To not only be producing the electricity here, but also all the components that you need to develop the entire industry also to be made in-house.

[0:35:24] AR: That makes a lot of sense. Yeah, energy sovereignty. It reminds me of back in the old days, people used to talk about how we have to get ourselves off of foreign oil. Now, we have tons of oil here, and we are trying to get off oil entirely. But all the other areas of energy that we need come from overseas and even from China, especially. I think the same is true in batteries, too, right? In terms of the concentration of manufacturing over there and control of raw materials and other stuff.

[0:35:48] SLM: Yeah, that's fully right. It's going to take time to develop that domestic supply chain. But the incentives are there. There still needs to be a bit more guidance from the IRS on that specific aspect. But the panorama seems very bright. At least from the announcement perspective, there is a lot of interest to start or restart the development of the domestic supply chain.

[0:36:12] AR: Yeah, and the guidance of the IRS, of course, because these are basically a lot of the incentives come in the form of tax credits. The IRS has to explain what the fine print means so people know how to apply them.

[0:36:21] SLM: Exactly. Yeah, that's totally right.

[0:36:24] AR: And ultimately, the hope is that these tax credits in the Inflation Reduction Act will help America to catch up in some of these critical industries where we've fallen behind.

[0:36:34] SLM: Yeah. I see like this is just the start. I think, a lot of investment, certainly a lot of renewable energy installations are going to come because of the Inflation Reduction Act. But I like to think the devil is in the details. So yeah, we're seeing a lot of announcements. We're seeing optimism all across the different segments in the industry. But in general, I think there is this need to have more details on how exactly the IRA is going to be implemented. That is what is ultimately going to determine how much of these announcements, of these new projects, of this interest is going to result in projects built at the ground, and factories built as well. So yeah, yes, super optimistic about it, but still need more guidance and more details on the implementation.

[0:37:27] AR: You said that there are a number of other constraints too, besides just those two that you mentioned. Do you want to just run through quickly a few of those?

[0:37:33] SLM: Yeah, so high commodity prices. Everything is more expensive right now. Obviously, raw materials for all renewable energy component production are high polysilicon, aluminum, glass, silver, copper. Everything is more expensive. So that ultimately affects capex.

[0:37:52] AR: Yeah, sorry. And you said, the capex, you're talking about capital expenditures, meaning the upfront cost of the fixed assets that the company is buying, as opposed to the operating cost?

[0:38:01] SLM: Exactly, exactly. Thank you for clarifying that. And the other element is interconnection types and costs. You may have an asset that is completely built, or do you need like certain permitting, certain elements that will tell you how that asset interacts with the rest of the grid. That process is becoming more complex, just because there is more generation, there are more and more projects. We call, in the queue, the interconnection queue. So it's more difficult for the transmission operator to evaluate what is going to be the effect of a certain project if it gets interconnected, how that interacts with load, how that interacts with other assets that are also in the queue. So yeah, like that. That process has become more complex and also more expensive. As you have more players in the grid, there needs to be grid upgrades that need to happen. Like the transmission has a certain limit, so you cannot interconnect thousand projects in a single line. So yeah, the fact of having more, more players just makes the dynamics more complex, both on the cost and on the dynamic side. 

The project now is taking – I think the latest research is that it takes about four years to be interconnected on average, but that varies depending on the region they are connected to. The main concern is that the budgeted amount for network upgrades can double or triple between the time that the estimate is made, which is very early in the project versus when the installation is actually interconnected. If we're talking about an original budget of 500k, imagine paying 1.5 million for the same installation. So that changes the economics of the project completely.

[0:39:52] AR: I see. So you might actually need like something physically different, even just for the same result to attach your solar farm to the wires, you might actually need more wires or different wires than what was originally anticipated. 

[0:40:04] SLM: Exactly.

[0:40:06] AR: Then, is there also a factor there related to local opposition around land use or just people who don't want these things near them or other kinds of local political opposition?

[0:40:18] SLM: Yeah. That is playing a bigger role. I've seen that play a big role, like just – I don't know, from starting two years ago. Yeah, there is definitely local opposition in some – I cannot identify specific states or regions where this is happening. But it can come from either the community, like the community itself is opposing to having a solar asset near their houses. I think some of the claims are like, "Oh, these is going to decrease the value of my house" or "They don't look nice." Just specific communities that don't want solar near them. There is also a political component too. There are some states in which the regulation is made in such way that they heavily limit where renewable projects or solar projects can be cited. I read a piece of legislation that said like, "You cannot build an asset that has, say like, 2% cadmium in their structure 500 feet away from a house." I'm just like inventing numbers, but you get the idea. That effectively targets modules, because they have 5%, or 2% cadmium or that specific metal that they were referring to.

There's like a political component, or could be a political component, depending on the region. But I think like that is going to be playing a higher role, not necessarily a major role, but a higher role from now on just because of – that there are more assets, people deciding projects in places that we have not seen before. So that could certainly be a factor that could stop upon the development of a project altogether.

[0:42:02] AR: So we've talked about all these new policies, and all these areas of change in the industry. As we're coming to the end of our time here. What are the most important developments in the US in the solar industry that we should be watching for in the next few years?

[0:42:15] SLM: Yeah. I think more in the longer term – in the short term, the main aspects that are affecting growth are supply chain, trade policy, which I think they are going to normalize relatively soon, say, in the next two, three year. But then after that transmission, interconnection are going to be the main bottleneck or the main item to address, just because the Inflation Reduction Act is driving so many investments, so much interest in renewables. Just increasing the interest that was already there. So the grid and the ISOs are going to have to adapt to this new volume of transactions, this new volume of projects that are going to enter the queue. There is some changes starting to happen, like there is this interconnection reform going on. That could change the way projects are evaluated, the time that it takes, how much it will cost. That's kind of the beginning, but that has to materialize in order to materialize the growth that we are expecting in the long term. Mastering the grid, or improving the efficiency of the interconnection process is going to be key for renewable energy development.

Also, the other thing that that I can think of is, we're going to be seeing more and more hybrid assets. Typically, we've seen a lot of solar standalone. But now, with more renewables integrated, you need to have more firm capacity. So renewables rely on intermittent resources, so you need an asset that is going to be there when you need it. That would be the case for storage when it's coupled with the renewable assets. With the storage investment tax credit that was introduced in the Inflation Reduction Act, we're certainly expecting that there's going to be more storage in the grid. But yep, I think those would be like the two main trends that I would be expecting in the longer term.

[0:44:14] AR: Great. When you say storage, that probably comes in the form of batteries?

[0:44:18] SLM: That is the most commercial one, but we also have long duration storage that could be one-level technology is compressed air. Like you store compressed air in salt cave or underground. With that compression, you play with it so it will dispatch energy at specific point in time. There are different applications for short-duration and long-duration storage. So we'll see, maybe like more and more of that new technology being implemented just because we're having more renewables integrated.

[0:44:52] AR: Very interesting. I guess, as with many other areas of new technology that are emerging now, we'll have to see how it plays out and what turns out to be most effective, right?

[0:45:02] SLM: Exactly. Yes.

[0:45:04] AR: Well, this has been just such a fascinating conversation to get a window into what is going on with this tremendous development of solar and renewables. Sylvia Leyva Martinez, thank you so much for talking with us.

[0:45:15] SLM: Thank you so much for having me, Alex, and it's been a great conversation.

[END OF INTERVIEW]

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