It's not just real estate that's difficult to acquire as the U.S. emerges from the COVID-19 pandemic. If you're looking to pick up electricity from an off-site solar development, you can expect to encounter some resistance, which is impacting prices.

Solar is increasingly a seller's market, Renewable Energy Buyers Alliance members have told REBA Vice President of Programs Mark Porter since the beginning of the year. REBA has more than 230 members, including Google, General Motors and McDonald's.

Indeed, prices for solar PPAs in North America rose 2.6% during the first quarter of 2021 compared to the prior quarter, according to data from LevelTen Energy's PPA marketplace. But the rise wasn't part of any sudden shift — according to LevelTen, solar PPA prices have been creeping upward now for over a year.

Rob Collier, vice president of developer services for LevelTen, believes that a rapid increase in demand for solar power from corporations seeking to meet new sustainability goals is the primary force behind the recent increase in solar prices. And there is no doubt, Porter said, that there has been a dramatic increase in demand.

But if there is such great demand for solar power, why hasn't the market expanded to serve these new customers? The answer, Collier and other experts agree, is complicated, and may not be easy to resolve as solar developers face materials shortages, limits on land and transmission resources, and delays in permitting and interconnection processes that prevent supply from growing in step with demand.

Market forces at both ends

John Smirnow, general counsel and vice president of market strategy for the Solar Energy Industries Association, has a different perspective on the upward trend in North American solar PPA prices. Solar developers are being pressured by high prices on their end of the market.

Some of the PPA price increase, Smirnow said, can be attributed to the Section 201 tariffs on imported solar cells and modules, which increased at the beginning of 2021.

But shipping delays have also made it more difficult to get product in a timely manner, and there are multiple shortages that have begun to drive up prices as well, as supplies of materials critical to the completion of solar installations become more scarce. 

"Steel costs have really increased over the last few months, and we're starting to see that have a real impact," Smirnow said. "There's a polysilicon shortage ... and we're also seeing a glass shortage that is impacting pricing and availability."

It's not just materials shortages causing delays for solar developers. As price of solar power declined over the past decade and demand increased, the number of projects started each year exceeds most regions' capacity to add that power to the grid, according to Mark Bolinger, a research scientist at Lawrence Berkeley National Laboratory. The wait times from interconnection request to commercial operation averaged 3.5 years between 2010-2020, compared to 1.9 years from 2000-2009.

"We've got a lot of people trying to connect projects at various points, and the system just can't keep up with the influx," Bolinger said.

Many of these projects, Bolinger said, will never actually be built, because developers often request connections for projects that do not yet have a buyer or financing lined up in an attempt to speed the process along.

There are also the related questions of existing transmission and geography, according to David Feldman, a researcher and financial analyst at the National Renewable Energy Laboratory.

"As solar gets more popular, it gets more challenging, because those prime places to connect to the grid are fewer," Feldman explained. "It's like wind. The windiest places already have a turbine on them."

Paths to a lower-cost future

It is important to note, Bolinger said, that current increases in solar PPA prices are relatively small compared to the increased cost efficiencies realized over the past decade. Most experts also believe the increases are temporary, and that solar prices will return to their downward trajectory after many of the factors currently in play are resolved.

This isn't to say that every factor pushing up prices can or will be resolved. Arizona has always been sunnier that Chicago, Feldman said, and Arizona won't be getting any larger, so the number of ideal locations for solar is limited. The increased inclusion of storage with solar projects will also likely increase prices for the long-term, Feldman said.

"Storage is a cost-add," he said. "It doesn't produce energy, so you have to sell the energy for a higher value because there's a higher cost."

But at the same time, Feldman said, NREL still sees potential pathways to further solar cost reduction, assuming businesses continue to become more efficient, interconnection and related regulations are reformed, and technology improves.

Transmission, Bolinger said, is a key area where government action is needed to ensure solar project pipelines don't experience costly backlogs. More transmission would also open up new areas for solar development, allowing more projects to come online and compete for buyers.

"That's the ultimate bottleneck," he said. "What you need to interconnect is new transmission capacity, and that is notoriously hard to build."

Multiple parties, including NREL, its partners, and LevelTen, are also hard at work improving the efficiency of what Feldman called the "paper practices" of the solar industry and associated regulators. FERC and several regional transmission organizations, Feldman said, have instituted "cluster" interconnection studies in regions with significant backlogs, which speeds up the process and allows participants to spread the costs of the studies across multiple projects, further reducing the costs of individual projects.

On the business side, LevelTen aims to improve transactional efficiencies by launching a new asset marketplace where solar developers can buy and sell in-progress projects among themselves, alongside the PPA energy markets already run by LevelTen. Patrick Worrall, vice president of the new asset marketplace, hopes moving sales online and using software to help automate the process will reduce costs and speed up development times. Moving PPA sales to an online marketplace cut the average transaction time by a third, Worrall said.

Solar transactions will likely continue to become cheaper and more efficient as the market matures, Worrall said.

"In the larger scheme of things, it's a very young market," Worrall said. "In commercial or residential real estate, those are hundreds of years old, so all this infrastructure has been put into place. But that hasn't been put into place for renewable energy projects."

And time itself may be a solution to at least some of the present challenges, Porter said. Because current constraints on some materials are tied to supply chain bottlenecks created by COVID-19, those are hopefully destined for the history books as part of a "freak incident that hopefully never happens again," he said.

Most of the materials shortages, Smirnow said, should be resolved within the short- to medium-term, depending on the specific material. Glass, for example, should rebound and grow in availability quickly, he said. Steel and polysilicon will take longer to address, as it can take a year or more to bring new production facilities online, even though new production is in the works.

U.S. policymakers, Smirnow said, could accelerate this process if they were to eliminate tariffs and restrictions on the sale of these critical materials, or else provide some form of support to domestic industries that must cope with rising prices as a consequence of trade policies. Ideally, he said, he would like to see manufacturing tax credits instead of tariffs.

"We have said, very consistently, that tariffs are ineffective at incentivizing domestic manufacturing," Smirnow said. "Section 201 is a great example, because it was clearly designed to expand U.S. solar manufacturing capacity. And it did that, very modestly. Before we had maybe a gigawatt of capacity. Now we have — call it five gigawatts. But nearly all that serves the retail, rooftop segment. On the other side of the ledger, we lost about two gigawatts per year in missed opportunities" because the tariffs kept solar costs artificially high

In the meanwhile, Porter said, REBA is preparing new corporate buyers for a more competitive solar market. Not, perhaps, a true seller's market — Porter said he does not believe demand exceeds supply to the point of triggering bidding wars — but a more balanced market where buyers need to have their goals and paperwork in order if they're serious about making a purchase.

"If you and I are both looking at the same house, we're not in a bidding war yet," he said. "But if I'm slow to talk to a lender and you're all ready to go ... you're more likely to end up with that house than I would. That may end up equating to companies needing to be prepared to execute more quickly than in the past."