Coronavirus fallout

Coronavirus fallout

April 05, 2020 | By Keith Martin in Washington, DC

CORONAVIRUS DISRUPTIONS may ultimately lead the US government to extend deadlines to start and finish construction of renewable energy projects to qualify for federal tax credits, but the effort is taking time.
Most renewable energy projects must be completed within four years after construction started to qualify for tax credits. This deadline was imposed administratively by the IRS rather than by the US tax code. (Solar and fuel cell projects face a statutory deadline of the end of 2023.)

Wind projects that started construction in 2016 are the most at risk because they must be finished by the end of this year. Wood Mackenzie, a consultancy, estimated in January that as many as 15,000 megawatts of new US wind capacity could be installed this year, but said that 9,000 megawatts of it was at risk of slipping into 2021 – before coronavirus hit. Some developers whose projects slip may be able to get more time by proving they made “continuous efforts” after construction started to advance the projects. Not all projects have this option.

Senior Treasury and IRS officials who are key to extending the administrative deadline are having to focus immediate attention on implementing the CARES Act that passed Congress on March 27 (see related story on page 1 of this issue).

Any changes in statutory deadlines, like additional time to start construction, would require action by Congress. The Senate is in recess until at least April 20, and the House is out indefinitely until called back by House leaders.

Talk is growing of another coronavirus relief bill. President Trump and House Speaker Nancy Pelosi talked within days after the CARES Act passed about using the next bill to focus, in part, on US infrastructure. However, as the number of new US coronavirus cases continues to climb, Pelosi suggested on April 3 that the next bill is more likely to involve changes in dates and dollar amounts in the CARES Act to ensure the relief measures taken in it to stabilize employment and keep businesses afloat are adequate. Stimulus measures to help with economic recovery are more likely to be the focus of another bill in June.

The renewable energy trade associations are asking for more time to start and finish construction and would like the Treasury to pay all or part of the cash value of tax credits for an interim period to address weakness in the tax equity market.

Some European countries have already extended their deadlines to ensure that projects are merely delayed rather than canceled.

For example, Bundesnetzagentur, the federal grid agency in Germany, said in March that developers of new onshore wind, solar and biomass plants will be given more time to finish construction to claim subsidies for which the developers qualified through state-run auctions. Developers must ask for more time by email or letter and give a reason.

The Polish Wind Industry Association is asking for a statutory change to extend project deadlines by up to 12 months. Italy and Greece extended various deadlines for renewable energy projects in March. Turkey did so on April 2. France, Ireland and Portugal have delayed auctions.

The Ministry of New and Renewable Energy in India said on March 20 that it will treat delays caused by coronavirus as a form of force majeure that excuses late performance. Developers must submit evidence to support their claims.

Wood Mackenzie reported in its updated wind industry forecast in March that the outlook in the United States for new wind capacity additions this year remains fluid. It said US construction companies report that supply chains remain intact, in part because a lot of new construction is in the central US and in rural areas where the coronavirus has not spread as widely and where states have not issued stay-at-home orders, but that recent closings of truck rest stops along major highways are causing concern and still-to-be-delivered high-voltage equipment is being closely monitored.

The Solar Energy Industries Association said results from a member survey still in progress on March 27 suggest that the general trend is worse each day and that the most severe effects are being felt by rooftop solar companies. Fewer than 10% of residential rooftop companies reported business as usual, while 60% reported severely reduced activity. About 50% of so-called C&I solar companies that focus on the commercial and industrial sector reported substantial reductions in business.

Liquidity concerns are mounting, but they vary by sector. Moody’s, the rating agency, said in mid-March that coronavirus could affect the credit quality of as many as 45% of companies in North America. March saw the fastest ratings downgrades by the three major rating agencies, S&P Global, Moody’s and Fitch, since at least 2002, according to a report by Bank of America. However, Moody’s said it expects only 16% of North American companies to suffer downgrades under its baseline scenario where economic activity recovers by the second half of 2020.

The Economist magazine reported on March 14 that a crude “cash-crunch stress test” that it did by looking at financials for 3,000 non-financial companies outside China suggested that 13% would exhaust cash within three months and the number would increase to close to 25% if the economic shutdowns last six months. The test assumed that revenues would drop by two-thirds without any reduction in operating costs.

S&P Global said it expects “a modest weakening of credit quality” among North American utilities. Its median utility rating of A- could fall to BBB+.

The trade press is full of reports of new asset sales. Some developers may need cash. It is not clear how many of these transactions will close if discount rates used to value projects increase due to greater perceived risk, causing bid-ask spreads to widen.

Buyers in such deals are now focusing on a series of coronavirus-related issues during diligence. They include force majeure claims by contractors and suppliers, notices that have to be given to contract counterparties and whether they have set a clock running on rights to terminate power purchase agreements, possible exercise of cancellation rights under MAC clauses on account of material adverse changes, going-concern issues in audits, potential insurance claims and possible grounds for purchase price adjustments.

Electricity demand is down in most parts of the United States, but not everywhere.

S&P Global reported that average hourly load was down in six of eight major power markets in March 2020 compared to March 2019. Average hourly load was down 8.9% in both PJM and New York. It was up 1.4% in ERCOT. March peak load was down 18.7% in PJM, 13.4% in New York and 13.1% in ERCOT compared to the year before.

The California grid operator, CAISO, reported weather-adjusted load reductions of 5% to 8% on weekdays and 1% to 4% on weekends compared to 2019 “due to a shift from commercial, restaurant and retail hubs to residential consumption.”