The beginning of 2022 has dealt most markets a difficult hand. Many industries are grappling with increased production and shipping costs, supply chain constraints, rising inflation and increased volatility — and the solar energy industry appears to be no exception.

While most industry observers report that 2022 will see continued widespread growth of solar development in the United States, project developers, investors and utilities alike must be mindful of several key factors impacting the profitability and timeline of solar projects.

1. Shortages in Raw Commodities

Heightened demand for certain commodities has resulted in soaring raw material prices as supply shortages continue, a lingering effect of COVID-19. In particular, a shortage of polysilicon, a key component in the photovoltaic (PV) supply chain, has caused solar panel pricing to skyrocket due to exponential demand for solar cells. Other components of PV cells — including silver, copper, aluminum and glass — have also been subjected to inflationary prices as demand outpaces supply.

2. Supply Chain Constraints

Commodity shortages are only exacerbated by global supply chain bottlenecks caused by increased shipping costs, factory closures, trade actions and import tariffs. These supply chain constraints hit China particularly hard and have resulted in nearly crippling schedule impacts on the United States solar industry, which is heavily dependent on solar panels manufactured in China. In addition, Chinese government-mandated power curtailments and an increased scrutiny on forced labor and other labor exploitation practices in certain Chinese regions have pushed manufacturers to shift production elsewhere, resulting in higher prices and longer shipping lead times for key project hardware.

3. Section 201 Tariffs

On Feb. 4, 2022, President Biden extended the Trump-era Section 201 “safeguard” tariffs on imported crystalline silicone solar panels for another four years. The intent of the Section 201 tariffs is to serve as a continued catalyst for U.S.-based panel manufacturing. However, in a major concession to installers, the Section 201 tariff extension excludes bifacial panels — which are the preferred panels for utility-scale projects due to their ability to absorb light on both sides, despite being more expensive than traditional monofacial panels. However, even with the exemption for bifacial panels, solar panels used in U.S. projects continue to be, on average, 55% more expensive than panels used in European projects — largely due to red-tape regulations and permitting hurdles that burden installation.

4. Interest Rates

With the Federal Reserve contemplating stricter monetary policies to combat rising inflation, the net effect on the solar industry is higher financing costs as borrowing becomes more expensive and market returns using debt financing levels off. Meanwhile, project developers with significant preconstruction investments face greater uncertainty as rising interest rates make projects less financially attractive.

5. Labor Shortages

Like most sectors, the solar industry is facing skilled labor shortages spurred by the COVID-19 pandemic. Last year, trucking companies in the United States suffered a record deficit of 80,000 drivers. Specifically in the solar industry, construction contractors are struggling to hire sufficient skilled labor to keep up with increased solar productivity. While these shortages are disguised slightly by record levels of solar capacity, they may become more apparent, given the broad corporate and political commitments to decarbonize the power sector by 2035 to achieve net-zero carbon emissions by 2050.

In most instances, project economics and expected cashflows prevent developers from fully absorbing these increased costs. Consequently, developers are seeking to negotiate higher fixed energy prices in power purchase agreements to offset the spike in solar development expenses. Doing so, though, will likely drive up the all-in costs of the project and increase the levelized cost of electricity.

For projects already under construction, contractors and equipment suppliers — already facing reduced margins due to competition and increased saturation — are now even more exposed, given the global economic landscape. They are more frequently seeking force majeure relief for price and schedule adjustments, regardless of whether the underlying contracts entitle them to such relief. Even with an owner-friendly contract that may exclude any or all forms of relief requested, project owners are left in a precarious position: Should they dig their heels in and contractually fight the merits of the claim (potentially putting the underlying project at risk), or bite their tongues and grant the requested relief (because their off-take and other commitments outweigh the reduced margins, and alternative construction and equipment supply options are scarce)?