This article is sponsored by NextEnergy Capital

The energy transition has long been a fraught topic in the US, but there is no doubt that the country is today witnessing a renewable energy revolution. Last year, solar projects accounted for 58 percent of new power generation capacity in the US, according to the Energy Information Administration. This year, utility-scale solar installations are set to almost double.

But the future of policy measures that have helped spur renewable energy deployment are in doubt ahead of the US elections. Nevertheless, ­Michael Bonte-Friedheim, CEO of NextEnergy Group, argues that the North American market will remain highly attractive for solar developers. The economic case for solar will simply prove too strong, he says, to be undone by political headwinds.

How strong is the market for renewable energy investing in North America currently? 

When we select markets in which we want to invest, we start with a top-down and bottom up-analysis of each country. We focus on regulatory clarity, government policy and the market structure as it pertains to renewable energy, particularly solar. And as we’ve looked at the US solar market and the Canadian solar market, we’ve identified highly attractive growth prospects around new build solar – which is one of our key focus areas.

Power consumption in the US is expected to increase by about 5 percent over the next two or three years. Data centres and artificial intelligence are a huge driver of that power demand growth, along with electrification of transport and other applications.

There’s a fundamental need to have new power generation capacity coming on stream to meet that growth in electricity demand. Because of this, we want to continue investing significant capital in the US – where we have 300MW of solar assets across 12 utility-­scale plants – as well as in Canada, where we’re developing 1.4GW of solar projects in Alberta.

Why do you view investing in solar as more attractive than other forms of renewables?

A key advantage for solar in North America is that it’s the quickest type of new power generation to develop and build. The growth in power demand is happening now – so we can’t rely on a technology that takes many years to build, like a wind plant. And solar is also quicker to deploy in the US than in many other markets. The planning processes in many states are much more efficient than in most of the world.

Solar is also the cheapest way to generate power in North America. It’s never been cheaper to build a new solar power plant than it is today, whereas with other technologies, such as onshore and offshore wind, biomass, hydro, nuclear – you name it – the supply chain problems have led to significant cost inflation. Solar also tends to be less controversial, given that solar panels might only be two metres off the ground, whereas a wind farm can be seen from 10 kilometres away.

From an investor perspective, the capital expenditure risk and the operational expenditure risk is much lower for solar than other forms of renewable energy technology. And on top of that, irradiation levels are very stable – unlike with wind, which varies greatly from year to year.

As an infrastructure investor, you want low volatility, you want dependability, you want high levels of precision in forecasting, and all those things are delivered by solar to a higher degree than other technologies. The returns from solar are very attractive on a risk-adjusted basis.

Now that we have developed expertise in solar and storage, and we have a solar market that is growing exponentially, we don’t see the need to expand our technology focus beyond solar and storage.

You mentioned the rapidly rising electricity demand from data centres. How do you see this trend affecting the strategy of renewable energy investors?

From our perspective, this trend of course strongly supports an accelerated build-out of solar and storage. What is particularly interesting is that many of the data centre developers are focused on securing power from renewable sources, because these companies and their investors have net-zero targets. They don’t want to take existing capacity from the grid, they want to have new sources of renewable generation. So, as a developer and builder of new solar power projects, we can be a part of the solution to meet the demand coming from power intensive industries like data centres.

We can see many opportunities around what we call ‘private wire’ projects, where a solar and storage plant feeds directly into a data centre or other industrial facility. Normally, for risk mitigation purposes, we would always also want to have grid access in parallel – that’s a model that we are already experimenting with in the UK.

How can you be confident that the policy environment in the US will continue to be supportive of renewables, given the possible change in administration?

The Inflation Reduction Act, as well as other regulations and policy measures, have been strongly positive for the deployment of new investment into new solar projects.

That is clearly one reason why more investors have focused on the US market, and with the upcoming elections a lot of investors are asking us about the risk of changes in regulations and policies. It is certainly a topic of discussion, and we are monitoring the political developments very carefully.

The consensus at present seems to be that a potential change in administration is not expected to lead to significant changes in government policy towards the solar sector.

A lot of regulations around permitting are set by states, rather than at the federal level. And much of the commentary from Republicans is in favour of fossil fuel production, rather than specifically negative about renewables. The IRA has benefited the ‘red states’ very significantly – so Republicans would be impacting their own economic base if they remove those benefits.

Ultimately, economics usually win out. It’s much cheaper to build a solar plant, and solar has many other benefits that I’ve talked about. That points to a continuation of strong growth in new solar deployment. A perfect example is that Texas now has more solar installed capacity than California, which you would not necessarily expect from looking at the politics of those two states. That, for me, is one of the indications that economics drives investment decisions.

How much of an obstacle are supply chain bottlenecks posing to solar deployment in North America?

When we talk about supply chains, we include everything that is necessary to build and operate a solar plant and to connect the plant to the grid.

That means land availability, grid access, the technology to install the solar modules. We include the modules themselves, the copper wires, the labour force, the construction company that’s going to build the asset. For us, the supply chain is a holistic concept.

The supply chain for our sector is also a mixed bag. We have experienced cost escalation for labour in parts of the value chain, but on the other hand, we have had cost deflation in key technology components like the modules.

Where do we see challenges in our supply chain? In North America, one of the biggest supply chain issues is around the construction sector. The construction sector’s capacity has remained constant over the last few years, but the number of new build wind assets and solar assets has increased dramatically.

Construction capacity has largely stagnated and suddenly there’s a huge demand for that capacity in renewable energy assets, which creates a ­supply-demand imbalance.

Another challenge in the supply chain is the infrastructure necessary to connect large solar plants to the grid. We see that across many of our projects, organising the grid access infrastructure is a key part of the construction process. The high voltage substations, which are critical components of the supply chain, are very challenging.

How challenging is importing solar modules into the US market? Do you expect more local manufacturing to eventually take place?

In Europe, we don’t see supply chain issues on the procurement of modules. In the US, we do have supply chain issues there. The reason for that is the regulation around importing products directly from China that the US has put in place, whereas Europe has not yet decided to regulate those imports in any way. However, the supply chain issues around importing modules has not delayed the deployment of capital from our site. 

When we look to Asia, it’s not possible to entirely cut China out of the solar supply chain. Chinese manufacturing capacity will continue to play an important role in the global supply of solar modules. But I do think we’ll see a significant increase in the module manufacturing capacity in the US specifically, as a result of the IRA and other government policies. That increasing capacity should eventually contribute to the faster deployment of new solar power projects in the US.