Electrification continues to drive US Electricity demand
The U.S. Energy Information Administration (EIA) expects U.S electricity sales to increase 2.3% in 2024, following a decline of 1.2% in 2023. Growth is expected to come primarily from the residential sector. The expectation is for additional heating degree days in the winter, and a summer hotter than 2023 will lead to more cooling demand for households. Commercial and Industrial demand growth is expected to be more moderate, with some areas of the country seeing more growth than others; Texas, Arkansas, Oklahoma, and Louisiana are expected to account for 40% of total national forecasted growth.
Renewables continue to be the primary source of new electricity generation in the U.S, with the EIA estimating nearly 25% of electricity generation to be renewable by the end of 2024. With the addition of 60 gigawatts of new solar generating capacity entering service through 2024, expectations are that solar will replace hydropower as the leading source of renewable energy. Coal consumption is expected to fall once again, with the decline predicted by the EIA coming primarily from declines in electric power demand as coal plants continue to be decommissioned.
Residential solar
The expanded investment tax credits under the Inflation Reduction Act as well as other benefits from the Inflation Reduction Act are a positive for the residential solar industry. However, higher interest rates and California Net Energy Metering 3.0 (NEM 3.0) are headwinds to growth. Originations in California are roughly 40% lower following the implementation of NEM 3.0 as the solar only value proposition has become less clear. That said, NEM 3.0 has incentivized solar plus storage and battery attach rates are increasing for companies that can offer solar plus storage solutions for consumers.
Over time, solar plus storage should drive higher margins, despite declining California originations. Higher interest rates have increased the cost of financing for residential solar service providers, although some still have access to capital as evidenced by recent debt and ABS offerings. Residential solar service providers have increased rates to offset higher interest rates and falling equipment costs are helping.
Interconnection backlog challenging long-term growth
Transmission backlogs remain an area of concern for grid operators but also may pose as an opportunity for the utilities industry. Solar and wind curtailments have been on the rise nationally, mostly caused by grid congestion, as lower cost sources of energy are increasingly unable to reach consumers.
While the Federal Energy Regulatory Commission made progress in streamlining the approval process for new transmission projects in 2023, the scale of new generation that will go online in the next two decades and the shift to more dispatchable generation will mean transmission bottlenecks are likely to continue in the immediate future.
Project price increases have so far been offset by higher cost of capital
2023 saw cost of capital increases, as elevated interest rates and equity declines led to higher project hurdle rates across the industry. Companies have compensated through higher prices, with solar power purchasing agreement costs on new projects up 25-40% depending on project type and location.
