US solar capex and O&M costs remain highly variable

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1 IHS TECHNOLOGY US solar capex and O&M costs remain highly variable Josefin Berg, Senior Analyst, Solar Power 2412_0616CU July 2016

2 IHS TECHNOLOGY July 2016 US solar capex and O&M costs remain highly variable Josefin Berg, Senior Analyst, Solar Power Solar installations grew massively in the United States last year, with completed photovoltaics (PV) systems in the country reaching record levels in Nonetheless, solar installation system costs still show tremendous variance between minimum and maximum capital expenditure levels, bearing weighty implications for PV owners and investors, confirms new data gained by IHS. The United States saw 8.3 gigawatts (GW) of completed PV systems last year, according to IHS estimates. This brings the country s total installed PV capacity to 28 GW, of which half consists of utility-scale systems larger than 5 MW. Despite this huge added volume of solar installations, installed costs vary greatly, according to IHS analysts. It is also important to consider whether solar installations are for rooftops or are ground-mounted, since roof installations in general are more costly. These findings are borne out by real, aggregated data accessed by IHS through an exclusive collaboration with Mercatus, the California-based energy investment platform. As managed by the Mercatus Asset Investment Management software, the data details anticipated capex as well as operations and maintenance (O&M) costs for planned PV systems throughout the last three years. For the American PV space, the high variability in anticipated solar capex was apparent in all three ranges during 2015, echoing the patterns seen in 2013 and The three PV size ranges broken out from the data in the Mercatus platform are 0-1 megawatt (MW); 1-10 MW, and larger than 10 MW. Rooftop and ground-mount installations were also separated. In the 0-1 MW range, the average capex for rooftop installations planned in 2015 was $2.96 per watt, with the lowest capex coming in at $1.79 per watt. For ground-mount installations, the average capex was $2.29 per watt 23% below that of rooftop systems. In the 1-10 MW range, the average capex for rooftops was $2.17 per watt, with a minimum capex at $1.80 per watt. For ground-mount installations in this segment, the average anticipated capex was surprisingly higher than the rooftop capex of $2.34 per watt. Such discrepancy is mainly the result of a few projects projecting capex as high as $5.12 per watt, exemplifying use by some asset managers of what IHS would consider unrealistic and high cost expectations for pipeline planning. The lowest capex can be found in the segment larger than 10 MW, where the average capex for ground-mount projects was $2.06 per watt, and the minimum was as low as $1.19 per watt. But while the minimum is in line with international benchmarks of the lowest-cost projects in Chile and the Middle East, IHS believes the minimum will be challenging to attain in the near term in the United States given current component, development, and labor costs.

3 Capital expenditures for US photovoltaic installations Average capex of total project cost (US$) Completed PV systems - IHS assessment Ground-mount Rooftop Anticipated capex of planned projects in Mercatus platform 0-1 MW Ground-mount Rooftop MW Ground-mount Rooftop Over 10 MW Ground-mount Ranges of anticipated capex Ground-mount Rooftop Source: IHS, Mercatus As a whole, what can be gathered from the capex that developers and asset managers record for pipeline management in the Mercatus platform is that system costs are declining, driven principally by lower hardware costs and increased installation efficiency. For example, the average anticipated cost of ground-mount systems larger than 10 MW fell 18% from $2.51 per watt in 2013 to $2.06 per watt in For its part, IHS estimates through the assessment of actual installed projects that the system cost of such projects completed in the United States in 2015 averaged $1.53 per watt in the segment above 5 MW. This discrepancy between average anticipated investments and the real costs of the installed systems reflects primarily the high variance in cost expectations for different pipelines. In effect, pipeline projects bearing the highest cost range will never be installed because their cost structures are not viable. That being said, the enormous variability in development costs between projects cannot be ignored. For ground-mount installations in general, there is wide regional discrepancy in costs such as developer expenses, land, permitting, and grid-connection costs. IHS research from October 2015 showed that grid connection and land expenses drive most of the variation in development costs between regions. The big exception is California, where environmental permitting is a significant cost factor. Depending on the location, development costs in general represent 5-10% of total capex. Those costs are projected to remain fairly stable over the coming years. Varying O&M costs The operation and maintenance (O&M) costs for planned ground-mount projects in the Mercatus Asset Investment Management platform show little annual variation of the average. The average ground-mount project larger than 1 MW expects to pay approximately $16,000 per MW per year for O&M services, regardless of whether the project was planned in 2013 or A reason for this stability is that companies compete by offering different service levels instead of low prices. 3

4 However, O&M costs showed immense disparity on a per-project basis. The lowest price expected for ground-mount projects planned in 2015 was $5,400 per MW per year, while the highest price was $45,000 per MW per year. These differences were mainly related to the wide range of services that could be included in an O&M contract, ranging from low-end reactive maintenance service plans to higher-end preventative and condition-based solutions. Overall, projects with high power purchase agreement (PPA) rates and obligations to achieve high production levels and maintain high plant availability will be contracting premium services that include items such as short service times, direct availability of spare parts, and detailed monitoring. In contrast, IHS assesses that projects with lower revenues will have minimal service contracts. The majority of projects will keep initial O&M contracts with the engineering, procurement, and construction (EPC) provider that built the project. As these contracts expire after two to five years, IHS projects that renegotiated or renewed contracts will result in either lower prices or the inclusion of additional services. Operation & maintenance (O&M) costs for US photovoltaic installations Average ground-mount PV O&M costs (US$ per MW per year) Completed PV systems - IHS reference Ground-mount systems over 1 MW ,000 Anticipated O&M costs of planned projects in Mercatus platform 0-1 MW 19,500 16,500 16, MW 14,900 15,100 15,200 Over 10 MW 16,900 15,400 16,300 Ranges of O&M costs Ranges of O&M costs 1,000-55,000 1,800-30,600 5,400-45,000 Source: IHS, Mercatus 4

5 ITC extension strengthens US market outlook The United States predominantly shapes the near-term growth trends of the North American solar industry. In particular, the extension in Washington of the federal investment tax credit (ITC) at the end of 2015 has given the market a means for significant growth over the next five years. The newly revised ITC includes: A multiyear extension of the 30% tax credit, previously scheduled to decrease to 10% on 1 January 2017 A gradual step-down of the incentive, from 30% in 2019 to 10% in 2022 A grace period for developers to complete projects within two years of each step-down. Previous legislation required projects to be operational by 1 January 2017 After the ITC extension, IHS forecasts the United States will add 15 GW of installations in 2016, making it the second largest PV market in the world after China. Utility-scale demand will be the primary driver of growth of installed PV capacity, most of which reached the late stages of development prior to the ITC extension. Moreover, IHS forecasts a softer decline than previously projected in 2017, as the hard ending to the ITC at the end of 2016 has been removed, with growth to pick up again in In total, IHS projects 74 GW of PV additions from 2016 to 2020, of which 44 GW will be utility-scale and the remainder coming from smaller residential and commercial installations. ABOUT MERCATUS Mercatus enables global energy producers to grasp the competitive advantage technology makes possible, by digitally transforming the way energy producers invest. Through Mercatus cloud-based Asset Investment management platform, energy producers can fully digitize their entire asset investment and management process, enabling them to move faster, gain insight and increase compliance. Since inception, Mercatus AIM has hosted over 80 GW of energy projects, across 75 countries and 8 different technologies. For more information technology.ihs.com Follow the AMERICAS technology_us@ihs.com EMEA technology_emea@ihs.com +44 (0) APAC technology_apac@ihs.com IHS Inc. All rights reserved. IHS and the IHS logo are trademarks of IHS. ABOUT IHS IHS (NYSE: IHS) is the leading source of information, analytics and expertise in critical areas that shape today s business landscape. Businesses and governments in more than 140 countries around the globe rely on the comprehensive content, expert independent analysis and flexible delivery methods of IHS to make high-impact decisions and develop strategies with speed and confidence. IHS has been in business since 1959 and became a publicly traded company on the New York Stock Exchange in Headquartered in Englewood, Colorado, USA, IHS is committed to sustainable, profitable growth and employs nearly 9,000 people in 33 countries around the world. 5