TitanGen Memo: Update on Solar Tariff Decision

In June, two now-defunct American solar panel manufacturers, Suniva and SolarWorld, brought a solar case to the Federal Trade Commission (FTC), contending they were forced into bankruptcy as a result of a flood of subsidized imports from China and other non-US solar component manufacturers. The companies said imports of photovoltaic cells and modules that are ultimately made into solar panels had driven them and other American companies out of business and constituted unfair trade practices under Section 201 of the Trade Act of 1974.

Source: Greentech Media

In November, the FTC recommended a variety of countermeasures that include a tariff of up to 75% on imported panels and certain components. The official ruling was issued on January 22nd. The news was less severe than anticipated: a 30% tariff in year one, set to fall by 5% each year for the next four years. The first 2.5 gigawatts of imported panels will be exempt from the tariff.

Click here to read the full 2018 Fact Sheet from the U.S. International Trade Commission.

It's important to ask: what actually drives panel prices and which panel producers have a right to exist in a free market system? How do we separate shortsighted political decisions from the right prescription for renewable energy job growth? 

The universally accepted drivers of price are innovation, economies of scale, labor costs, exchange rates and basic laws of supply and demand, not domestic protectionism targeting only a sliver of the overall economic pie at the expense of the rest. Clearly, the truth of the matter goes well beyond allegations of unfair competition made by bankrupt American companies and no amount of counterproductive, protectionist trade policy will change the global panel market. 

Perhaps most importantly, of the 260,000 Americans employed in the solar industry, only 2,000 of those jobs involve the manufacturing of panels and components. The benefit of protecting 2,000 jobs at the expense of 240,000 seems ill-conceived when the best jobs in the renewable energy sector are high-tech manufacturing and specialized services: business development, finance, electrical engineering, construction, maintenance and product innovation.

It's irresponsible to have this debate without noting the hypocrisy of subsidizing the fossil fuel industry and ignoring environmental degradation's true costs to the global economy. According to a 2016 study by the Council on Foreign Relations, the fossil fuel industry receives over $4 billion dollars of tax subsidy each year, not to mention below-market land leases on federal land, loan guarantees (like those provided to Solyndra) and other R&D support.

Direct, immediate government support is only a part of the story: according to a study published in the scientific (nonpartisan) journal Nature, global climate change could eliminate close to 25% of Global GDP by 2100. Corporate America has taken note, as well. A Citigroup report issued in 2016 estimates that preventing global temperatures from rising by a mere 2.7 degrees Fahrenheit would reduce the chances of more than $50 trillion dollars in wealth destruction within the next few decades. Protecting the environment protects the mother of all resources.

In spite of headwinds, the bigger picture still looks bright for renewables. Solar's "levelized cost of energy," or the price that must be obtained for each mWh of production in order to break even, has fallen to half that of coal, and is now on par with gas-driven turbines and wind, as the cost decline has created 12 times the growth in 2017 as compared to 2010 and the trend shows no sign of abating. 

Swanson's law, attributed to Richard Swanson, founder of SunPower (an American panel manufacturer), states that the price of solar photovoltaic modules tends to drop 20% for every doubling of cumulative shipped volume, and the chart below clearly depicts the idea in practice. At present rates, costs halve about every 10 years and remain the lowest they've ever been, almost to the point where costs per watt will reach a floor and the only value to add will be through increased electricity production- a direct byproduct of innovation, not protectionism.

price-history-silicon-cells

The impact of the tariff on each project will vary depending on the project's location (by state) and utility. It's important to note that modules account for one third or less of overall project costs and a 30% tariff increase will only increase effective project costs between 5 and 12%. This is akin to turning back the pricing clock by two years to a time in which, somewhat ironically, US manufacturers still weren't competitive against foreign imports. The most important near-term price signals to watch from the deregulated capacity, gas and electricity markets, regulated cost for electricity transmission and distribution and the local utility's incentive mechanisms for project development. Everything is local in energy, and your business's unique situation will ultimately dictate if renewable energy is the smart choice. 

In the meantime, we've sought to keep our clients apprised of these developments as they've occurred and encouraged swift contract execution when possible. For those with projects still in the development queue, we expect the overall impact to be minor, as our EPC partners have made procurement decisions in anticipation of the tariff. The bigger concern is taking full advantage of Connecticut and Massachusetts utilities' exceptionally lucrative incentive programs like the Z-REC and S-REC before they terminate. It is the continuation of those programs that truly dictate the future of solar in New England, and we encourage everyone to speak this truth to their state legislator when possible. 

Thank you for your attention and hope you find our commentary useful simply as a guide to making the best business decision.