How much are tariffs holding solar back?
Rising interest rates also raise questions, but the solar industry is fighting back
Solar advocates issued dire warnings about the impacts of tariffs on imported solar cells and modules, ahead of President Trump's January decision to impose the trade penalty.
Solar Energy Industries Association President Abigail Hopper said the tariffs would "create a crisis" for the solar industry and threaten its 260,000 American jobs.
But while the tariffs are having some negative impacts, the industry and its customers now say their concerns were exaggerated. This is largely because solar installed costs have fallen so far and so fast, especially for utility-scale solar, that the relatively small increase in the module price due to the tariffs is having less of an impact than anticipated.
The tariffs will “shrink the total addressable market for U.S. utility-scale solar,” GTM Research (GTMR) Senior Solar Analyst Colin Smith told Utility Dive.
But the industry will still see “consistent increases in new capacity year over year,” he said, adding, “utilities are beginning to realize that the tariffs will not be the end of the industry."
That view was echoed by representatives from a variety of investor-owned electric utilities who told Utility Dive via email they are monitoring their markets but have seen few impacts. The same applies for developers and installers.
Recurrent Energy, a leading utility-scale solar developer which opposed the tariffs, has reported no project changes. First Solar, an equally important utility-scale scale developer which endorsed the tariffs, has also announced no major changes.
National residential installer Sunnova and California residential installer Spice Solar both told Utility Dive the falling installed cost has offset the tariffs.
It may be time for solar builders and buyers to start thinking about interest rate increases, which could have a real marketplace impact.
The tariffs then and now
The president’s January decision cemented a U.S. International Trade Commission (ITC) ruling. It places 30% tariffs on imported solar photovoltaic modules and cells. The tariffs decline 5% per year, to 15% in 2022.
While the U.S. solar industry adjusts to the tariffs, multiple countries are pursuing challenges against them, both in court and at the World Trade Organization.
While the tariffs are lower than what Suniva and SolarWorld — the U.S. solar manufacturers that petitioned the ITC — said they needed to stay in business, neither has announced a change of status.
SolarWorld Americas spokesperson Ben Santarris said his company is ramping up its capacity and watching market conditions. Supplies were “stockpiled” ahead of the tariffs, limiting immediate market impacts, but “we continue to receive good responses from new and existing customers,” he emailed.
Steve Ostrenga, VP for U.S. module manufacturer Seraphim Solar, said orders are between 25% and 50% higher than they were in Q1 2017. There is also "increased interest by the investment community" in financing U.S. manufacturing, he told Utility Dive.
Other solar sector indicators show an industry adapting.
The Solar Foundation publishes an annual National Solar Jobs Census. Senior Director Ed Gilliland emailed Utility Dive that the tariffs’ impact on jobs will not be clear for "some time." But respondents to a Solar Foundation 2017 survey done ahead of the final tariff decision predicted “modest, 5% job growth” in 2018.
The tariffs “were not as severe as some of the worst-case scenarios predicted," he added. "But job growth would almost certainly be higher if tariffs had not been imposed.”
The initial GTMR forecast was that a 30% tariff would add $0.10/watt to $0.15/watt to the module cost and cause a 7.6 GW, or 11%, drop in installed capacity for its four-year duration. The biggest impact would be from 2018’s 30% tariff, with impacts diminishing with each 5% drop in the duty, it added.
GTMR’s most recent U.S. Solar Market Insight now forecasts “a roughly 13% decline in total capacity from what was expected between 2018 and 2022, and the tariffs are the number one factor,” Smith said. But while projections are lower, the industry is still expected to add 15 GW per year and double the current installed capacity over the next five years.
Utility-scale solar now
While tariffs are having some impacts on solar growth, countervailing factors are reducing the effects.
Without tariffs, 2019 and 2020 were expected to be “big years for utility solar,” Smith said. As the 30% investment tax credit steps down to 26% in 2020, 22% in 2021 and 10% in 2022, the value proposition might be somewhat compromised. But growth could be sustained by solar’s low power purchase agreement (PPA) prices, driven by a wide range of cost and labor efficiencies in the development process and by economic factors.
The tariffs may actually make growth in the solar sector more even over the next five years.
“It is very possible that with solar tariffs, steel tariffs and a rising cost of capital, there will be contracts signed for projects at prices that are not viable. It is likely someone will be left holding a non-financeable project or a project that will not return what was paid for it.”
Senior Solar Analyst, GTM Research
“With the tariffs, there will be steadier growth through 2023,” Smith said. “Some utilities are delaying future procurements, so projects that would have come online in 2019 are now getting pushed out to 2020 or 2021.”
The change will be most noticeable in emerging U.S. markets, where the cost of utility-scale systems has dropped below $1/watt, he added. “With module prices going from $0.30/watt to $0.45/watt, solar may not grow as fast as we originally anticipated.”
Smith said there are indications that Recurrent Energy's 100 MW Mustang Two project may have been pushed out a year "to allow more time to procure and install at 2020 rates.” Recurrent emailed that its plans for the project have not changed.
Many “large utilities that understand power market dynamics have chosen to go forward with project procurements,” Smith said.
Project prices continue to drop, making solar the least-cost option for utilities despite the tariffs, he added. Though Georgia Power had difficulties with a recent solicitation, the three projects it chose had an average $36/MWh PPA price.
Georgia Power, its unregulated Southern Power affiliate, Duke Energy, its unregulated Duke Energy Renewables arm, Oklahoma Gas and Electric and Arizona Public Service reported “limited,” “minimal,” or “no” impacts of the tariffs by email.
Public Service Electric and Gas spokesperson Francis Sullivan said the regulated New Jersey utility saw a “modest increase in cost per watt” but has not changed plans to build 33 MW of landfill/brownfield solar by 2020.
Austin Energy is proceeding with a 150 MW project to be built by Intersect Power at a reported $21/MWh, reportedly the lowest U.S. PPA price ever for solar.
Spokesperson Mark Stutz said Xcel Energy Colorado “has not seen any significant impact from the solar panel tariffs” and “potential impacts may be relatively limited.” An update on its 2016 solicitation, released March 1, included new bids addressing the tariff, Stutz emailed Utility Dive. “We did not see significant differences in the refreshed bids. Some 58% of the bids affirmed no change in pricing, and 26% had decreased pricing.”
Utility-scale opportunities and pitfalls
GTMR’s Smith said the “new frontier” for a now maturing solar industry is solar-plus-storage. PPAs will include values for both energy and capacity services, he said. But these new deals will make it necessary for both utilities and developers to be “more watchful for risks” and to question projects’ "economic viability” and “financeability,” he added.
Separate from the tariffs on solar cells and modules, the administration has moved to levy steel and aluminum tariffs.
There will definitely be markets where solar tariffs will have a measurable impact, but the projected 2.5% price impact of the steel and aluminum tariffs "will be hard to even notice,” Smith said. System prices are falling rapidly enough that whatever is lost to those tariffs will be made up in a matter of months, he added.
“The really big question for utilities is about corporate off-takers,” Smith said. In 2016, corporate deals were about 1 GW, which was 10% of the 10 GW utility-scale solar market. In 2017, they were about 16% of the market.
Deal drivers were the low installed cost and the recognition that, with the investment tax credit stepping down in 2020, it would be prudent to buy, he said. “Smart utilities are recognizing this demand and working directly with corporations.”
“Residential solar costs have come down significantly across the industry over the last five years and we expect those cost declines to continue, despite tariffs.”
The biggest pitfall for utility and corporate off-takers, and for developers, is that economies of scale and low PPA prices make developers aggressive about squeezing their margins, Smith said.
“It is very possible that with solar tariffs, steel tariffs and a rising cost of capital, there will be contracts signed for projects at prices that are not viable,” he said. “It is likely someone will be left holding a non-financeable project or a project that will not return what was paid for it.”
Distributed and rooftop solar
Sunnova spokesperson Kelsey Smith said rooftop solar has been tested by tariffs and falling incentives before and has always been resilient. “Residential solar costs have come down significantly across the industry over the last five years and we expect those cost declines to continue, despite tariffs,” she said.
California installer Barry Cinnamon, CEO of Spice Solar, said the tariffs have pushed the installed cost of an average 6 kW rooftop array to about $630 higher than the 2017 cost. He passes that on to the customer, but his company has sustained its momentum in 2018, despite the tariffs, he said. “And impacts will be even less as the tariff gets 5% smaller each year.”
GTMR Senior solar Analyst Austin Perea said his broader national view reflects the responses of those installers. “There are a lot of installers who don’t see tariffs as a make or break issue,” he told Utility Dive.
2017 was the first year since 2010 that there was a contraction in residential solar, Perea said. “It was down 16% from 2016.” There was a gradual rise in module prices throughout the year, from $0.40/watt to $0.48/watt by the end of 2017, as installers stockpiled modules in anticipation of the tariff, he added. But because the module is only 16% of the overall residential system cost, the installed cost rose only 2% from Q4 2016 to Q4 2017.
The 2017 module price spike was not “a direct function of the tariff,” Perea said. “It was increased demand to procure tariff-free modules and module suppliers charging more on a per unit basis as a hedge against the anticipated tariff-caused reduced demand.”
Going forward, residential solar’s installed cost is likely to be unaffected by the tariffs because of the module’s relatively small portion of it, he added. “And developers and installers may decide to take lower margins instead of passing on the cost to the customer.”
The primary driving factor in the 2018 to 2023 forecast of industry-wide slowed growth is the fact that the module is 50% of the installed cost of utility-scale solar, Perea said. “The economics are much thinner when the installed cost is just over $1/watt. That can push gigawatts of projects out of economic viability against other forms of utility-scale generation.”
The cost of money and the price of solar
A less discussed factor that could impact solar’s competitiveness is the cost of capital.
Motley Fool reporter Travis Hoium recently calculated that “a 200-basis-point increase in interest rates would have a far bigger impact" than tariffs on utility-scale solar projects.
“Any increase in rates is going to hit the entire solar value chain, and it's not going to have a positive effect,” he wrote.
Duke Energy Renewables spokesperson Tammie McGee agreed. “The effects of rising interest rates are harder to see as directly because they have been more gradual,” she emailed. “But they will contribute to higher prices in the long run.”
Sunnova’s Smith said the impact of rising interest rates has so far been “modest,” but the solar industry's cost of capital is already “very high.” That means rising interest rates could benefit the solar industry by closing the gap between its cost of capital and the interest paid by its competitors, she said.
GTMR's Perea said interest rates could impede the transition away from third party ownership in residential solar. “The trend toward loan products will likely be affected by rising interest rates because it will increase the price of the loan,” he said. “We have not quantified that impact yet.”
GTMR’s Smith said the interest rate question has loomed since the 2008 recession sent rates to record lows. “Higher interest rates will make it harder to raise capital for projects,” he acknowledged. “It is not yet clear how fast rates will rise, but everyone knows it is coming, and everyone knows it will limit how much solar is installed.”
But rising interest rates will also impact all other generation resources, Smith said. Utility-scale solar's falling installed cost will make it "a viable alternative to natural gas, coal and other generation sources, and keep the market robust.”