The Threat of Tariffs Is Already Reshaping the US Solar Market

You’ve probably heard about the solar eclipse that will pass across the U.S. on August 21.

But if you’re in the solar industry -- whether a manufacturer, contractor or service provider -- you're no doubt aware of a much more significant eclipse: the United States International Trade Commission (ITC) case on imported crystalline-silicon solar cells and modules.

You may think that this industry eclipse is not a big deal, or that it's someone else’s problem. You’re wrong. It’s time to break out your peril-sensitive sunglasses.

Suniva and SolarWorld are seeking tariffs of $0.40/watt on all imported solar cells and a minimum price of $0.78/watt on solar modules that use imported solar cells. On September 22, the ITC will determine if the crystalline-silicon PV industry was harmed by global trade practices. If harm is determined, a remedy recommendation will be sent to President Trump.

I’m normally a very optimistic guy -- otherwise I wouldn’t be in the solar industry. But a tariff or minimum price of this magnitude would present severe difficulties.

It would effectively double the price of the vast majority of modules installed in America. Current production of solar cells in the U.S. is currently negligible, and it takes two or more years to begin production of solar cells at a new or relocated factory. If a tariff or minimum price is imposed, we can expect that all solar module prices that use imported cells will increase (including those assembled in the U.S.), and this increase will persist for several years until domestic cell capacity ramps up. 

Long-time industry participants have seen a similar story play out before. The worldwide silicon shortage that began in 2004 had a significant effect on solar module pricing.

At that time, the worldwide solar industry was much smaller, and the $1.00/watt increase in prices did not have as big an impact when average installations were still in the $6 to $10/watt range (12.5 percent). However, a $0.40/watt increase today will be applied to utility-scale system prices of $1.00/watt (40 percent), substantially reducing the economic benefits of these large projects. 

Supply chain impacts

Simple economics tells us that the tariff price increase will reduce demand from residential, commercial and utility customers.

Let’s consider what is happening throughout the entire solar supply chain. First, solar module manufacturers are already reacting by accelerating shipments to the U.S. before mid-November. Any shipments that arrive after a tariff decision would be penalized. Building U.S. inventory is a low-risk way to continue to supply the market, but shipments that arrive after the tariff is imposed will be subject to an unknown cost increase.

As soon as this ITC action was initiated, suppliers to worldwide solar module manufacturers started ramping up deliveries of “ingredients” such as glass, aluminum and wafers. But there is only a limited amount of surplus component capacity that can be manufactured into modules -- so shortages are already occurring.

Since a final remedy decision will not be made until January 2018, it is uncertain which countries will be affected and what the size of the tariff will be. Manufacturers are sitting on the sidelines waiting to see what happens before they make any major U.S. investments. During these uncertain pricing times there is unlikely to be any production planned for shipment to the U.S. that would arrive after a tariff imposed.

Savvy consumers of solar modules, primarily utility-scale developers, are taking early delivery of modules for their projects right now -- even if these projects may not be slated to begin construction until 2018. Distributors and installers are also preordering for upcoming projects. Available inventory is getting soaked up like water seeping into a dry sponge.

From a solar module manufacturer’s standpoint, demand is very high and supplies are limited. Since many of these companies were making tiny profits (if at all) before, they are taking the opportunity to increase prices. These prices are being passed on to distributors and installers, who must pass these increases on to their customers or lose profit on jobs.

Customer impacts

Utility-scale customers are deferring purchasing decisions. Since this is the biggest market segment, it should come as no surprise that utility-scale developers and suppliers have mobilized swiftly to fight this tariff action. Companies in the entire utility-scale supply chain will be hit the hardest since a $0.40/watt increase in prices destroys the current economics of most projects.

Financiers, developers, engineers, salespeople, consultants, racking manufacturers and inverter companies are seeing their post-2017 pipelines disappear as customer economics have deteriorated. The C&I solar segment is seeing a similar contraction in demand, although one that's not quite as dramatic, since prices in these segments are higher.

I spend most of my time focused on the residential market segment, where sales cycles are much faster. As such, most residential contractors have not been affected too dramatically -- yet.

Module prices have increased by about 20 percent, and future availability is uncertain. It will indeed be more difficult to sell systems when the price of the main component goes up by about $0.50/watt (the $0.40/watt will be marked up). For contractors who have inventory, sales through the end of 2017 could be brisk. But if contractors need to purchase modules on the spot market at higher prices, they could see their profits completely wiped out.

This same situation happened in 2004 and 2005 when prices of modules went up by about $1.00/watt. Customers generally refused to renegotiate contracts due to higher prices, and some contractors defaulted on contracts or went out of business when they realized they would lose money on their pipeline of jobs.

Overall I expect the U.S. residential market to be smaller than we expected in Q4 of 2017, and for the foreseeable future, until affordable U.S. production of cells and components ramps up.

Companies in all segments of the residential supply chain -- including racking, inverters, financiers, lead generators, software developers and service providers -- will be hit by this slowdown. Attendees at Solar Power International 2017 in Las Vegas next month will have a chance to reconnect with suppliers and friends, but there will be no “selling” among module companies, since they will have no inventory to sell and will not know what their future price will be.

There is a silver lining to this eclipse, but only for a few companies -- primarily thin-film module manufacturers that do not use crystalline-silicon cells.

American module manufacturers are seeing an almost ludicrous demand increase, but since they source cells from overseas, they will also have to pass on the increase in price from a $0.40/watt tariff.

Moreover, these manufacturers have limited ability to quickly increase their capacity. Cell equipment manufacturing companies are seeing an increase in interest, but probably no committed orders until a final tariff determination is made. Remember that it takes two or more years to design, purchase, build, install and configure a new state-of-the-art cell manufacturing line, so the U.S. industry will be in the doldrums for several years.

What can we do to rebuild American solar ​manufacturing?

A Section 201 trade case is an incredibly blunt instrument when applied to a complex global industry like solar module manufacturing. I read with dismay that another component supplier recently shut down operations in Oregon after its biggest solar module customer went bankrupt. Tariffs on solar cells did not work the last time around.

The ITC’s prehearing staff report on this case noted that 26 solar manufacturers shut down operations in the U.S. since 2012.

So what can we do to rebuild U.S. solar manufacturing? Unfortunately, slapping a $0.40/watt tariff on all imported cells may not be enough of an incentive to quickly release the billions of dollars it will take to build gigawatts' worth of state-of-the-art solar cell manufacturing. We need to consider the entire solar module supply chain -- not just the cells themselves.

Because of the complicated supply chain for solar module manufacturing, just building a solar cell plant here in the U.S. that will come on-line in 2020 will not make the U.S. competitive with modules from other countries.

American manufacturers still must import almost all the other components, since domestic supply is either not available at all or priced higher than from other countries. For example, frame extrusions for solar modules cost twice as much in the U.S. than those available at comparable quality from Asian countries.

A dozen years ago, when China decided to make a big commitment to the solar industry, it incentivized not just cell and module manufacturers, but also silicon, glass, aluminum, backsheet and junction-box manufacturers. Large-scale module manufacturers designed integrated operations combining almost the entire supply chain.

China planned complete solar manufacturing cities -- like Detroit for cars, but for solar modules. Wafer and cell operations were situated next to extruders, junction box companies and module assembly plants, thereby reducing logistics costs and reducing turnaround time. Of course, many of these companies benefited from favorable government policies -- just as America provides in terms of federal tax credits, as well as state and local incentives.

Here in the U.S., we must put thought into a comprehensive solar industrial policy that considers all aspects of the supply chain. Expecting a better outcome by adding capacity at one point while ignoring other points is insanity.

In order to compete in the global module manufacturing industry, the sum of the costs of all the ingredients, including labor, must be competitive. Right now, virtually every factor of production is more expensive in the U.S. Once this rationalized supply chain policy is in place, existing U.S. module assembly companies will benefit the most -- as well as customers that prefer modules made in the U.S.

In the meantime…

While trade commissioners and legions of lawyers figure things out, many of us have businesses to run. We can see this slow-motion train wreck materializing, so there are actions we can take to reduce the harm to our businesses.

Rhone Resch’s recent GTM article provided terrific advice for project developers. Residential and commercial contractors who operate with fewer resources and shorter time frames can take action to mitigate the risks to their businesses.

Now is a good time to preorder inventory for installations in Q3 and Q4 -- there is still some product availability. If past experiences are any indication, some module manufacturers may cancel purchase orders or increase prices on unshipped orders. Distributors will do the best they can to ration out supplies to their best customers. No company is likely to get all the inventory they want. And everyone should plan on continued price increases.

Contractors must make sure they price jobs based on when they will receive modules for that job. One good strategy is to purchase inventory immediately when a contract is signed, even if the job will not be ready to start for a few months. Customer proposals should have a fairly short time frame during which prices will be honored (say five business days).

Consult with your attorney to see if a “force majeure” clause can be added to your contracts that would allow you to cancel a contract or raise prices if a tariff is imposed. The one shred of good news for contractors is that a 2018 price increase is a good incentive for customers to buy now.

Finally, we should continue to support our solar industry advocacy organizations, including the national Solar Energy Industries Association and the state SEIA chapters. Although not everyone may agree with SEIA’s position on this trade case, we are all on the same page when it comes to building a thriving and sustainable solar industry.

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Barry Cinnamon is the CEO of Spice Solar. He's also the host of The Energy Show podcast.