Section 201: Solar Tariff Determination Coming on January 26 – What Will Be the Impact?

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______________________________________________________________________________

Eric Selmon Hugh Wynne

Office: +1-646-843-7200 Office: +1-917-999-8556

Email: eselmon@ssrllc.com Email: hwynne@ssrllc.com

SEE LAST PAGE OF THIS REPORT FOR IMPORTANT DISCLOSURES

______________________________________________________________________________

January 18, 2018

Section 201: Solar Tariff Determination Coming on January 26 – What Will Be the Impact?

January 26 is the deadline for President Trump to determine what trade restrictions to apply to imports of solar cells and modules under the Section 201 safeguard proceeding initiated by Suniva in April 2017. In our note from September 26, 2017, (USITC Determines US Solar Module Manufacturing Industry Seriously Injured by Imports: Why the Worst Case Impact May be Better Than Investors and the Industry Realize), we discussed the background and legal framework of this case. In this note, we assess its potential impact on U.S. solar installations.

The maximum tariff allowed by law in a Section 201 proceeding is 50%. Our assessment is that a 50% tariff would only bring domestic module prices back to their level in 2016 – a year in which U.S. solar installations reached 14 GW, their highest to date. Allowing for declining balance of system costs, which last year made up almost two thirds of the total installed cost of utility scale solar systems, a 50% tariff on modules would be consistent with lower installed costs for utility scale solar in 2018 than in 2016. The impact is similar for non-residential distributed solar systems. For residential systems, whose balance of system costs have declined less rapidly than utility scale, we calculate that at a 50% tariff on modules would be consistent with 2018 installed costs broadly unchanged from 2016 levels.

Even if the Trump administration were to exceed the authority granted it by the Trade Act of 1974, and set a 100% tariff on solar modules, we calculate that utility scale and non-residential distributed solar system costs would still be lower in 2018 than in 2016. For residential systems, we calculate that a 100% tariff on modules would be consistent with 2018 installed costs below 2015 levels, the second highest year on record for residential solar installations.

In summary, the cost of solar modules has become a sufficiently small part of the installed cost of solar systems that even a punitive tariff on modules is unlikely to have a material impact of the level of solar capacity installed.

Portfolio Manager’s Summary

  • January 26 is the deadline for the decision by President Trump on the imposition of trade restrictions in the Section 201 safeguard proceeding for imports of solar cells and modules. This is the culmination of a nine month long process since the petition was filed in April 2017 by Suniva.
  • In September 2017 the U.S. International Trade Commission (USITC) determined that increased imports of crystalline silicon photovoltaic (CSPV) cells and modules have caused serious injury to the U.S. CSPV cell and module manufacturing industry.
  • On October 31, 2017, the commissioners issued their recommended remedies:
    • Commissioners Williamson and Johanson recommended a tariff-rate quota[1] on cells and a 30% tariff on modules, declining 5% per year over four years.
    • Commissioner Schmidtlein recommended a tariff-rate quota on cells and a 35% tariff on modules, declining by 1% per year over four years.
    • Commissioner Broadbent recommended a quota on cell and module imports of 8.9 GW increasing by 1.4 GW per year over four years.
  • Although the USITC has made remedy recommendations to President Trump, the president has complete discretion as to which legally authorized trade restrictions to impose, if any. The trade restrictions available to the president under the Trade Act of 1974 are tariffs, quotas, tariff-rate quotas or auctions of import licenses.
  • Various political considerations could shape President Trump’s response to the ITC’s finding of harm and remedy recommendations, however, we believe that some form of tariff or, possibly tariff-rate quotas, would be the most likely action by President Trump for three reasons:
      • President Trump has expressed a desire to impose tariffs.
      • A tariff ensures a predictable increase in the price of imports that would likely capture more headlines than quotas.
      • The revenue from tariffs goes to the U.S. government, as opposed to the benefits of quotas that accrue in part to the foreign manufacturers.
  • The constraints which the Trade Act of 1974 places on the president’s ability to impose trade restrictions could limit their impact on the domestic solar energy industry.
    • Minimum import prices, the remedy requested by Suniva in its petition and the remedy used by the European Union in a similar case, do not appear to be authorized under the law. They are definitely not one of the options that the USITC is allowed to recommend to the president.
    • Imports from most countries with which the U.S. has free trade agreements, including Canada, should be exempt from any restrictions. South Korea and Mexico, however, would be subject to restrictions as the USITC specifically determined that imports from those countries contributed to the harm.
    • If the president imposes a tariff on the import of CSPV modules and/or cells, which are currently imported duty free, the tariff may not exceed 50% of the value of the imported items. (Suniva argued in its Section 201 filing that this provision does not apply to duties expressed in dollar rather than percentage terms; however, based on our reading of the statute, we disagree with that interpretation.)
    • Trade restrictions imposed in a safeguard proceeding are not allowed to exceed four years and must be reduced over that time.
  • A significant caveat, however, is that the Trade Act of 1974, while imposing restrictions on the actions the president can take under safeguard proceedings, also limits the right to challenge the president’s decisions (and the ITC’s) in court. This provision limits the efficacy of the law’s constraints on the president’s actions, and may permit experimentation by the Trump administration in the design of trade restrictions.
    • Courts have stated, “For a court to interpose, there has to be a clear misconstruction of the governing statute, a significant procedural violation, or action outside delegated authority.” This is a very narrow window for judicial review and has resulted in few, if any, cases of the judiciary overturning decisions in safeguard proceedings.
    • Furthermore, even if the president’s decision were to be overturned, by the time the final appeals court decision was issued it would likely be a year or more that trade restrictions would have been in effect.
  • Given these considerations, we believe the president is most likely to choose among four potential trade restrictions on module imports,[2] all of which will have a four year life:
    • One of the tariffs recommended by the USITC Commissioners:
      • 30% tariff on modules, decreasing over four years
      • 35% tariff on modules, decreasing over four years
    • 50% tariff decreasing over four years. 50% is the maximum tariff authorized by law in a safeguard proceeding.
    • 100% tariff decreasing over four years. 100% is the tariff level that would achieve a module price similar to what Suniva requested in their petition, $0.78/W.
  • We analyzed the potential impact of tariffs on solar installations by examining historic module pricing, system installation costs and total solar installation volumes.
    • Exhibit 1 presents total U.S. solar installations over 2012-17, as well as the average cost of solar modules in each of these years. We added an estimate of 2018 module prices resulting from each of the four tariff options discussed above.
      • Solar module prices averaged ~$0.40/W in 2017, but prices had gone as low as $0.35/W before the Section 201 petition was filed, driving a surge in demand for modules in advance of tariffs. We have based our post-tariff module pricing on this $0.35/W pre-tariff import price.
  • As illustrated in Exhibit 1, a 50% tariff would only bring domestic module prices back to the level of 2016, when solar installations reached 14GW, their highest level to date.

Exhibit 1: Solar Installation Volumes and Module Prices for 2012-17

Source: GTM, NREL, SSR analysis

  • Critically, moreover, looking at the impact of tariffs on module prices overstates the impacts of tariffs on the installed cost of solar.
    • In 2017, the cost of solar modules made up just 35% of the total installed cost of utility scale solar systems, and less than 15% of the cost of residential systems.
    • Over the past several years, moreover, the balance-of-system (BOS) costs per watt, i.e. the other costs of solar installations (racking, inverters, wiring, labor, etc.), have also declined significantly across all types of systems, and are expected to continue to do so. (See Exhibit 2.)

Exhibit 2: Balance-of-System Costs per Watt, 2012-17 (2012=100)

Source: GTM, NREL, SSR analysis

  • Therefore, to understand potential impact that tariffs on modules could have on the level of solar installations, it is necessary to analyze how the tariffs affect the total installed cost of utility scale and distributed solar power systems.
  • Utility-Scale Systems
    • Utility-scale systems have fallen in cost very rapidly over the past few years, with the rate of decline in BOS costs exceeding the rate of decline in module prices.
    • As noted above, module prices averaged $0.40/W in 2017, and had gone as low at $0.35/W before Suniva’s Section 201 petition was filed. The total installed cost of utility-scale systems cost averaged ~$1.10/W in 2017. Assuming international module prices fall back to $0.35, and that BOS costs fall by a further $0.05/W in 2018, then the installed cost of utility scale systems, before module tariffs, can be estimated at ~$1.00/W in 2018.
    • A 50% tariff on modules would increase total system cost to ~$1.18/W. This compares with an average installed cost for utility scale systems of $1.45 in 2016, when utility scale installations reached 10.5 GW, their highest on record. (See Exhibit 3.)
    • Even with a 100% tariff, the installed cost of utility-scale systems would rise to $1.36, 7% lower than the actual cost in 2016.
    • Therefore, we expect that tariffs up to 50% should have a de minimis impact on utility-scale installations.
    • Moreover, based on the industry’s performance in 2016 and prior years, it is not clear that even a 100% tariff on solar modules would have a material adverse effect on utility scale installations. We note that the rapid growth of utility scale solar to date has taken place despite the fact that the all-in cost of solar energy has far exceeded peak hour prices in wholesale power markets, and has been approximately twice the all-in cost of wind.

Exhibit 3: Utility-Scale System Installations and Costs, 2012-17

Source: GTM, NREL, SSR analysis

  • Non-Residential Distributed Solar Systems
    • Non-residential distributed solar systems have also shown a rapid decline in system costs in recent years. (See Exhibit 4.)
    • In 2017, non-residential systems cost ~$1.85/W, when solar module costs averaged $0.40/W. If we apply the same assumptions used in our estimate of utility scale system costs, and assume that international module prices fall back to $0.35 in 2018, and that BOS costs decline by $0.05/W, well below the recent rate of decline, the total cost of non-residential systems this year can be estimated at $1.75/W, in the absence of tariffs on solar modules.
    • Assuming a tariff on solar modules of 50%, our estimate of the total cost of non-residential systems rises to ~$1.93/W, only 4% above its 2017 level of $1.87/W, and some 9% below its 2016 level of $1.45.
    • With a 100% tariff, commercial system costs would rise to $2.10, 3% lower than the actual cost in 2016.
    • Therefore, as with utility-scale systems, we expect that tariffs up to 50% should have a de minimis impact on commercial installations. At 100%, the impact would be limited, with installations likely to fall closer to 2016 levels of ~1.5GW before growing again.

Exhibit 4: Non-Residential Distributed Solar System Installations and Costs, 2012-17

Source: GTM, NREL, SSR analysis

  • Residential Systems
    • Residential system price declines have been much slower than non-residential and utility-scale systems.
    • In 2017 residential systems cost ~$2.80/W, when solar module prices average $0.40/W. (See Exhibit 5)
    • Again assuming that international module prices fall to $0.35/W in 2018, but assuming no decline in residential BOS costs, the installed cost of residential solar systems this year can be estimated at $2.75/W, in the absence of tariffs on solar modules.
    • A 50% tariff on solar modules we increase this estimate to ~$2.93/W, a 5% increase on 2017 but 2% below 2016.
    • Even a 100% tariff on solar modules would take total systems costs to $3.10/W, slightly below the level in 2015, a year in which installations were higher than 2017.
    • Residential installation volumes have been inconsistent in recent years due to capital constraints among the largest residential installers and changes in net metering and state incentive programs.
    • Given the relatively limited impact of module tariffs on the installed cost on residential systems, we expect the level of installations to be driven more by state net metering programs and the availability of capital to residential installers.

Exhibit 5: Residential System Installations and Costs, 2012-17

Source: GTM, NREL, SSR analysis

  • Winners and Losers
    • FirstSolar (FSLR) and, to a lesser extent, Canadian Solar (CSIQ) will benefit from trade restrictions.
      • FSLR is the biggest beneficiary as their solar modules are not CSPV and thus are exempt from any import restrictions. Any import restrictions should increase FSLR’s sales and margins in the U.S. and support FSLR’s earnings as they transition to their Series 6 modules.
      • CSIQ should also benefit to the extent that they can meet their needs with modules manufactured at their Canadian module assembly plants, which should be exempt from any restrictions.
      • Tesla’s (TSLA) SolarCity subsidiary would also benefit as it just opened a module manufacturing plant in Buffalo, NY, although the potential impact is small in the context of TSLA’s overall finances.
    • Foreign solar manufacturers, including JASO and JKS, benefitted from module and cell import volumes and pricing increases in anticipation of tariffs which will rapidly reverse once a remedy is put into effect, hurting results in the near term.
    • However, overall, we see few companies suffering significant impacts as the effect of a 50% tariff on total installed cost should be de minimis. Even the limited anticipated impact of 100% tariffs would likely only be temporary, as underlying module and BOS costs decline and the tariff rolls off.

Exhibit 6: Heat Map: Preferences Among Utilities, IPP and Clean Technology

Source: SSR analysis

©2018, SSR LLC, 225 High Ridge Road, Stamford, CT 06905. All rights reserved. The information contained in this report has been obtained from sources believed to be reliable, and its accuracy and completeness is not guaranteed. No representation or warranty, express or implied, is made as to the fairness, accuracy, completeness or correctness of the information and opinions contained herein.  The views and other information provided are subject to change without notice.  This report is issued without regard to the specific investment objectives, financial situation or particular needs of any specific recipient and is not construed as a solicitation or an offer to buy or sell any securities or related financial instruments. Past performance is not necessarily a guide to future results.

  1. A tariff-rate quota establishes an import quota that is tariff-free and then one or more levels of tariffs for imports above specified levels. For example, the first 10 million modules could be imported without quotas, the next five million modules could be imported with a quota of 30%, and a 50% tariff would be imposed on all further imports. 
  2. We will focus on the restrictions on module imports because modules incorporate cells and have been the primary import. 
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