This is an excerpt from the February 2018 edition of The SOL SOURCE, a monthly electronic newsletter analyzing the latest trends in renewable energy based on our unique position in the solar industry. To receive future editions of the journal, please subscribe.
For the solar industry in 2017, many a federal policy storm lurked on the horizon, leaving the industry to navigate through uncertain and choppy waters. Suniva and SolarWorld's Section 201 trade case and the potential resulting tariffs, alongside threats from tax reform which finally barreled its way through Congress in late 2017 both created uncertainty in the market.
President Trump has now made his decision on the 201 trade case in the form of a 30 percent tariff on imported CSPV solar cells and modules. This tariff will decline by 5 percentage points each year over a four-year period with an allowance of 2.5GW of solar cells to be imported each year tariff-free. Overall, the ruling was perhaps better than the industry had begun to fear and ended months-long speculation, but there are still many pending questions in its wake. The same could be said for tax reform. While the corporate tax rate was lowered, giving investors less tax appetite to utilize the investment tax credit, the preservation of the tax credit itself has left solar a viable option for the remainder of tax liability investors are looking to offset.
However, even with the new overarching policies in place, these 201 and tax reform "storm clouds" have by no means dissipated in 2018. Although there is finally certainty on what these new policies are, there is remaining hesitation on the extent of their effects.
Section 201 Tariffs – How is the Market Reacting Post-Decision?
With the tariff decision now released, the industry has started doing the math on its effects. While the initial numbers aren't catastrophic, they're not great either. Based on analysis by GTM Research, overall market growth will likely be 11 percent below what it would have been without tariffs, but what's really lost is new entrants to the market. Nascent state solar market like those in the Southeast or ones simply trying to break in may not have the opportunity to do so now. States with more favorable and entrenched policies, such as California, won't be as negatively affected, likely only seeing a 7 percent decline. This contrasts with states that are more recent entrants into the solar markets, such as Montana or Idaho, that lack substantial incentives such as a renewable portfolio standard (RPS) or state-level tax credits that could help soften the blow.
However, solar developers aren't the only ones facing a decline in growth due to the tariffs. Many international manufacturers are feeling the pressure as well. Canada and Singapore have already requested exemptions, and the Europeans and Chinese have requested consultations with the World Trade Organization, which is the first stage of formal dispute resolution. Alongside countries, certain companies, SunPower being the largest to date, are also considering filing for exemption. Exemptions could provide some relief to the price increases but are by no means guaranteed.
There is also potential for the tariffs to result in their stated intent: growth in U.S. solar manufacturing or the movement of foreign-owned companies to the U.S. Recent consensus on the topic is that the tariffs are not strong enough or long-lasting enough to cause this on a large scale. However, some companies have at the very least indicated that they are exploring options. Jinko Solar is one company that has begun to toy with the idea of setting up U.S. operations.
Despite what we know on the rulings so far, the brunt of the tariffs won't begin to be felt until after 2018 given that many U.S. companies – especially larger players who were able to make big purchases pre-decision - currently have 2GW of tariff-free modules reserved for 2018 projects. Once these reserves start to be placed into projects and new panels are needed, we will begin to get a clearer picture regarding pricing and new project pipeline.
Tax Equity in 2018 – Déjà Vu?
Pricing and project pipeline is also a key topic of concern for tax equity in 2018. As we've mentioned before, 2017 was a year of challenges to the tax equity status quo. The uncertainty of tax reform initially made investors hesitant to enter the market in early 2017. When most investors began seeking opportunities in earnest around April of last year, there was a lack of available projects for same-year investment tax credit deployment. This was further exacerbated when the 201 trade case was filed.
In the wake of tax reform and the 201 tariffs, the tax equity market may see similar themes in 2018. Investors are updating pricing and terms in the wake of tax reform, with overall pricing decreasing due to the lower tax rate. This pricing could drop even further if additional investors stay out of the market due to a lack of tax appetite. The number of investors that will play seriously in the market this year, much like at the beginning of 2017, is still unknown. Some are still waiting for the final word from their CFOs on what, if any, their tax appetite will be; others are still digesting BEAT and other tax reform changes.
If uncertainty from tax equity continues, it may drive some sponsors to seek to delay build out of pipeline until 2019. Developers may seek to take advantage of expected lower build costs in the future, making a bet that costs continue to fall, or the price impact from the 201 trade case fades or is repealed at the World Trade Organization. Not all sponsors have the luxury of extending project timelines, however, as some deals may be restricted by utility or PPA deadlines, or a sponsor’s own cash flow needs.
Despite headwinds in 2017, JP Morgan estimates the total wind and solar ITC market dropped from $11bn to $10bn (with about half of that decline attributable to solar ITC deals). Analysts expect 2018 to be roughly the same, finally returning to a growth path in 2019.
Setting a Course Forward
Federal changes have left a lot of questions about the future of solar development in the U.S. Nevertheless, the solar industry is moving forward in the wake of these questions. With no major decisions now on the horizon, we can find ways to make deals work under this new regime. The main drivers behind solar’s growth have not faded, and more and more companies are pursuing renewables as studies continue to show that consumers are demanding it. If your company or organization is looking to go solar or you have more questions regarding the recent changes at the federal level, don't hesitate to reach out to the team at info@solsystems.com.
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Over the last nine years, Sol Systems has delivered 650MW of solar projects for Fortune 100 companies, municipalities, universities, churches, and small businesses. Sol now manages over $650 million in solar energy assets for utilities, banks, and Fortune 500 companies.
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