Would the Solar Tariff Kill the Solar Industry?
When President Trump announced tariffs on solar imports last week, many were baffled. How does this latest executive order fit into his overall strategy?
He withdrew the US from the Paris Agreement announced the repeal of Clean Energy Plan and was just about to chop the Investment Tax Credit for clean energy installations under the new tax code. On one hand, the Trump administration is bent upon taking out the entire ecosystem for renewable energy industry to thrive — negating the growth that the country has achieved thus far, and on the other it is claiming to protect the domestic solar industry by imposing tariffs on all imports of solar panels and cells — the basic building blocks required to capture solar energy.
What are PV Cells and Modules?
- Photovoltaic (PV) cells represent the smallest unit in a photovoltaic power producing device, typically available in 12.5cm, 15 cm and up to 20 cm square sizes.
- PV Modules consist of individual PV cells connected together and encapsulated between a transparent front, usually glass, and a backing material, usually plastic or glass.
- A PV array consists of a number of modules connected in series (strings), then coupled in parallel to produce the required output power.
The Tariff
The Trump administration ruling is based on recommendations from the US International Trade Commission and adds 30% tariff on solar cells and modules. The tariffs will exempt the first 2.5 gigawatts of imported solar cells as long as they are manufactured into panels in the US. Many industry insiders are of the opinion that the tariff is ‘weak’. The imposition is only for a four year period and is slated to decline to 15%. The time and incentive are very little for manufacturers to start new factories or revive old ones and reap profits from sale in the domestic market. Also, the cells can still be imported — leaving very little room for technology innovation. The cells are the starting point, the remaining is just assembly.
Plausible Reason 1: Trade War with China
Is the tariff introduced as an extension of the so called ‘Trade War’ with China? If yes, how effective is this tariff going to be in undermining Chinese prowess?
The US has imposed tariffs on Chinese solar panels and cells on two occasions in the last five years. The Chinese found a loophole in the tariff policy that allowed them to bypass the tariff duties. They shifted manufacturing to other countries like Taiwan, Malaysia, Singapore and as far as Germany. In fact, as a direct result of these tariff impositions, the Chinese solar companies — barring a few small ones — grew beyond its borders. The following graph clearly shows that US tariffs had practically no effect on the growth of the Chinese solar manufacturing industry. Their market share of PV modules grew from 63% in 2012 to 69% in 2016. Similar observations can be made for cell production.
With just 13% of the global PV capacity within US borders, and with more nations aiming to enhance their PV capacity — this tariff regime is unlikely to affect the current dynamics of global production or trade of PV modules and cells in any significant way.
What we fail to consider is that the Chinese themselves are the greatest solar cell and module consumers. In 2016 alone, their new solar installations were to the tune of 34.5 Gigawatts in comparison to 14.7 GW in the US. The cumulative photo-voltaic capacity installed till 2016 in the US (40 GW) is only half of that installed in China (78 GW).
Plausible Reason 2: To Revive the Solar Manufacturing Sector
Reviving the manufacturing sector has been Trump’s political mantra. So, will the tariffs be effective in protecting domestic solar manufacturers?
About 260,000 Americans work in the solar industry. Installation, sales & distribution, and project development, R&D, finance together contribute 85% of the employment while manufacturing provides only the remaining 15%.
According to the National Solar Jobs Foundation(link is external), in the five-year period between 2012 and 2016, solar employment grew by 110% overall or 16% annually, adding 131,000 jobs.
Within this period, solar employment grew nine times faster than the overall US economy, and one in every 100 new jobs was a solar job. Solar generates under 2% of overall US energy, yet it employs twice as many workers as the coal industry, almost five times as many as nuclear power, and nearly as many workers as the natural gas industry. Also, it is clear from the statistics that manufacturing contributes just about 15% of the total jobs in the industry.
It is true that over two dozen cell/module manufacturers in the country have gone bankrupt in the last decade or so. So will the tariff help reverse the situation? It is highly unlikely. To explain why, we have to understand why these companies failed in the first place. Americans invented solar technology, still hold a good number of patents, and have led the industry for three decades. However, it was foolhardy to believe that others would not get on the bandwagon in such a competitive world.
The Chinese did.
Since 2008, their government flushed the domestic industry with subsidies, which in turn flooded the global market with their product. In the meantime, what happened to the US? The country stopped innovating.
With the currents tariffs, manufacturers (domestic and foreign) get a four-year window. However, it is too little to start production and reach a size that would compete with the Chinese.
Unless the solar manufacturing industry brings in process and product innovation that delivers better than their Chinese counterpart in design, efficiency and value — not just cost — the future for solar manufacturing in US is bleak.
Short term Effect of the Tariffs
- The tariffs will inflate market prices of solar installations, particularly by the utilities, thus punishing consumers who installed solar facility hoping to save money on their electric bills. For utilities — as can be seen from the graph — the hardware price fluctuations will amount to huge variations in the final cost to the consumer.
- With decreasing demand, installation jobs (that currently account for more than 50% of all solar jobs) will be lost. The Solar Energy Industries Association (SEIA)(link is external) calculates the trade remedies will trigger 23,000 job losses this year alone.
- A counter strike from China can also be expected. After the U.S. imposed tariffs on solar panels imported from China in 2012, China imposed its own tariff on polysilicon imports from the US. Polysilicon is used in the production of solar panels. US is the second largest producer of polysilicon, first being China. China’s tariffs prevented US polysilicon manufacturers from competing in China’s rapidly growing solar market. They are still struggling.
- US could lose whatever competitive edge in the industry we had thus far. By the time, we will have a tariff free industry in 2022, the world will have moved way ahead of us.
- Furthermore, the US will be blemished with the stigma of protectionism. The US withdrew from the Trans-Pacific-Partnership, while other signatory nations are going ahead with the treaty. Now, Trump plans to renegotiate the NAFTA. Such protectionist intensions will not help that process in a positive way.
How can we turn the tables in our favor in the long term?
US investing more in R&D, leading to new processes and products, will reassert American leadership in the solar marketplace. This is and has been the US forte. Majority of panels range from 14% to 16% efficiency rating. Efficiency quantifies a solar panel’s ability to convert sunlight into electricity.
With superior product efficiency and features, we can create a market where we need not follow the Chinese.
Secondly, the US needs to create a workforce that is highly skilled and sensitive to consumer’s needs and demands. Currently the average solar hardware cost is about 35% of overall costs. The soft costs, which includes labor, permitting/inspection and supply chain, are very high — in fact among the highest in the world. The country needs to adopt a cross-sector multidisciplinary approach to train and educate, which would effectively improve sales transactions, speed up installations and lower expenses throughout the value chain.
It is certain, the industry will feel the heat in the next four years with decreased demand, job losses and consumers losing the cost benefit. Although consumers are not going to tear the panels off their roof as a direct result of this tariff, new installations will definitely slow down.
Surely enough, these effects will wear down. In a survey(link is external) — Politics of Climate — conducted in 2016, 61% Americans are sure that they will make major changes to their ways of life to address the effects of climate change. Adopting solar energy, the price aspect aside, is one such way of life and is a conscious choice.
With 1.3 million solar installations lighting 6,560,000 U.S. households, a good momentum has been built up and it will definitely take more than a 30% tariff to kill it. Trump’s tariffs surely will not be the last chapter of the solar industry in the US.
