Clouds drift over US solar industry

With robot precision, a series of machines at SunPower’s headquarters in San Jose, California, slices wafers from an ingot of silicon, treats them and coats them to make cells, and then assembles those cells into panels. The site is a manufacturing research facility, opened in August, that is emblematic of the success of the US solar industry over the past decade. Between 2007 and 2016, installations of new panels rose nearly 90-fold, from 169 megawatts of capacity to 15 gigawatts.

As it enters 2018, however, the industry faces a clouded future. President Donald Trump has talked about his enthusiasm for solar power, but the priorities of his administration lie elsewhere. Tax reform, electricity regulation and potential new duties on imported panels are looming over the industry, threatening to disrupt the conditions that have made success possible. Already, installations have slowed for the first time in more than a decade, dropping about 22 per cent to 11.8GW last year, according to estimates for the Solar Energy Industries Association. This year is expected to be weaker again.

SunPower’s San Jose facility does not churn out panels in bulk for the mass market. Instead, it makes small batches to support the company’s research and development, delivering finished products so manufacturing processes and performance can be tested. When a new product does go into mass production, it will probably be at SunPower’s plants in the Philippines and Malaysia.

“A person building a cell in America costs five times as much as a person elsewhere. And they are not five times as productive,” said Tom Werner, SunPower’s chief executive.

The company employs about 300 people in San Jose, where one wall of the facility is covered with patent awards — but mass production there is unlikely ever to be viable, he added.

The distinction is important because the lack of cell and panel manufacturing plants in the US may turn out to be the industry’s greatest point of vulnerability. For most US solar companies, revenues come from designing, managing, installing and maintaining systems, generally using imported panels. If they do manufacture, they mostly do it outside the US. Imported cells and panels took about 95 per cent of the US market during 2012-16.

Imports have made it possible for the solar market to grow very rapidly. Driven by global overcapacity in manufacturing, the cost of panels has spiralled downwards, helping make solar power competitive against other forms of generation. Nearly three-quarters of the large-scale solar projects in the pipeline in the US have been ordered because they were the lowest-cost option for supplying power, rather than because of state rules mandating the use of renewable energy, according to GTM Research.

However, the finances of many US solar companies have been fragile, as they have focused on rapid growth over profitability. In 2016, SunEdison went into bankruptcy and Elon Musk’s SolarCity was swallowed up by Tesla. The surviving companies seem to be on a firmer footing: Sunrun, the largest independent residential solar supplier, is generating net cash. But policy changes now threaten to destabilise the industry again.

One threat that looked serious a month ago has been largely defused. Proposed tax reforms would have slashed the value of credits for renewable energy, but the final version signed into law by Mr Trump shortly before Christmas had shed almost all of those adverse impacts. The reforms could nevertheless still have implications for renewable energy. Most of the equity investment in US renewables comes from large companies that are able to take advantage of tax credits, but these are now worth less since the main federal corporate tax rate was cut from 35 to 21 per cent.

Chart: Solar shares' rollercoaster ride

A second looming threat is the prospect of new subsidies to help coal-fired and nuclear generation in competitive electricity markets. Under a rarely used power, Rick Perry, energy secretary, last year called on the Federal Energy Regulatory Commission to “protect the resiliency of the electric grid” by drawing up rules to subsidise coal and nuclear plants. Ferc played for time, asking for a month-long extension on his original deadline, saying it needed longer to assess more than 1,500 comments from interested parties. But it still needs to come up with a response by January 10.

The impact on the solar industry will depend on how any coal and nuclear subsidies are structured, said MJ Shiao of GTM, but “anything that subsidises uncompetitive generation means that other alternatives [including solar] need to be priced more aggressively”.

The biggest worry for most of the US solar industry, however, is the prospect of new duties on imports. The plunging cost of panels has made life difficult for American manufacturers, and last year two bankrupt companies that produce in the US, Suniva and SolarWorld, brought a complaint at the International Trade Commission seeking protection under the rarely used Section 201 of the 1974 Trade Act.

The ITC agreed that US manufacturers had suffered “serious injury” from imports and proposed a range of possible remedies, but the final decision lies with Mr Trump. He is scheduled to deliver a decision by January 26, and if he chooses to impose the tariffs sought by Suniva and SolarWorld, the price of panels in the US could double.

Suniva has expressed optimism about his decision, saying it “applauds the Trump Administration for championing American manufacturing in the face of cheating by China and its proxies who want to kill American jobs”. However, US solar companies that use imported panels and the Solar Energy Industries Association say that, on the contrary, tariffs could wipe out tens of thousands of jobs by raising the cost of solar power. Ed Fenster, chairman of Sunrun, said he was hopeful that Mr Trump would “do what is best for American workers” and hold back from new duties.

Most US solar companies take a similar view. Even Tesla, which has been investing in US manufacturing and started production of solar panels at its new Buffalo plant last year, told the ITC that the Section 201 case “threatens to significantly harm the US solar industry at large”. It said its own plans to manufacture in the US would go ahead “regardless of the outcome of this proceeding”.

Mr Werner backs the idea, supported by the SEIA, of a licence fee on imported cells and panels, raising money that would be paid directly to US companies, perhaps to invest in new technologies. “Cell manufacturing: that’s yesterday’s battle,” he said. “We should be investing in energy storage, in integrating renewables into the grid. That’s the future.”

Mr Trump, however, has consistently made clear his instinctive enthusiasm for tariffs. For the US solar industry, the next three weeks will be a nervous time.

Bright spots in the market

In terms of stock market performance, by far the most successful US solar company over the past 12 months has been First Solar. Its shares have more than doubled from their low point close to $26 in early April last year, to about $70 this week. In part, that has been the result of a quirk in the trade case that threatens its US competitors. First Solar is a developer and a manufacturer, with factories in the US, Malaysia and Vietnam. But any panels it imports into the US would not be hit by new duties imposed by President Donald Trump, because it uses a different technology from the rest of the industry. Most solar panels are made from crystalline silicon cells assembled into modules, but First Solar uses “thin film” technology, with panels made from cadmium telluride bonded between sheets of glass. 

First Solar said it does not expect Mr Trump’s decision to make much immediate difference to its business. Last year, as companies scrambled to buy imported panels before any new duties hit, it gained from the rise in prices and demand. However Alexander Bradley, chief financial officer, recently told analysts that for 2018 “we see relatively limited change associated with whatever the outcome is”, because the company already had firm contracts that could not be cancelled. First Solar attributes its success to the greater efficiency of its technology, which means that in terms of dollars per watt, it has “the lowest cost product in the market today”.

Investors are not so sure that the trade case is irrelevant, however. Last year, First Solar’s share price responded to changes in expectations about import duties. If Mr Trump does crack down hard on imported crystalline silicon panels, First Solar could be one of the biggest beneficiaries.

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