China's solar subsidy cuts erode the impact of Trump tariffs

[August 30, 2018]  By Nichola Groom

LOS ANGELES (Reuters) - A move by China to slash subsidies for domestic solar installations has unleashed a flood of low-cost Chinese-made panels onto the global market - pushing down prices and eroding the impact of U.S. President Donald Trump’s tariff on solar equipment imports, according to industry officials.

That's good news for U.S. companies that purchase and install imported solar panels, including Inovateus Solar and Pine Gate Renewables, which had expected that the protectionist policy would raise their costs and slow their business.

The falling prices, however, will hurt panel manufacturers including China’s Jinko Solar [JKSAA.UL] and Korea’s Hanwha Q CELLS, which had announced hundreds of millions of dollars in U.S. solar manufacturing investments in the expectation that tariffs would boost their profits.

Trump announced a 30-percent levy on all imported solar panels in January, his opening salvo in an escalating global trade war that he says is aimed at helping U.S. manufacturers and other businesses rebound from years of decline. Critics say the tariffs could backfire by hurting other domestic industries that depend on imports.

The prospect of solar tariffs initially sent U.S. panel prices soaring, making domestic manufacturing more profitable and drawing a handful of new investments. But the tax on imports cooled the red-hot pace of U.S. solar installations by raising panel costs.

The U.S. solar industry employs more than 250,000 people, with about 40 percent of those people in installation and 20 percent in manufacturing, according to the U.S. Energy Information Administration.

The solar panel market shifted in June after China - the world’s top solar installer and a major critic of the Trump tariff - announced a plan to cut the amount of installed solar capacity this year nearly in half by cutting subsidies for such projects. While the move could undermine the effectiveness of Trump's tariffs on panels, China's National Development and Reform Commission has said the subsidy cuts were motivated mainly by domestic concerns about the industry's rapid growth.

Surging solar capacity has left China struggling to build sufficient transmission infrastructure to link projects to the electrical grid, and the finance ministry has scrambled to find billions of yuan in subsidies owed to new projects.

The subsidy reductions forced Chinese panel makers to find new buyers on the export market. The increased global supply has driven down the cost of buying a panel in the United States to about 40 cents a watt from 45 cents shortly after the tariff, according to pricing data from Wood Mackenzie Power & Renewables. The research firm said prices could fall to about 30 cents by the end of 2019 – less than they were before the administration began considering a tariff in 2017.

"It's becoming a buyer's market again," said Sheldon Kimber, chief executive of U.S. developer Intersect Power, a solar project developer founded in 2016 that has plans to purchase large volumes of panels starting in 2019.

The unexpected price declines are eroding the effectiveness of the tariff in boosting manufacturing profits and could completely offset its initial market impact by November, said Paul Strigler, a vice president with Esplanade Capital, a Boston-based investment firm that has a fund dedicated to solar energy investments.

White House spokeswoman Lindsay Walters did not respond to a request for comment. The four-year tariff on solar modules steps down by 5 percentage points a year before expiring in 2022.

The Solar Energy Industries Association (SEIA), a trade group representing both solar developers and panel manufacturers, opposed the tariffs as a net loss of industry jobs and revenue. The falling prices mitigate some of the pain but still amount to a drag on growth, said SEIA spokesman Dan Whitten.

"It may be less bad than it could have been, but it's still not nearly as good as it should be," he said.

BRIGHTER OUTLOOK FOR DEVELOPERS

Utility-scale solar developers including Cyprus Creek Renewables and Southern Current told Reuters earlier this year that the higher panel prices caused by the tariff had forced them to cancel or freeze plans for more than $2.5 billion in projects – a figure that topped new investments announced by manufacturing firms that benefitted from the tariffs.

Solar panels sit on the roof of SunPower Corporation in Richmond, California March 18, 2010. REUTERS/Kim White/File Photo

Many installers are now feeling more optimistic.

South Bend, Indiana-based Inovateus Solar, for example, said lower panel prices had helped it close a deal in June to develop a 6 megawatt system for the city of Pratt, Kansas and to revive hiring plans.

"The drop in panel prices has really helped stimulate more activity," Inovateus co-founder TJ Kanczuzewski said in an interview.

The lower prices have also helped the economics of projects already in the pipeline, especially those with marginal prospects for a payoff, said Ben Catt, chief development officer of Charlotte, North Carolina-based Pine Gate Renewables.

Cypress Creek said the decline has yet to resuscitate its shelved projects for 2018, but the company said it expects panel prices to keep falling, potentially helping projects next year.

"Ramping construction up and down is not something that happens overnight," said Cypress Creek's director of government affairs, Hewitt Strange.

Southern Current did not respond to requests for comment.

Colin Smith, an analyst for Wood Mackenzie Power & Renewables, said he expects the U.S. utility-scale solar market to expand between 2020 and 2023 because of the falling price of panels, instead of remaining flat as the firm had forecast earlier this year.

"The market has become comfortable again,” Smith said.

MANUFACTURING 'MORE CHALLENGING'

Panel manufacturers that announced U.S. expansions in response to the tariffs - including China’s Jinko Solar, California-based SunPower Corp and Canada's Heliene - said they still planned to move forward with planned investments.

But the falling prices are forcing them to operate at a lower margin, they said, to compete against foreign rivals who benefit from lower labor and material costs.

"It makes domestic manufacturing that much more challenging," SunPower Chief Executive Tom Werner said in an interview.

SunPower earlier this year agreed to take over the Oregon factory of troubled SolarWorld Americas - one of the companies that sought the tariffs. The deal is expected to close before the end of the third quarter, SunPower said. The facility is capable of producing nearly a gigawatt of solar cells and modules a year, or enough energy to power about 700,000 homes.

Jinko's investor relations director, Sebastian Liu, called the price collapse a normal fluctuation and said the firm was "making reasonable margins" thanks to a focus on higher efficiency products and lower costs for polysilicon, solar's key raw material. He said Jinko will begin producing panels at a U.S. facility in Florida in the fourth quarter of this year.

Heliene President Martin Pochtaruk said his company had weathered such price drops before and would do so again as it works toward opening its Minnesota factory next month. Heliene took over the facility in May of 2017 and has invested $21.5 million to get it up and running. The company expects to produce 140 MW of panels there a year.

Heliene said it would focus on cost cuts to compensate for falling prices.

"It is of course stressing" Pochtaruk said of the sudden market shift, but also "business as usual" in a volatile sector.

(Reporting by Nichola Groom; Editing by Richard Valdmanis and Brian Thevenot)

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