Will tariffs on Chinese modules hurt your solar installation business?
On March 2, the U.S. Commerce Department is scheduled to make a preliminary ruling on placing an import tariff on Chinese solar modules. This ruling was prompted by a trade case petition filed with both the Commerce Department and the International Trade Commission (ITC) in October by a coalition of seven American solar photovoltaic (PV) module manufacturing companies, calling themselves the Coalition For American Solar Manufacturers (CASM), who accuse the Chinese solar industry of using billions of dollars in government subsidies to sell its panels in the United States at below cost, a practice called "dumping." In the complaint, the U.S. solar manufacturers claim they have been harmed because China’s government uses cash grants, discounts on raw materials, preferential loans, and tax incentives to gain an unfair portion of U.S. market share for solar module exports.
"Obviously, these subsidies have gone into the industry, and their full intention is to export and control markets in other countries," said Gordon Brinser, chief executive of SolarWorld Industries America, Camarillo, Calif., the lead company in the coalition, in a statement accompanying the petition. Brinser claims Chinese solar companies, such as Suntech Power Holdings Co. and Trina Solar Ltd., are flooding the United States with cheap solar panels, subsidized by $30 billion a year from the Chinese government. By contrast, the U.S. government provided subsidies of around $1 billion to the entire U.S. solar industry the same year, according to the Energy Information Administration.
The petition alleges the subsidies are inconsistent with World Trade Organization’s rules in its Agreement on Subsidies and Countervailing Measures, which ban the use of subsidies by a government to aid its export industries and also allow cases of dumping to be pursued within member countries. The trade case asks for duties of 50% to 250% to be placed on Chinese solar module imports.
In December, after an initial investigation of up to 30 Chinese solar subsidies, the ITC voted to allow the case to proceed and for the Commerce Department to announce preliminary duties this year. "There is a reasonable indication that a U.S. industry is materially injured by Chinese imports," read the statement released with the ruling. Following that, in late January, the Commerce Department announced it had found a "reasonable basis to believe or suspect" that Chinese subsidies of solar panels imported to the United States were in violation of international trade agreements and that, as a result, domestic manufacturers are facing "critical circumstances."
Furthermore, when on March 2 the Commerce Department announces its final decision, if tariffs are to be enacted on Chinese imports, they will be retroactive from 90 days of the date of the decision, meaning they will require Chinese companies to pay higher fees on all panels imported to the United States as of Dec. 3, 2011. The retroactive order is to prevent the potential flood of new imports should the tariffs be imposed.
U.S. imports of Chinese modules have increased greatly in the last few years (click here to see Fig. 1). Currently, it is estimated that Chinese modules make up almost two-thirds of module imports in the American market (click here to see Fig. 2). In the "U.S. Solar Energy Trade Assessment 2011" released in August by the Solar Energy Industries Association (SEIA), Washington, D.C., it was revealed that the United States imported $1.4 billion worth of solar panels and other solar products from China in 2010, as compared to $430 million in 2009. "Much of this growth came from PV modules, as Chinese producers gained a stronger foothold in the U.S. market in 2010," reads the report.
However, as proof of its grievances, SolarWorld Industries America has calculated that imported Chinese solar panels increased to $1.6 billion in the first eight months of 2011. Using data from the U.S. Customs and Border Protection’s Port Import Export Reporting Service, the U.S. solar manufacturer points to a 76% increase in Suntech imports in November compared with the previous month. In addition, imports from Trina rose 209% in the first half of December compared with the first half of November. "This significant increase in imports demonstrates that the Chinese know they have violated U.S. and international trade rules and are trying to evade the consequences," said Brinser in a statement.
In its defense, Suntech referred to a modification in the U.S. government program for solar installations at the end of 2011 for the rise in its imports. Previously, the program paid solar developers a cash grant of 30% of the cost of new products. Currently, the tax benefit program allows solar power plant developers to deduct 30% of a project’s cost from their taxes over several years. "Strong U.S. market demand in the fourth quarter was driven largely by the anticipated expiry of the cash grant program," said a Suntech representative.
Despite this explanation, the coalition’s suit claims the less expensive Chinese imports contributed to the recent collapse of three U.S. PV module manufacturers, including the politically charged Solyndra, which participated in the U.S. Department of Energy’s (DOE) loan guarantee program. However, it has not been determined if these business failures are causally linked to Chinese imports.
On average, Chinese panels are around 10% cheaper than panels made elsewhere. As a result, the wholesale price of solar panels in the United States has fallen from $3.30 per watt in 2008 to
$1 to $1.20 a watt now, by some estimates. However, this drop in price also coincides with the 2010 decrease in the cost of silicon used to make the panels.
Nevertheless, if tariffs are added to Chinese imports, the cost of all modules is expected to rise, causing American homeowners and businesses to pay more for the panels. "The prices will have to increase a little," said Brinser. "They will find their new, natural balance in a competitive and legal environment."
Whatever the reason for cheaper prices, many industry leaders credit them with the recent solar boom in the country. In 2010, according to SEIA, there were 887MW of new PV installations installed in the United States, as compared to 435MW in 2009 (click here to see Fig. 3). Growth was again evident in 2011. "The U.S. solar industry grew substantially last year, almost by 100%," says Jigar Shah, chairman and co-founder of the Coalition for Affordable Solar Energy (CASE), which describes itself as an organization dedicated to creating a level playing field for the solar industry and supporting policies and business models that make solar accessible and affordable. "This year, it could grow by another 100%."
But, according to Shah, who in 2003 founded SunEdison, which introduced the revolutionary business model of selling solar as a service, tariffs could threaten that growth. "The problem is if prices are going to go up, some customers are going to find the economics a little less attractive," he says. "Now the rate of return is only 8%, and maybe they don’t want to do something at only 8%. We’re not suggesting that all solar will go away, but it wouldn't grow at the rate it normally would have."
On January 30, the Brattle Group, Washington, D.C., which provides consulting and expert testimony in economics, finance, and regulation to corporations, law firms, and governments around the world, released a solar jobs study sponsored by CASE. According to the study, solar panels make up about a quarter of the cost of installing a solar system on a home roof and about 40% of the cost of utility-scale systems, which are more efficient to install, because they do not require separate engineering and design for multiple small systems. Under the imposed tariffs for panels, the cost of installing a 20MW solar system for a utility would rise from $62.6 million to $68 million. Therefore, the report is projecting slower growth in the U.S. solar industry, which may result in loss of jobs, both directly and indirectly related to the solar industry.
According to the Brattle report, each megawatt of new solar capacity installed in the country creates 30 new jobs. However, of those jobs, only three are in manufacturing. Of the other 27 jobs, about half are solar installers, while the other half are employed in engineering and design, sales, marketing, and "all of the other professions in the middle."
The SEIA’s "U.S. Solar Energy Trade Assessment 2011" report backs this up. According to the report, "a significant portion of the domestic value generated by the PV industry resides beyond manufactured components: site preparation, labor, permitting, financing, and other industry ‘soft costs’ comprised nearly 50% of total solar revenue in 2010."
Overall, the U.S. solar industry is still going to grow jobs, according to Shah. But under the tariffs, the estimated 100,000 new jobs over the next four or five years it was projected to create may not materialize."Those people are not going to get hired, many of them, if the tariffs are put in place," he says.
In addition, some workers downstream of manufacturing may also lose their jobs. "These workers far outnumber the manufacturers, and some of them are going to get laid off," he says.
CASM said in a statement, however, that there was more to its petition to the Commerce Department than the balance of jobs. China, it said, is "breaking U.S. laws and international treaties that the world community has deemed essential to preventing government-sponsored destruction of foreign industries.’’ Additionally, the group predicts that if China is allowed to establish a monopoly, it would later raise prices.
Because price is only one consideration when sourcing solar equipment, some solar contractors are ambivalent about the proposed tariffs. Joe Bono, president and CEO of Solar Universe, a Livermore, Calif.-based solar integrator and franchiser, says that it’s the job of the solar integrator to sell clients on reliability and a good return on investment as opposed to focusing solely on a cheaper up-front cost. "You rarely advise your clients to take the cheapest bid," says Bono. "It’s critical any integrator, large or small, consider their reputation when it comes to acquiring certain products. Remember, you’re putting an entire solar system onto somebody’s home or business — your name is on the line."
According to Bono, it’s "buyer beware" when it comes to purchasing solar modules. "Reliability is key," he says. "Modules are just one part of a global supply chain. As such, investigate the companies before you give them your business. Make sure they offer performance data and warranties."
Performance is what clients want, maintains Bono. "Be sure they’re going to stand behind their products and have the finances to stick around for the same number of years their solar systems will last," he says.
In addition, sometimes there are spin-off companies that may exploit the good reputation of a company to pass off inferior products. "Sometimes, you can find panel manufacturers that are trying to make an entry into the industry, and they may offer some discounting to try to get some market share to start," continues Bono. "Make sure you know where the components of the system are being manufactured and weigh the risk against the reliability."
Although price isn’t everything when it comes to modules, it is still important. There are ways to acquire lower prices on modules. "Most high-profile solar contractors benefit from aggregating their demand across the entire company, putting them typically in a better position to negotiate with and buy from manufacturers directly," says Bono. "The bigger guys can send out a request for proposals to multiple manufacturers and expect competitive bids."
With more than 1,000 solar energy installations in its portfolio, Borrego Solar, the San Diego-based solar design and construction firm, says it saves clients money and reduces long-term risk by sourcing materials directly from the manufacturers. Yet, pricing is only one part of the company’s analysis when it comes to choosing equipment. "We believe in a holistic approach to procurement," says a company representative. "We look very closely at the total return and risk profile including price, payment terms, warranty terms, provider balance sheet, and technical specifications."
The company holds no binding partnerships with manufacturers, feeling that would limit its flexibility. For its consulting clients, the solar integrator issues a formal request for proposals (RFP) in a three-step process. It creates a metric to evaluate vendors on the basis of efficiency, cost, financial viability, aesthetics, and quality. Then it conducts a competitive bid process to source modules, inverters, and racking from prequalified vendors. Finally, the company prepares and analyzes the results of the bid.
For smaller companies, franchises can offer the same economy of scale when it comes to purchasing materials. Under the umbrella of a franchise, buying power is pooled so the companies hold more leverage and can purchase directly from the solar distributors or manufacturers. "If you buy in large volume, you get better terms, better pricing, and insight into availability," says Bono.
Additionally, there are circumstances every integrator can take advantage of. According to Bono, there are times, such as at the end of a fiscal quarter, when manufacturers and distributors want to sell more inventory. "They may be willing to negotiate better pricing if they haven’t quite hit their sales targets for the quarter," he says. "You may catch them in a situation where they need to make a sale."
Unfortunately, solar manufacturers can’t set up accounts for every solar installer, particularly those who don’t install solar systems on a full-time basis. These smaller integrators are be able to source their equipment through solar distributors. In addition, some electrical distributors have set up renewable energy divisions. For instance, in 2010, Albuquerque, N.M.-based National Electric Supply announced its entrance into the renewables market by adding a 250kV PV system on the roof of its 95,000-square-foot headquarters. It also launched a new division, Energy Solutions Group, to provide customers with a package of PV products and work with customers for their clients’ system design and pricing process, assist with on-site surveys, and provide information and package pricing. (For more information on the distributor’s foray into solar PV, read "Where Solar Makes Sense" in the August issue of Electrical Wholesaling, available on the magazine’s website at http://ewweb.com/distributor/electric_solar_makes_sense/.)
Although buying from a solar or electrical distributor may be slightly more expensive than buying directly from the manufacturer, they can provide additional technical support. "The challenge with buying from a distributor is you’re introducing one more person into the string who has to take a profit," says Bono. "But they can offer more in-house support."
Furthermore, if you calculate the amount of equipment you’ll need for your business in a year, you can try to negotiate a larger purchase at a lower price. "Try and negotiate a supply of panels at a price that reflects the sale of those panels or the sale to you of those panels over the course of the year," he says. "Volume pricing is one of the ways to get a better deal. If you focus on the best relationship you can build and maintain with your distributor, any integrator — large or small — can give their business to one distributor, driving pricing down."