This morning the U.S. International Trade Commission found injury to the domestic crystalline silicon solar cell industry based on a petition bought by bankrupt manufacturers Suniva and SolarWorld. Akin Gump Strauss Hauer & Feld partner John Marciano, associate Shana Hofstetter and counsel Greg Lavigne, in Washington, D.C., explore what it means for live deals.
The fact that the Suniva 201 trade case is now moving to the remedy phase has the potential to slow or stop solar projects in the works. That means fewer jobs on its face. It also means higher prices for power from consumers.
Two ostensibly American solar panel manufacturing companies (one backed by foreign interests) are seeking to use the U.S. International Trade Commission to stunt the burgeoning U.S. solar industry.
The ITC determined today that the U.S. solar manufacturing industry has been harmed by the “dumping” of imported solar cells and modules at unfair prices. Now, we move to the remedy phase, where the ITC will determine what to do about the “harm”. The two manufacturers have asked the ITC to impose tariffs on solar cells and provide a price floor on solar modules.
Power plant owners determine how much to charge customers based on the expected cost to build the project. That means the project owner has to forecast costs when it pitches a deal to customers. For solar projects, the customer could be your local utility, but it could also be your local school, library, church or business.
Due to the length of time it takes to develop a project (particularly the larger ones), these forecasts often have to be made months or even years ahead of time.
Margins are thin and the competition for consumers of solar power is tight. If the cost changes by even a few percentage points, there are three possible outcomes. One, the deal with the consumer may have to be renegotiated, which delays the project. Two, customers could be stuck paying more for power to cover the higher cost of the project. Third, the project may not get built at all because the costs of construction now outweigh the revenue from contracts previously negotiated with the purchaser of power.
The prospect of a possible tariff has already created a shortage of panels, generally (even thin film panels), in the short term. At least three U.S. developers have stockpiled huge quantities of foreign solar panels as a hedge against the increase in price from a tariff. This has led to an increase of panel prices and a risk of unavailability.
It also means that a tariff will cause hundreds of small businesses (that couldn’t afford to place large panel orders) to become less competitive. This could exacerbate job losses and slow growth of solar in smaller markets.
Will projects be immune if they have already signed supply or turnkey construction contracts? Not necessarily.
Typically, the contractor bears the risk of price increases. Under most construction contracts, the project owner is signing on for the turnkey, fixed price, lump sum contract price. So, increases in costs of materials (like solar panels) and inputs are typically expressly the risk of the contractor.
Even so, the Suniva trade case is interesting since it likely would be considered a change in law under these contracts. Most allow the contractor a change order in the event there is a change in law (one of the few excusable events). In most cases, the contractor will be allowed to get a change order and shift that cost back to the owner (subject to how the change in law is drafted).
Some recent construction contracts expressly put this risk on the contractor, but they are the exception.
IMPACT ON RENEWABLE TARGETS
Even though national policy under the Trump administration has moved away from renewable energy targets, a significant number of local, regional and state agencies have set renewable power targets in both the near and long term.
The “stick” behind a lot of renewable targets is a penalty that must be paid by local utilities if they do not meet the targets for generation with solar, wind, hydro or other qualifying plants. Many of these policies were instituted with the assumption that panel prices would continue to go down, ensuring that these projects don’t become a burden on energy prices in local markets.
Look for local governments that have set renewable targets to grapple with these issues and reevaluate the penalties and timelines for noncompliance. In the short term, ratepayers may be the losers in the equation.
Utilities looking to satisfy their renewable targets may also look to other technologies like wind and hydro (if practical in their footprint) which may become more attractive while solar pricing takes a hit.
TEMPORARY BLIP OR PERMANENT ISSUE?
Many solar developers have a long pipeline of contracted projects waiting to be constructed. Given that power prices negotiated under these contracts assumed an environment without tariffs or price floors, many are likely to be “out of the money” if a tariff is implemented.
The question becomes whether these agreements can be renegotiated and how long any adjustment will take to implement.
In jurisdictions (like the Southeast) where the utilities are only required to buy power at their avoided cost, it is unlikely pricing can be adjusted on the offtake agreements. This means if the remedy is more than a very small tariff, these deals are dead if other costs of the project cannot be squeezed down. The same is likely true for power contracts awarded after a public request for proposals. The process would have to be repeated. Residential solar projects also have limited ability to renegotiate consumer agreements because they were initially priced with only a very small discount to retail rates. Retail rates will not change after a tariff is imposed.
The bright spot may be commercial and industrial projects where deals can be renegotiated, albeit presumably with some reluctance on the part of the offtakers.
Any new offtake contracts signed should have a pre-defined repricing mechanism to adjust for the potential of a tariff or price floor.