Participants in solar project finance are beginning to digest the long-awaited announcement that the U.S. will impose a tariff, initially of 30%, on imported solar cells and modules.

The trade relief measures approved by President Donald Trump will apply for four years, stepping down each year, and include an exemption for the first 2.5 GW of solar cells imported each year, according to a statement issued by U.S. Trade Representative Robert Lighthizer on Jan. 22. 

The tariff steps down from 30% to 25% in year two, 20% in year three and 15% in year four.

Despite the tariffs being more or less in line with expectations and bearing some resemblance to the recommendations made by the U.S. International Trade Commission last October (PFR, 10/31), the impact on individual solar project finance deals "remains to be seen," says a New York-based project finance banker. "We're yet to see how people respond and adapt."

Utility-scale projects that won power purchase agreements in aggressively-bid requests for proposals in the last six-to-12 months are the most likely to suffer serious consequences, deal watchers tell PFR.

Since the potential impact of the trade case became clear in the middle of last year, market participants have found ways to factor the risk of increased panel costs into deal documentation.

"Most of the large developers have already addressed potential tariff measures in frame agreements with producers secured over the last 6-9 months," said Ted Brandt, ceo of Chicago-based boutique investment bank Marathon Capital, in a statement. "The open question will be how much of the price increase will be borne by developers, versus investors."

The economics of smaller-scale projects are also likely to provide some insulation for those kinds of projects. "Community solar and [commercial and industrial] are intrinsically more rich, so should be able to absorb the tariffs better than utility-scale," says the New York-based banker.

In some cases, utilities could allow participants in RFPs that were completed before the tariff announcement to reevaluate their bids in light of the decision. Even before the announcement, Xcel Energy had decided to "allow bidders to refresh their bids" in its most recent procurement process, which had resulted in record prices for renewables-plus-storage projects. Xcel also cited the recent tax reform bill as a reason for reopening the bidding (PFR. 1/18).

Responsible participants in recent RFPs would have factored the potential rise in panel costs into their bids, says a solar developer, adding that it would not have been practical to delay the procurement process until after the tariff decision was made.

"There's no way to stop business," he says, adding that his firm had participated in an RFP for a national retailer in the past few months. "Developers may bid too low, but groups that award them these deals that are too good to be true also bear some responsibility if the projects don't get built," he adds.

The imposition of the tariff could meanwhile put the brakes on efforts by solar developers to finance projects, especially those located in Texas, on the basis of power hedges. Interest in such deals had been intensifying as the cost of solar panels had come down (PFR, 1/12).

If trade restrictions hamper solar development in ERCOT, there could be a silver lining for other market participants.

"To the extent there's less development, it's beneficial to the fossil plants," says a developer of gas-fired plants in Texas.

However, any impact is likely to be short-lived, according to analysts.

"While tariffs may delay investments in solar generation at first, we think the long-term impact will be limited since the tariffs expire in four years and the recent pricing of solar energy for 2023 reached record lows," says Leslie Ritter, an analyst at Moody's Investors Service, in an e-mailed statement. "The near-term impact is also partly mitigated by annual tariff declines, exceptions for the first 2.5 gigawatts of imports, and exemption of Canadian panels," she adds.

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