Stephen Lacey: Today, we're talking about something that you have been following very closely that I am trying to wrap my head around, and I know that a lot of people in the solar industry are trying to wrap their heads around as well. This is Suniva's petition to the International Trade Commission to put tariffs and minimum prices on solar cells and modules coming into the US. This is not solar equipment coming in from Asia, mind you, this is solar equipment coming in from everywhere, so this could have a very dramatic pricing impact on the solar industry. We mentioned the Suniva petition when it was first proposed when Suniva filed for bankruptcy, but the ITC has officially taken up the case, and we're going to talk about what happens next, what could happen to pricing in the US, and all the legal maneuvering around this fairly complicated case.
Shayle, let's take a step back and remind everyone exactly what happened and what a section 201 petition is.
Shayle Kann: Right. Ok, let's go back a few years to start. In, like, 2007 through 2011, China started growing its solar manufacturing. Before that, most of the solar panels that were installed were manufactured in either Japan or Germany, and the US was starting to come up as a manufacturing location largely thanks to a new influx of new thin film solar manufacturers. This was in the days before companies like Solyndra failed. It looked like the US was going to be home to a lot of solar manufacturing and in part because of thin film. None of that really played out, and so what ended up happening instead was that most of the solar panels that we were installing in the US increasingly were shipped to the US from largely China and Taiwan.
Fast forward to 2011, SolarWorld, which is a Germany-based solar manufacturer with a big operation, manufacturing operation, in Oregon filed an anti-dumping countervailing duty position. This is one type of trade remedy petition that they filed to the Department of Commerce in 2011 asking for import tariffs on Chinese cells and modules imported in to the US, so specific to China. That ended up succeeding, so they got import tariffs imposed from China. Then they expanded it a couple of years later because a lot of manufacturers were shipping cells from Taiwan to be assembled in China. That was a loophole of sorts, so it expanded the scope in 2013. As a result, we have tariffs today on both China and Taiwan.
Now, the result of that was not a big boom in US solar manufacturing. Largely, what happened instead is that we ended up shipping a lot of solar panels into the US from other parts of Asia, Southeast Asia, from Mexico, from even Canada, from bunch of other locations. As a result, in 2016, about 13 percent of all the solar panels that were installed in the US were actually manufactured in the US. The other 87 percent came from somewhere else in the world.
Stephen Lacey: We're manufacturing a couple of gigawatts? That's what the capacity is in the US right now?
Shayle Kann: Yes, exactly. Last year, the US installed about 14.5 gigawatts of solar and some were around 2 gigawatts of manufacturing, so we're still importing a lot.
Now, Suniva was one of the few remaining module manufacturers in the US based in Georgia, and they filed for bankruptcy last month. As part of their bankruptcy filing, their creditor who has seen them through bankruptcy called SQN said that they intended as part of the bankruptcy financing to file a section 201 petition. Section 201 is a different kind of trade petition from the anti-dumping one that was filed in 2011, and it's rarely invoked. This is the first time that there has been a section 201 investigation since 2002. The last one was in the steel industry in 2002, and it's different for in a bunch of ways that we'll talk about. But importantly, in contrast to the anti-dumping version, which we've already seen, which is generally focused at a specific country or a small number of countries, the potential results of a section 201 petition can be much broader.
As you mention, we don't know what'll happen yet, but it's possible that whatever remedies come out of this, they could apply to imports from everywhere. It could be applied universally across the board, which would obviously have a much bigger impact on the market. Suniva filed the petition, and the more recent news was the the International Trade Commission decided to take up the petition. They official started the investigation. That wasn't a guarantee that they were going to do that because they had to look at whether Suniva had standing, basically represented enough of the US industry to have standing to represent that industry. The ITC decided that Suniva did, and sort of simultaneously with that, SolarWorld who had been the initiator of the other trade petition joined on to this one, so now it's both as co-petitioners, SolarWorld and Suniva, which means they definitely have standing, and so the case is moving forward. Now we're off to the races.
Stephen Lacey: I'm particularly intrigued by this SQN portion of the story, which has just gotten bizarre in the last couple of weeks. Bloomberg reported recently that SQN had sent a letter to the Chinese Chamber of Commerce basically saying we'll drop this case if you or a Chinese company that you represent buys us out.
Shayle Kann: Yes, so SQN effectively owns all the Suniva assets now through bankruptcy and basically said, "Look, if you buy these assets off our hands, then there's no reason for Suniva to pursue this case anymore." It was going to be a $55 million sort of way to get around having the case filed in the first place.
Stephen Lacey: Way to get around is one way to put it. Extortion is another way to put it.
Shayle Kann: Yes, I mean, if that's really true, and SQN just wants its $55 million back and is willing to totally upend the US solar industry as a whole in order to get its payment back and that's what this is really all about, then that's totally crazy.
I will say, that day has probably passed because first of all, nobody bought Suniva back when SQN, or Suniva's assets back when SQN sent that letter, so then Suniva went and filed the petition, but then now that SolarWorld has also joined on -- SolarWorld, of course, also going through bankruptcy, insolvency in its parent company in Germany -- but its the US part of SolarWorld that filed on to this petition. Now that SolarWorld's involved as well, you can't really just buy Suniva's assets and get out of it because you still got SolarWorld in the petition. One way or another, this is moving forward now.
Stephen Lacey: It's not obviously not just Suniva that has suffered, as you said. SolarWorld has joined the petition because it filed for insolvency, and Mission Solar, which is an Austin, Texas-based manufacturer, is down to a skeleton crew. I'm told they've had a number of major layoffs. This is bad for pretty much anybody operating in the US right now. The environment is bad, so there is a case to be made if you're one of these companies that we need to do something bigger and bolder. You could make the case, this isn't just about Suniva holding the industry hostage, that this truly is about an existential threat to US manufacturing because it's not just one company that's been brought down, it's many different companies.
Shayle Kann: Yes, but the counterpoint to that is every solar manufacturer globally is hurting right now. We're in a period of oversupply, prices have crashed. As a result, the margins for every single solar manufacturer be they America-based or China-based are suffering. Some companies are going to survive through that and come out the other end when we end this oversupply cycle and some are not, and a lot of the US-based companies have less ability to weather that storm. They can't price as aggressively, they don't have as a big a balance sheet for whatever reason.Either you could say, well that means the US needs to do something about domestic solar manufacturing, and I'm not opposed to that idea, whether the answer is import tariffs or not is another matter, or you could say, look, they just couldn't compete. This is a open global market, and they're not competitive so they can't last through a downturn cycle.
Stephen Lacey: Couldn't compete even with tariffs in place.
Shayle Kann: Even with sort of limited tariffs on China and Taiwan.
Stephen Lacey: What the heck is going to happen now? I mean, this thing is filed, the government has said they're going to go ahead with it. We have, I think 150 days, right? Because it's usually a 120-day process, but they've given themselves an extra 30 days.
Shayle Kann: Well, the process is a little bit longer than that, ultimately. Here's how the process goes. First, I guess, let me just say this. I think there's going to be a period during which things are going to get a little bit quiet, and it would be a mistake to think that because things get a little bit quiet, you're not hearing this in the news all the time that this isn't still a huge deal for solar in the US. This is the most important thing solar is facing in the US right now, and anyone who's involved in this market should be paying incredibly deep attention to it and getting involved in any way that they said.
Stephen Lacey: Yes, so our Solar Summit, when you were on stage with John, and then I immediately went up with SEIA CEO Abby Hopper, we kind of had a one-two punch explaining the importance of this case, and there were a lot of people in the room who had not been paying attention, who came up to me afterward, and they were completely flabbergasted that this had such broad implications for the industry.
For us, we've been kind of paying attention to this from the beginning, and we kind of understand that it's a big deal, and I was taken aback by who many people who just had no idea that this was going on.
Shayle Kann: It's also really, it's kind of wonky when you get into it. You're hearing about the section 201 trade petition at the International Trade Commission and remedies and all this kind of stuff. It's easy to get lost in the noise. I just wanted to start with like, this is now, because it is underway, this is happening, and it is incredibly important.
Let's talk through what the process is going to look like, and then we should talk about what might happen as a result and what that might mean for the market, which will speak to why it is sort of important. Here's the process the International Trade Commission already initiated. They basically said, they called this an extraordinarily complicated case, and because of that, they gave themselves a little bit of extra time to get to the first next milestone, which is, they have to determine whether there has been "serious injury," that's the technical definition in quotation marks, "serious injury" to domestic manufacturing, and that the proximate, the primary cause of that injury was increasing volume of imports. That's what they have to determine, and they've got until September 22nd to make that determination, so that's a thumbs up or thumbs down. It's binary.
If they say thumbs down, the domestic industry has not suffered that much or it has suffered but there's been another reason for it, then the case ends right there.
If they give a thumbs up, then the next step is they have to do a remedy recommendation. This is when the ITC will say, "Ok, there has been industry. Let's figure out what to do about it."
What Suniva is requesting, which we can talk about in detail, is just a request. The ITC can take that request, they can change it, they can introduce a completely different set of remedies, so those can be anything from import tariffs to minimum import prices to volume quotas. They have pretty wide leeway in making a recommendation. Assuming that they do find injury by September 22nd, they then have until November 13th to make their remedy recommendation. Now, this is where this process is significantly different than the process in the previous case. In the previous case, it was sort of a quasi-judicial process, exists largely outside of the political atmosphere. This one is not like that. Once they make a remedy recommendation, it goes directly to the desk of the president, and the president has full authority to do pretty much whatever he wants. He can accept the recommendation, reject the recommendation, change the recommendation. It is, again, just a recommendation that the president can then do anything with. He would involve the US Trade Representative and other members of his cabinet, but at the end of the day, President Trump, presuming he is still the president at that point, would make whatever decision would have to get made if it gets to his desk.
That's where the biggest uncertainty lies because obviously in this administration, we just don't have a great sense of what he would do.
Stephen Lacey: We do have some sense, and we can only base our estimation of what he'll do based on his campaign rhetoric. He said during his campaign that he was going to declare China a currency manipulator. He ended up walking back on that. He really stoked a lot of anger and fear about China, and since his administration started, I think he's toned that back a little bit. With that said, he has continued to push for domestic wins to keep industries and companies operating in the United States. Whether it's good economic policy or not, or good for a broader industry or not, it is very important for him to have individual wins that he can then talk about and spin a certain narrative around. This, presumably, is one of them. If he can say, "I am helping these three or four companies keep hundreds of jobs in the US," that's a good story for him to tell, whether or not it's a bad story for the industry, broadly.
Shayle Kann: Right. I've been thinking a lot about this, and we're getting ahead of ourselves, right? It may never get to his desk, and those who are opposing the petition are going to do everything that they can between now and then to make sure that it never does. But if it does, I think the surface level of view of what he would be likely to do is similar to what you were saying, which is sort of, okay look, he's ran on a protectionist-trade platform during the campaign. His incoming US Trade Representative, I believe, actually specifically mentioned section 201 as a tool in the toolbox to support domestic industry, which was surprising because nobody usually uses section 201, so they're obviously thinking about it already.
You could imagine this coming to the president's desk, him looking at it and saying, "Oh, this is great. I can protect the domestic industry. I don't really care if it hurts all these other jobs." The case against this from an economic policy perspective is there are a couple of thousand domestic solar manufacturing jobs, and there are like 250,000 installer/downstream jobs in the US, and those are the ones that would suffer if prices increase. He may not care about that. He hasn't shown a lot of interest in the US solar industry.
I think the high-level view suggest that he would do something pretty stringent. There is a slightly deeper view that as you sort of mention, in the cases when he's actually had to start to make policy or changes rhetoric a little bit with regard to China in particular but also other countries since being elected, he's shown a little bit of sway on some of these issues. So it could get to his desk, and then other political wins could be blowing in some direction, and so you just don't know what would happen. But of course, uncertainty is a market killer, right? It's always been true. Political uncertainty is always one of the worse things for a market, so just not knowing what he would do is bad enough, at least in the near term.
Stephen Lacey: Yes, I'm particularly interested in how this plays out in the geopolitical sense because right now, everyone's focused on whether or not the president's going to stay in a global climate deal, and he has been pressured on his first international trip by officials from almost every country that he visits to-
Shayle Kann: And the pope.
Stephen Lacey: And including the pope, to stay in the climate deal. People within his administration have tried to convince him to stay in as well and just say, you can dial back your commitments but don't rip up the treaty because it would be a diplomatic nightmare. We're far enough out from any decision being made here, but one could assume that because renewable energy generally is so important for diplomatic relations as a subset of issues underneath the global climate deal that this could become elevated, like a month out or if the ITC makes recommendations that all of a sudden the president starts hearing from global leaders who are worried about this type of trade policy.
Shayle Kann: Right. Who knows. I mean, one of the big questions for me is, like obviously we're going to be talking about this on an energy podcast all the time, but is there a point where this hits the mainstream news? Like does this become one of the early tests of trade policy in the Trump administration. I don't know. But it could, right? I mean, this is the first section 201 petition filed in 15 years. That hasn't really hit the general consciousness yet, and maybe it won't until it gets to the president's desk. But if it does get there, then does this become a bigger geopolitical issue or is it still wonky trade stuff that people don't really care about.But, again, we're getting ahead of ourselves, right? Maybe it doesn't get to that point.
Stephen Lacey: That's very true. We've got a long way here, but I think it's important to walk through the worst-case scenario.
Shayle Kann: Well, let's talk about even not the worst case scenario but the Suniva-proposed scenario. Again, this is their request, and the ITC can decide something entirely different, but all we have to go on at this point is what Suniva has requested. Interestingly, SolarWorld is going to make its own set of requests at some point, and so they may differ from Suniva's. We'll have to find out.
But what Suniva asked for was a few things. They asked for a 40-cent per watt tariff on cells. They asked for a 78-cent per watt minimum import price on modules, and then they basically asked for pretty much all the money from that tariff that gets collected to go into a pool that will support domestic manufacturing. That gets less of the attention, that last bit, because it's just a pool of money that would go to help companies like Suniva and SolarWorld and potentially others. That pool of money might be a great idea, but it would be coming from this tariff.
Now, first thing that people are generally confused about and often misinterpreting is how these two things work with each other. So we have a 40-cent tariff on cells and a 78-cent minimum price on modules. Just by way of comparison, like current pricing in the US is probably in the high 30s, 35 to 40 cents a watt. Most people have just assumed that the minimum price, the 78 cents, would be the price you'd end up at. It's possible, one interpretation of this is that that's possible. So a Chinese manufacturer ships a module into the US at 38 cents a watt, pays a 40-cent tariff. That brings it up to the 78-cent minimum, and that ends up being pricing for imports in the US.
That, in and of itself, would almost double or potentially more than double module pricing in the US. That would bring you back to module price levels that we haven't seen since about 2012. Already a big deal in terms of economics of solar in the US. But there is a second interpretational which is that these two things would have to get stacked. You would have to import the module at 78 cents a watt, and then pay the tariff, which would make the actual minimum price a $1.18 per watt, which is pricing that we haven't seen since like 2011 and is incredibly high relative to any normal standard today.
I mean, module prices haven't been a dollar a watt since the market was less than a 10th the size it is today. The problem is, we don't actually know which of these interpretations it is. There's been very little clarity from Suniva. Suniva, their attorneys haven't made this clear, and I've heard different interpretations from trade attorneys that I've spoken to. Even that, alone, is super complicated.
One way or anther, though, whether it's 78 cents a watt or $1.18 a watt, if that were imposed, would drive prices for solar up, at least from imports, significantly.
Now, if you want to add one more layer of complexity to this, not every module is important. For domestic manufacturers, they could continue to sell at whatever price they want to, and this tariff would only apply to crystalline silicon, which exempts thin film. So for the most part, First Solar. First Solar can continue to important cells from Malaysia, where it has a lot of its manufacturing, or even modules from Malaysia, but they could also assemble them in their Perrysburg, Ohio facility, and they wouldn't be subject to any of these import tariffs. The single biggest winner in all of these would certainly be First Solar. You'd still have some product in the US that would have a lower price, but not nearly enough, based on the volume that's out there, to meet demand in the US, which means overall, pricing would increase.
Stephen Lacey: Then you've got another complication, which is the SolarWorld problem. SolarWorld imports cells and assembles modules, and you could conceivably put a slap-tariff on those crystalline silicon cells, and that's one of the reasons why SolarWorld was hesitant to sign on to this petition in the first place, as I understand it.
Shayle Kann: I believe that's right. SolarWorld has both cell and module manufacturing in Oregon, but they have more module manufacturing than cell. They make some of their own cells, but they also import some of their own cells. Those cells that they imported would be subject to whatever tariff is applied if there is a tariff imposed. Now, in a situation where you end up with all these tariffs and minimum prices and stuff, what they could just do is ramp up their cell manufacturing facility in Oregon, which, I think would be what they would end up doing if they actually win this case.
In the meantime, they're sort of fighting for survival. The German parent company is going through insolvency. US headquarters had to issue a warn notice which basically says possibly of impending layoffs to, I think, 400 employees in Oregon, so they're fighting for survival while they're fighting this legal battle.
Stephen Lacey: You go to help me understand one thing. I've heard a number of people say this will be worse for utility-scale developers than residential installers. I understand that there's a lot more price sensitivity when you're trying to shave off a 10th of a penny and you're starting to compete for 4-cent contracts and utility-scale solar, but the margins are pretty damn thin in residential solar too, so I don't understand why that price sensitivity is that much greater in utility-scale solar. Am I interpreting wrong or?
Shayle Kann: No, I think you're right. I mean, it remains to be seen. We'll find out how it actually impacts these markets, but I think the going wisdom, which has some inherent logic to it, is that it would have a bigger impact on utility-scale solar than it would on distributed solar for a couple of reasons.
One is something that you mentioned, which is that a lot of the growth in utility-scale solar right now is coming purely from the fact that utility-scale solar has just become cost-competitive, and so utilities are including it in in their integrated resource planning outside of mandates. They're doing bilateral contracts. They're issuing technology agnostic RFPs that solar is winning just because solar is the cheapest resource today .If you increase the price on solar, it gets a little bit harder to make solar the cheapest resource. You might lose some of that market. But more importantly, you could just think about the math this way. A utility-scale solar project might get installed sort of turnkey today for about a dollar a watt. A residential solar project right now is getting installed for $3 a watt-plus. If module prices in the US increased by 40 cents a watt, so say they go from 38 to 78 cents, that 40 cents a watt is a 40 percent increase on the cost of utility-scale solar where its only like a, what is it, a third of that on residential solar.
Just in proportional terms, the economic impact is a lot better on the bigger project.
Stephen Lacey: Do you lose a bunch of states, though, in residential? Like even though the impact is smaller, clearly that takes a lot of states off the table.
Shayle Kann: Yes. I mean, we've been modeling this out right now. Cory Honeyman is working on a piece right now that's looking at this state by state and trying to figure out under various pricing scenarios what states would remain in and out of the money. The short version is yes, you would lose some states in terms of economic viability for residential solar if you increased prices even to 78 cents a watt, let alone $1.18 a watt. The impacts would be felt certainly across the entire market.
Stephen Lacey: We try to be rational and level-headed on this podcast, but man, this feels like doomsday scenario. I mean, it feels really bad.
Shayle Kann: You know, the solar market wouldn't disappear. If you increased module prices to 78 cents a watt and everything else were held equal, the cost of a total solar installation today would be back where the cost of a total solar installation was a couple of years ago, 2015ish pricing. Module pricing would be back in 2012 levels, but because the cost of everything else has fallen since then, you'd end up in total back around 2015 or so. The market in 2015 was a lot smaller than it is today, and in fact, there was more state-level support and subsidies and things like that you don't have today. It would be bad for the market in terms of growth. But there was a market in 2015, and there would be a market in 2018. It would just be a lot smaller than it is today. It depends on your definition of doomsday.
Stephen Lacey: The wildcard here. What happens to Tesla and its supposedly coming solar roof? You got a company that's manufacturing the entire product in the US. It plans to manufacture the entire thing in Buffalo. Eventually, it'll scale up at Fremont and then move to Buffalo. This could all of a sudden make an expensive product look a lot less expensive. Do you think that this will have any benefit to a Tesla solar city over the next couple of years, assuming we see tariff levels or minimum prices that mirror what Suniva wants?
Shayle Kann: It's hard to say what it would be like. Obviously you'd think that Tesla would benefit from this, just like First Solar, and if they're not subject to the tariffs, in their case because they're manufacturing in the US, they obviously would have more of an advantage then.
That said, now that we've got pricing details on the solar roof, it's a complicated value proposition that's not entirely based on competitiveness with rooftop solar. It's based more on competitiveness with a roof replacement plus solar. It might get a little bit better, relatively speaking, but my guess is that because they're not trying to compete apples to apples exactly, that they wouldn't be felt as clearly as it would be felt for somebody like First Solar or even SolarWorld who's just selling an apples to apples product within the same market.
Stephen Lacey: I think we should also be clear about the impact, assuming we get the kind of remedies that Suniva's asking for. We have a couple of gigawatts of production capacity here in the US. Assuming foreign manufacturers wanted to come in and set up shop, it would take years to scale up manufacturing capacity to sort of meet the demand for solar we've seen over the last few years. This is not an overnight thing where all of a sudden we just meet demand for solar with production capacity that's already underway. This will take years to balance out.
Shayle Kann: Yes. I think, look, if you had a wave of foreign manufacturers deciding immediately upon the imposition of tariffs that they were going to set up facilities in the US, and I'll tell you in a minute why I don't think that's totally realistic, they could set up reasonably quickly. Module assembly is pretty fast. Cell manufacturing, I think, takes a little bit longer. I wouldn't necessarily say it's going to take years.
Stephen Lacey: So like, a year maybe.
Shayle Kann: Maybe a year, yes, and you'd have a lot of turmoil in the market between now and then.
Now, here's why that probably wouldn't happen. Even though the US solar market has tons of potential and every global solar manufacturer needs the US market ultimately. It's high on their list along with China and Japan and India as these are the big solar markets. They want to play here and they would probably want to do anything that they need to in order to play. Like we said at the beginning, they're struggling just like everybody else. They don't have a ton of additional capital that they can deploy into more manufacturing. Keep in mind, this is a global oversupply that we're in now. The last thing that they want to be doing is adding more capacity to the mix. They're trying to focus on rationalizing their existing capacity at the moment, so it's a bad time for them to talk about adding more manufacturing, getting access to capital to do so.
My guess is that you wouldn't see an immediate wave. Maybe it would happen eventually but certainly the solar market, for at least a couple of years in the US, would have sort of dramatic undersupply of domestic manufacturing, and thus, likely higher prices because you'd still have to import some stuff.
Stephen Lacey: Yes, so this will go a little quiet for a while. We'll try to give updates if there's any big news. I know Shayle is going to sit here obsessing over it. I've seen, he's been scrawling on the walls, all section 201 and no play makes Shayle a dull boy. This is truly a monumental news story for the industry, and if there are any big updates, you'll surely hear about them here.