Solar tariffs could fall heaviest on Southeastern states

Source: Zack Colman, E&E News reporter • Posted: Friday, January 19, 2018

Expected tariffs on imported solar equipment could throttle a renewable energy boom in the Southeast, extending the reliance on natural gas and coal by the region’s utilities.

The Southeast had historically been a laggard on clean energy, but that changed as solar energy costs plummeted in the past 18 months. Many developers began eyeing the increasingly attractive utility-scale market that analysts say could drive solar’s growth in the United States for the next five years or more.

Southeastern states are vulnerable to price increases associated with a tariff because the region’s cost margins for solar are so thin, experts said. That means a 30 percent tariff on cells and panels, as has been suggested by some members of the U.S. International Trade Commission, could take those states out of play for utility-scale solar as the Trump administration considers penalizing overseas suppliers. The White House is expected to approve the tariffs as early as this week.

“It wasn’t that economically friendly for utility-scale solar, but that’s really changed in the past couple of years. You’re seeing states like Arkansas, Georgia, Louisiana where there are some big projects,” said M.J. Shiao, head of Americas research at GTM Research. “Ultimately, you increase the price by 10, 15 cents a watt, that could ultimately affect the viability of the project going forward.”

Electric grid decisions are largely made on an economic basis, and, until recently, that has made it difficult for solar to compete in the Southeast. Many utilities purchase solar power through wholesale markets, where prices are only now beginning to be competitive under power purchase agreements — around $35 per megawatt-hour in Georgia and Florida and $40 to $45 per MWh in Virginia, South Carolina and Texas.

A tariff similar to the one floated by some International Trade Commission members would add roughly 12 percent to the installed cost of utility-scale solar, said Thomas Koch Blank, a principal at the Rocky Mountain Institute.

That would have an effect in the Southeast, which largely operates on a system that prioritizes the lowest-cost fuel source. Many states have resisted clean electricity standards that seek to diversify power supplies and avoid emissions from fossil fuels that endanger public health and cause climate change.

“In most markets that is calculated based on the costs of gas-fired generation. We either beat that cost or we don’t get the contract and the project doesn’t get built,” Hewitt Strange, director of government affairs with solar farm developer Cypress Creek Renewables, said in an email. “If any significant cost goes up (like the price of panels), we simply don’t get a contract for our power. And the consumer loses the lowest cost generation on the grid.”

Others believe that any setback for the Southeast’s solar progress will be temporary.

Some are guardedly optimistic that the anticipated tariff won’t be as large as most developers and utilities predict. Petitioners Suniva Inc. and SolarWorld Americas>, which argued that cheap imported cells and panels have made it impossible for domestic solar manufacturers to operate, had asked for much steeper tariffs than the roughly 30 percent tariff the ITC recommended (Climatewire, Jan. 10).

A tariff may only prove a “speed bump” given the region’s solar momentum, said Bryan Jacob, who directs the Southern Alliance for Clean Energy’s solar program. Utility-scale projects are threatened the most, but he said that if estimates are right and tariffs raise prices to what they were 18 months ago, the industry could weather those increases. States like North and South Carolina have renewable power targets, and utilities such as Tampa Electric Co. and Florida Power & Light Co. have made solar power commitments to keep installations flowing, he said.

“I don’t think it will be as bad as we were thinking it could have been,” Jacob said. “I don’t see the utility-scale stuff hitting a wall at all.”

Still, experts say the region’s growth in utility-scale solar would take a disproportionate hit under a tariff compared with the rest of the country. How utilities and developers respond to tariffs would differ across every state, given their different policies and market structures. President Trump must make a decision on the tariffs by Jan. 26.

“There are some markets where the economics are close, but there are some soft costs that can be brought down,” said Elias Hinckley, a partner at K&L Gates whose clients include utility-scale solar developers. “And there are some that just aren’t, and utility-scale is one of them.”

The region was projected to account for 38 percent of all cumulative capacity additions between 2017 and 2022, according to a December 2017 report by the Solar Energy Industries Association and GTM Research. A tariff would reverse that forecast, with 30 percent of the projected reductions in solar deployment occurring in the Southeast, said Prajit Ghosh, who heads Wood Mackenzie’s power and renewables research.

Developers would need to decide if they can make an economic case for utilities’ business in the Southeast. Utilities like South Carolina Electric & Gas Co., for example, buy solar energy at what’s known as “Public Utility Regulatory Policies Act avoided cost rates,” meaning it can cost no more than the price of fuel from a traditional power plant.

“As such, the potential solar tariff would be a consideration for solar developers, not SCE&G, as to whether they could complete projects at SCE&G’s avoided cost rates,” a SCE&G spokeswoman said in an email.

That may be a tall task.

“This is unexpected or was unexpected as they were preparing their bids,” Shiao said. “Solar is either on the cusp or just preparing to beat alternatives. A tariff would turn back the clock.”

What that means in the short term for the Southeast is more reliance on natural gas and coal, Ghosh said.

Nationwide, a tariff along the lines of what the ITC proposed would hike natural gas demand 300 million cubic feet per day — a small amount compared with the 27 billion cubic feet per day of natural gas used in power generation in 2016. But it’s still enough to displace 1.5 million homes that otherwise would have been powered by solar energy.

If the tariff merely results in a postponement of solar projects, that doesn’t necessarily mean new construction of long-lived natural gas power plants is in the offing. Instead, utilities may choose to slow-walk planned retirements of plants because the gap between supply and power demand is not anticipated to grow significantly between now and when tariffs would end.

“Pushing some of these decisions out a year is not necessarily detrimental,” Koch Blank said. “You obviously need to put capacity on the grid in time to meet demand, but you’re likely to have some flexibility in timing.”