For more than 20 years, we’ve seen a substantial increase in renewable energy adoption across the United States, driven in large part by the falling cost of clean technologies, particularly solar photovoltaic panels. That trend has reversed over the past year, and continually evolving geopolitical tensions present the U.S. renewables market with a series of unfamiliar challenges.
US renewables now face significant financial headwinds, despite the US federal government’s commitment to cut emissions by 50-52% by 2030 and the recent “code red for climate action” issued by the Intergovernmental Panel on Climate Change (IPCC).
The driving factors behind these challenges are four unique, but intertwined, developments in the price of renewables, their raw materials, and how those materials are either taxed or subsidized. The combined outcome will test existing corporate commitments to the renewable energy transition and ultimately underscore the need for greater resolve – on both a voluntary and a regulatory basis – in the future.
Let’s explore these interlocking challenges and their implications.
1. The Hidden Costs of Low-Cost Solar Cells
The primary costs of producing crystalline silicone photovoltaic (CSPV) cells and modules are raw materials, energy inputs in the manufacturing process, and labor. China has maintained a very real competitive advantage for many years with its easy access to polysilicon, which it extracts from locally mined quartz. Research suggests that a whopping 45% of the world's supply of polysilicon comes from China’s Xinjiang region.
Xinjiang is also home to a significant portion of China’s Uyghur population. The abundance of locally sourced quartz has been paired with this local workforce, which many insist is built on forced labor1, to create very low-cost solar panels.
Estimates suggest 70-80% of all CSPV is manufactured in China. This monopoly on the market creates a very real point of failure that we’ll explore in challenges #2 and #3.
2. Chinese Solar Tariffs and Their Effectiveness
Complaints about the Chinese chokehold on the market came to the attention of the US Department of Commerce (DOC) under the Trump administration. Several U.S. solar manufacturers claimed that subsidized Chinese imports (both directly and indirectly through their broader East Asian manufacturing presence) were substantially undercutting pricing offered by domestic manufacturers, which ultimately forced some out of business. In response, the U.S. imposed tariffs of ~30% on direct Chinese solar imports. Meanwhile, the DOC is now investigating additional claims of dumping and circumvention that could lead to secondary tariffs on solar hardware procured through specific Chinese-owned manufacturing groups based in Vietnam, Thailand, Malaysia, and Cambodia.
The decision was not without controversy. Critics pointed to global competition as the catalyst behind the 10+ year reduction in the cost of renewable power and charged that any increase in cost would curb growth. That stagnation, critics insisted, would cost tens of thousands of domestic jobs in an industry that was blossoming and paying strong wages to U.S. workers. The delicate balance between the solar cost of components in Asia and job creation in the U.S. remains a tightrope that policymakers must navigate. In February of 2022, the government extended some pre-existing tariffs for four more years, and they’re contemplating levying new tariffs on top of that.
3. The New Circumvention Petition & Near-Term Renewable Project Development
In early April 2022, the US DOC published a notice to initiate country-wide inquiries to explore whether U.S. imports of solar cells and modules from Cambodia, Malaysia, Thailand, and Vietnam bypass antidumping and countervailing duty (AD/CVD) orders on crystalline silicon photovoltaic (CSPV) cells and modules from China - which are subject to the tariff.
The inquiry will create an extended period of uncertainty in the solar market. The DOC must issue a final determination within 300 days, delaying any resolution until early 2023. This market uncertainty threatens solar project development, financing, contracting, and installation in the near term as the specter of additional (and retroactive back to October 2021) tariffs on imported materials puts billions of dollars of investment in the margins. Solar panels comprise roughly 50% of the cost of a utility-scale solar array in the United States. Newly contemplated tariffs could potentially increase the cost of CSPV cells and modules by 50% to 250%.
The tariffs and the DOC investigation also highlight a growing ethical dilemma that U.S. companies must grapple with: how do they aggressively advance renewables adoption without contributing to the human rights and trade violations that make some of that same technology possible?
This is likely only the tip of the proverbial ethical iceberg for renewables. As demand for raw materials for clean technologies skyrockets, both human and ecosystem impacts are also increasing. With many businesses already facing intensified scrutiny of supply chain ethics and sustainability, concerns around human rights alone (aside from cost impacts and delays) could result in an inflection point for the industry toward more sustainable and equitable solutions.
4. Expiring Energy Tax Credits
These near-term headwinds are nested against the backdrop of the reduction and eventual phase-out of the wind power and geothermal power Production Tax Credit (PTC) and the solar power Investment Tax Credit (ITC), neither of which was renewed or extended as part of the recent U.S. infrastructure legislation.
The PTC, which gave tax relief of up to 2.5+ cents/kWh on wind and geothermal projects was phased down over a period of years and expired for projects that failed to qualify by the end of 2021. As a result, on-shore U.S. wind power installations are projected to dramatically slow in 2023 and beyond.
The ITC, enacted in 2006, contributed to dramatic growth in the U.S. solar sector, as measured by both the thousands of well-paying jobs that it created as well as the billions of dollars in investment that it generated in every corner of the country. The current 26% ITC tax credit will drop to only 10% for qualifying commercial-scale projects by 2024.
Opponents of the extension of these credits claim that renewables should be able to “stand on their own” financially if they are to compete against other forms of electricity generation. Yet, data supports that the credits have 1) driven significant growth in the sector [including jobs], and that this growth has already 2) helped to drive massive decarbonization of the U.S. power grid. Also, whereas renewables must perpetually compete for extensions of their incentives, many of the tax policies that support legacy (carbon-intensive) generation sources are permanently embedded in the U.S. tax code. Put differently, it’s easier to keep something that’s “embedded” than it is to extend something that is “set to expire”.
Taken together, each of these four factors may combine to delay our collective uptake of renewable technology. At the very least, they’re the latest examples of how we should expect the market to evolve toward new solutions, both short- and long-term. And, as the market emerges from this current period of uncertainty, we anticipate our clients will be well-positioned to respond to any future implications.
As a takeaway, corporate buyers should remain curious, creative, and patient.
- Renewable strategies that historically relied heavily on PPAs and VPPAs will likely need to be reconfigured, if not reimagined, in the short term.
- In the long-term, the industry will remain nimble by expanding supply chains to additional regions and evolving the cost of solar to reflect the true value of both labor and raw material inputs.
- For corporate buyers, an enterprise-wide commitment to sustainability and readiness to transact will be key components to meeting renewable energy goals.
- Corporate buyers can assess the merits of existing renewables projects (without additionality) to fill the shortfalls to reach their goals. While competition for projects is high today, for companies with support from internal stakeholders, more ambitious goals, and excellent credit, the opportunity for new projects remains an option.
- As an industry, we will all need to consider other carbon-reduction strategies, such as renewable thermal technologies, efficiency measures, tax equity investment in renewable projects, and unbundled environmental commodity purchases as other paths toward decarbonization.
- Many other global markets offer favorable renewable energy opportunities; multinational corporations may need to temporarily shift their focus towards these markets instead.
Schneider Electric maintains its role as a trusted advisor to help clients navigate these complexities to remain transaction-ready during that market evolution as new opportunities open and close. Contact us for help navigating how these changes may impact your renewable energy portfolio and ambitions.
1 The Biden Administration’s attempt to combat these and other human rights abuses in the area have taken the form of a ban on imports of some Chinese solar materials. The resulting Uyghur Forced Labor Prevention Act goes into effect in June 2022