Tariffs: effect on US power sector
Uncertainty around what US import tariffs the Trump administration might impose is making it difficult to get fixed-price quotes for equipment that may be affected by tariffs.
Some vendors are insisting on clauses that give them the ability to pass through future tariffs.
The tariffs, plus rising interest rates, could upend a business model that some solar and wind developers have used to sign power contracts to supply electricity at prices that are currently unrealistic, but that should be manageable by the time electricity must start being delivered under the contract. Such developers have counted on equipment costs to keep falling. A reversal in costs could put some projects in distress.
The solar industry is waiting to see whether tariffs might be imposed on inverters from China. Inverters remain off the latest list of Chinese products that the US might target, but President Trump threatened to up the ante after China said it would impose reciprocal tariffs on an equal volume of US products. A significant percentage of inverters used in US solar projects are imported from China.
Import tariffs are now in effect at the US border on solar cells and panels, steel and aluminum, and Trump is threatening tariffs on up to $150 billion a year in Chinese products that could be put into effect later this year.
The solar tariffs went into effect on February 7 and will remain in place for four years, starting at a 30% rate and then declining annually to 25%, 20% and 15% over the period. The US Court of International Trade declined on March 6 to order a temporary halt to tariffs on solar cell and panel imports from Canada. Four Canadian companies filed suit, arguing in part that Canadian products should be exempted under the North American Free Trade Agreement. The chief judge said he is not persuaded the plaintiffs are likely to succeed. The case is headed to trial.
The European Union, China, South Korea, Taiwan, Singapore, Vietnam, Malaysia and The Philippines are challenging the solar tariffs before the World Trade Organization. The WTO process is expected to take roughly 18 months to play out.
Fifty-two companies applied for exemptions from the solar tariffs for particular products by a March 16 deadline for such applications. Ironically, the applicants include SolarWorld Industries GmbH, the former German parent of SolarWorld Americas Inc., which has been pushing for tariffs in the US. The two companies are no longer affiliated after the German parent went bankrupt.
The US started collecting tariffs on imported steel at a 25% rate and imported aluminum at a 10% rate on March 23. However, the Trump administration temporarily suspended tariffs on imports from Canada, Mexico, the European Union, Australia, South Korea, Brazil and Argentina through May 1. Any extension will require the affected countries to persuade the Trump administration that they will take “satisfactory long-term alternative means to address the threatened impairment to US national security” caused by their steel and aluminum exports to the United States. South Korea has already agreed to an export quota in lieu of tariffs.
The countries given temporary reprieves accounted for 65% of US steel imports and 55% of aluminum imports in 2017.
The steel and aluminum tariffs are expected to affect the cost of transformers, wind towers, solar ground-mounted posts, tracker torque tubes and containers for housing batteries. Roughly 25% of steel pipe and tube purchased by US companies in 2016 were imports, according to the US Department of Commerce.
GTM Research estimated that broad steel and aluminum import tariffs would add 3% to 5% to the levelized cost of electricity from renewable energy projects. The Solar Energy Industries Association said the tariffs could add 2¢ a watt to solar installed costs.
China hit back on March 22 by releasing two lists of 128 US products against which it plans to retaliate in response to the steel and aluminum tariffs. It imposed a 15% duty on 120 of the products worth about $1 billion in US exports, and said it will levy a 25% tariff on the other eight valued at $2 billion after further evaluation of the US measures. The second list includes pork. China is the third largest export market for US pork producers.
The European Union published two lists of American products that it will target if the US ends up imposing tariffs on European steel and aluminum. The European Commission also opened an investigation on March 26 into whether the US tariff on steel will cause steel originally destined for the United States to be diverted to Europe and, therefore, whether it needs to impose its own tariffs to protect European steel producers.
The Commerce Department is entertaining requests for exemptions from the steel and aluminum tariffs. However, the process is a mess. Commerce requires a separate five-page form be filed by each importer for each individual product for which an exemption is sought. Thus, for example, if one importer wants exemptions for five products, it must file five separate applications. Trade associations are not allowed to apply for whole industries. An exemption granted to importer A on product X does not allow importer B to import the same product duty free. B would have to apply for its own exemption.
Commerce expects to receive 4,500 exemption requests for steel and 1,500 for aluminum. It hopes to respond within 90 days to requests, but that is after a period through May 18 while it collects and later considers comments about the process. Domestic steel and aluminum producers have 30 days after requests are posted on line to object.
As the NewsWire went to press, Trump and Chinese leaders were trading threats to impose and match tariffs on each other’s products. The US threatened to impose tariffs, under section 301 of the Trade Act of 1974, on more than 1,300 Chinese products valued at $50 billion in annual exports, the US said, as punishment for Chinese theft of US intellectual property and Chinese policies that require US technology companies to turn over rights to their technology as a cost of admission to the Chinese market.
The list of Chinese products includes wind-powered generating sets, nuclear energy equipment, industrial robots, lithium primary cells and primary batteries, DC motors with outputs of less than 75 kilowatts that are used for mechanical power in electric cars, among other items. The US is collecting comments on the proposed list until May 22 and will take up to 180 days thereafter to decide against which of the products to act.
China wasted no time in retaliating. It promptly released a list of another 106 US products with the same $50 billion value as the US list and said tariffs would be imposed at the same rate as any US tariffs.
The list includes soybeans, putting US farmers deciding now what crops to plant this spring in a bind. Roughly a quarter of the US soybean crop is exported to China. The US agriculture secretary, Sonny Perdue, said the administration is looking at ways to insulate US farmers from harm.
President Trump quickly upped the ante by announcing that he would release a list of another $100 billion in Chinese products that would be subject to tariffs. The list had not been released by press time.
The Chinese commerce ministry responded in a statement: “The Chinese side will follow suit to the end, not hesitate to pay any price, resolutely counterattack and take new comprehensive measures in response.” However, Chinese President Xi Jingping then gave a conciliatory speech in which he vowed to cut Chinese import duties on autos this year.
Chinese exports to the US were $506 billion, and US exports to China were $130 billion, in 2017.
The US government is also looking into limiting Chinese inbound investment. Such investments have already faced hurdles getting approval from CFIUS, a 16-agency committee that reviews foreign acquisitions of US companies for national security implications. Trump directed the US Treasury in a March 22 memo to propose actions that he can take to address concerns about investments “directed or facilitated by China” in industries or technologies “deemed important” to the United States.
The US commerce secretary, Wilbur Ross, told Fox News on March 27 that “There will be limitations on foreign investment.” Ross suggested there will be “other actions” that go beyond a bill pending in Congress to give CFIUS authority to review a broader range of inbound foreign investments. (For more details on the CFIUS bill, see “CFIUS” in the December 2017 NewsWire.)
Among the options being considered are to block Chinese investments in specific sectors, like 5G wireless communications, or to require strict reciprocity on Chinese acquisitions, meaning that CFIUS would only approve deals in sectors in which US companies are allowed to invest in China. The administration is also reportedly looking into possible uses of a 1977 law called the International Emergency Economic Powers Act that lets the president block transactions and temporarily seize assets in response to an “unusual and extraordinary threat.”
The mere threat of tariffs leads to price increases and changes in behavior before the tariffs are actually imposed. Solar panel prices increased dramatically after April 2017 when Suniva and SolarWorld petitioned the US government to impose tariffs, as US developers scrambled to find panels to get past US Customs before the tariffs could take effect. New solar development slowed as developers were uncertain at what price they would be able to offer electricity.
Aluminum prices increased last year also in anticipation of tariffs, but once the tariffs were imposed, prices fell, possibly because the level of import duty was less than the market expected.
The typical construction contract allows the contractor to pass through increased costs due to changes in tariffs, but this ability turns on what the contract says about change orders, changes in law and force majeure, according to Tim Walsh and Luke Maher with Norton Rose Fulbright in St. Louis.
The willingness of the Trump administration to protect US manufacturers may invite more requests from domestic industry for protection. Energy Fuels and Ur-Energy petitioned the Commerce Department on January 16 to require nuclear power plant operators to buy at least 25% of their uranium from US suppliers. Roughly 5% of uranium comes currently from US sources. The government has yet to act on the request. Any “Buy America” requirement could hobble nuclear power plants that various states are trying to keep open with zero emissions credits. Domestic wind tower manufacturers are asking to extend existing anti-dumping duties on Chinese and Vietnamese wind towers for another five years.
Meanwhile, the US, Canada and Mexico have been engaged in challenging negotiations to rewrite the NAFTA treaty. Any repudiation of the treaty by the US president could complicate US wind and other renewable energy projects on agricultural land. Many states have laws that restrict foreign ownership of such land. However, Canadian and Mexican companies generally escape the restrictions under a NAFTA requirement that the US not discriminate against such companies in favor of US developers.