chevron-down Created with Sketch Beta.

ARTICLE

Investments in Solar are Subject to Tariffs and Geopolitical Uncertainties

Heather Marie Welch, Michelle Lim, and John D. Padgett

Investments in Solar are Subject to Tariffs and Geopolitical Uncertainties
iStock.com/LeoPatrizi

Investments in Solar are Subject to Tariffs and Geopolitical Uncertainties

For the first year on record, solar and wind energy production is on track to surpass coal-fired generation. This growing demand and investment in alternative energy has been supplemented by advancements in technology, the Inflation Reduction Act’s amendments to investment tax credits, and certain trade policies intended to promote home-grown manufacturing. The affordability, reliability, and accessibility of solar energy, in contrast to other alternative energy sources, is reflected in its impressive growth this quarter—an increase of 36% compared to the same 2023 quarterly data. However, the solar industry’s growth and stability has become more and more reliant on global supply chains and policy.

This article (i) provides a brief background on solar supply chains, (ii) sets out the current manufacturing market, (iii) analyzes the Biden Administration’s recent reinstatement of solar tariffs; and (iv) provides insight for private equity and joint venture (“PE/JV”) investors regarding the risks and opportunities in the solar industry.

Supply Chain Background

The solar manufacturing market consists of the production and procurement of polysilicon, solar cells, modules, and inverters. While each supply chain stream faces its own challenges, polysilicon production and module/cell production face a significant constraint—a massive monopoly of rare earth elements (“REEs”) held by China. REEs, like gallium, polysilicon, tellurium, and indium, are essential in the production of solar cells. Because of their concentration in mainland China, the spot price of each REE is dependent on Chinese mining and production; thus the price of each REE is constantly in flux. Polysilicon, for example, has sold for $5 per kilogram up to $460 per kilogram. Different types of solar photovoltaic (“PV”) cells are made of different REEs. 95% of the market uses silicon PV cells, which require polysilicon. Other silicon PV cells, which are more efficient, are made of gallium.

Manufacturing Market

The Inflation Reduction Act’s subsidies and grants are meant to close the gap between Chinese and American solar module manufacturing, and those investments seem to be coming to fruition. American module manufacturing capacity grew by 71% in Q1 of 2024. However this increase in domestic capacity has done little to meet domestic demand. In 2024, American manufacturing capacity rose to 2.8 gigawatts, while new projects in the first quarter surpassed 11 gigawatts. So while the gap between American and Chinese manufacturing is shrinking, domestic projects remain reliant on Chinese imports.

Currently 80-90% of the entire solar supply chain is controlled by China. As discussed earlier, China’s dominance is largely linked to the REEs needed to produce PV cells. Besides the monopoly on REEs, the cost of manufacturing PVs is backed by low labor costs (and possibly the forced labor with regards to products produced in the Xinjiang region), low overhead costs, and technical knowledge. Chinese policies, focused on winning the energy race and subsidizing production, have led PV costs to decline by more than 80%.

Policy and Tariffs

Geopolitical unrest in Taiwan, Section 301 tariffs, antidumping duties, and forced labor concerns are only some of the policy and tariff challenges that could increase costs in the solar supply chain.

The tension in Taiwan has been a constant sticking point in U.S.-China relations, however former U.S. House Speaker Nancy Pelosi’s trip to Taiwan in 2022 and President Biden’s recent claims that the U.S. would come to Taiwan’s defense in the event of an attack by Beijing, have fanned the flames. As a show of force, the Chinese have increased their physical presence and have conducted military exercises around the island. With a grip on the energy supply chain, China now has a strong economic card to play in any future disagreements regarding the independence of Taiwan, which some experts speculate to occur within the next decade.

Section 301 of the U.S. Trade Act of 1974 refers to the additional taxes and duties applied to imports from nations that the U.S. regards as violating fair trade practices. Antidumping and countervailing duties (“AD/CVD”) are imposed on imports when the Department of Commerce finds that the merchandise was sold in the U.S. for an unfairly low or subsidized price. In 2022, Congress proposed a reinstatement of tariffs on solar panel imports from Southeast Asia, specifically Cambodia, Malaysia, Thailand and Vietnam. Congress and domestic manufacturers accused the Chinese of circumventing AD/CVDs that limit imports from China by rerouting panels to Southeast Asia or by creating foreign facilities that did not perform significant manufacturing operations and claiming a country of origin other than China. On May 16, 2023, the Biden administration vetoed the congressional resolution citing the hundreds of solar projects that would have been abandoned if such a tariff was imposed. The administration also claimed that the delay in tariffs was necessary for the solar supply chain and solar installation market to obtain some certainty in pricing and supply fulfillment. The result of the veto was a stall on the tariff for a period of two years. However, this May, the Biden administration not only reinstated the original 25% tariff on solar cells but increased the rate to 50%. The Biden administration also indicated that any existing inventory of critical solar supply chain items must be installed and operational by December 23, 2024, or be subjected to the additional tariffs. The overall impact will eliminate tariff-free sources of the solar supply chain and dramatically increase costs in the U.S. market, making it even more difficult for American manufacturing to compete with Chinese prices.

Many agreements used in utility scale projects include representations stating that no major components of a project will be procured or manufactured through forced labor or modern slavery. The Uyghur Forced Labor Prevention Act prohibits the importation of goods into the U.S. manufactured wholly or in part with forced labor in China, particularly in the Xinjiang region. With these restrictions, certain supplies, like polysilicon, may be entirely prohibited from use in U.S. projects.

Impacts on Investing

The tension remains regarding short term supply chain issues and the desire to grow solar manufacturing within the U.S. The geopolitical issues and U.S. policy are complicating the landscape, but investors understand the significant demand for U.S. investments. Investment strategies are reliant on a constant stream of critical material and the development of manufacturing hubs that can meet the demand and a price point which fuels domestic demand of solar energy. In the past, U.S. policy makers plugged these gaps with tax credits, financial incentives and inexpensive imports. Yet, tensions with significant trading partners, competing demands on government revenue and significant changes in the political landscape, will require investors to reevaluate supply chain risks and determine if the uncertainties and additional costs will significantly impact demand or continued government assistance.

In 2019, the threat of tariffs against Chinese imports imposed by the Trump administration caused panic in the alternative energy markets. A report by the Solar Energy Industries Association estimated a 19 billion dollar loss in private investments due to potential procurement and price related tariffs. In 2022, before Biden’s veto on congressional tariffs, uncertainty caused the delay and cancellation of solar projects. Some reports show that these reinstated tariffs may increase the costs of hardware imports by 91-286%.

In short supply chain constraints will continue to limit capital investments until the uncertainties are resolved or hedging methods, including government assistance, are developed.

    Authors