Jan 24, 2018

Impact of Section 201 Import Tariffs on Utility-Scale Solar LCOE

CHICAGO, IL – January 24, 2018 - On January 22, 2018, the Trump administration released a fact sheet describing new tariffs on imported solar cells and modules. The tariffs were in response to the U.S International Trade Commission’s determination that foreign imports of solar cells and modules are a substantial cause of serious injury to domestic manufacturers.

Marathon Capital estimates that, holding all other assumptions constant, the tariffs cause the levelized cost of energy ("LCOE") of a utility-scale solar project to increase by approximately 10-12% over 2017 levels.

The tariffs last for four years, beginning with 30% and phasing down by 5% per year (30%, 25%, 20% and 15%), with the first 2.5 GW of imported solar cells exempt from the tariffs. Although the tariffs are less severe than initially requested by the petitioners, they will have a meaningful impact on the economics of utility-scale solar projects.

“The solar industry has understood for months that some type of tariff was likely. Our analysis shows that paying the full 30% tariff will have a non-trivial effect on the LCOE of solar. Most of the large developers have already addressed potential tariff measures in frame agreements with producers secured over the last 6-9 months. The open question will be how much of the price increase will be borne by developers, versus investors? In general, we are expecting the market to absorb and move forward in the next year, returning towards a normal pace of activity,” said Ted Brandt, Marathon Capital CEO.

      

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Impact of Tariff on Utility-Scale Solar LCOE

  • In this update, Marathon Capital quantifies the impact of the new 30% tariff on the levelized cost of energy (“LCOE”) of a sample 100MW utility-scale solar project
  • Project costs with tariffs are up, but because panels are ~40% of project costs, the after-tax effects are mitigated by the ITC and availability of 100% expensing
  • We estimate that the LCOE for a project owned with tax equity increases from $40.82/MWh to $44.72/MWh, or by ~9.5%, between 2017 and 2018, holding all other assumptions constant
    • The LCOE on projects with tax equity owned by sponsors that value on a pre-tax basis increases to $45.65, or by ~12%. These projects are disadvantaged because the sponsor does not benefit from the impact of the lower tax rate on its post-flip tax liability 
  • For sponsors that are tax efficient, we estimate that LCOE increases from $39.43/MWh to $43.40/MWh, or by ~10%, assuming bonus depreciation was claimed in 2017 and 100% expensing is claimed in 2018
  • If LCOE is held constant, the unlevered after-tax project level return decreases from 6.5% to 5.3%, or by 120 bps, due to the combined effect of the tariffs and tax reform
  • In practice, in order for projects to be built, a combination of higher PPAs, lower EPC costs, and lower investor yields will need to absorb the 30% increase in panel costs 

Tariffs on Imported Solar Cells & Modules

  • On January 22, 2018, President Trump approved the recommended safeguard tariffs on imported solar cells and modules. The tariffs were in response to the U.S. International Trade Commission’s investigation and determination that foreign imports of solar cells and modules are a substantial cause of serious injury to domestic manufacturers
  • The tariffs last for four years, beginning with 30% and phasing down by 5% per year (30%, 25%, 20% and 15%), with the first 2.5 GW of imported solar cells exempt from the tariffs
 

This document has been prepared by Marathon Capital, LLC and Marathon Capital Markets, LLC (collectively, “Marathon Capital”) solely for discussion and evaluation purposes. The document should not be used as a basis for trading in the securities or loans or for any other investment decision. This document does not constitute an offer to sell securities and should not be construed as investment advice. This document does not constitute a recommendation or take into account the particular investment objectives, financial situation or particular needs of the investor, and is conveyed by Marathon Capital based on our belief that the recipient can independently evaluate investment risks and is using independent judgment in its evaluation process.

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