President Donald J. Trump’s decision to implement tariffs on imported solar panel components in early 2018 is expected to have a reverberating impact on the renewable energy industry in California, impacting both businesses and regulators. Among the many ramifications from the decision will be the need for the California Public Utilities Commission (CPUC) to revisit some of its policy decisions aimed at achieving the state’s ambitious climate change goals at the lowest cost possible for ratepayers.

What happened?

On January 23, 2018, President Trump released Proclamation 9693 ordering the implementation of new safeguard tariffs on imported solar panels components. The new tariffs originated in a September 22, 2017, decision from the U.S. International Trade Commission (“USITC”) that agreed with a complaint by two solar panel manufacturers filed under Section 201 of the 1974 Trade Act claiming that low-cost solar panel imports had caused a serious injury to their industry. Section 201 allows the President to impose temporary quotas, tariffs, or minimum prices to protect domestic industries against threatened or actual injury caused by goods entering the United States. The USITC decision gave President Trump until January to decide whether to impose tariffs on imports of solar panels from other countries. The solar import tariffs became effective on February 7, 2018.

What exactly are the new tariffs?

The tariffs impact crystalline-silicon solar photovoltaic cells, whether or not they are partially or fully assembled into other products (such as modules, laminates, panels, and building-integrated materials). The new import duties apply to all imported solar products over the first 2.5 gigawatts (which are exempt). The Proclamation includes some exceptions based on the country of origin, but these exceptions only cover a percentage of imports: 3 percent per country and 9 percent total annually. At this point, it is unclear whether the full tariff will become effective once imports reach these percentage thresholds. Further, the issue of whether or not these tariffs also apply to imports made by Indian Tribes into their territory is unknown.

The applicable tariff is 30 percent this first year, phasing out over a period of four years with 5 percent decreases each year (i.e., 25 percent in the second year, 20 percent in the third year, and 15 percent in the fourth year). Experts estimate that the tariffs on crystalline-silicon solar photovoltaic cells may increase the cost of assembled solar modules by 10 to 12 cents per watt, which is equivalent to a 29 to 34 percent increase over the current import prices of 35 to 40 cents per watt.

What do the new tariffs mean for California’s energy policy?

The impact of these tariffs on California’s renewable energy industry will be significant. Notably, state regulators now need to review their approach to meeting the state’s ambitious climate goals while minimizing the financial impact on state ratepayers. In the near term, the CPUC will have a clear opportunity to assess the impacts of higher solar generation costs in the Rulemaking 16-02-007, Order Instituting Rulemaking to Develop an Electricity Integrated Resource Planning Framework and to Coordinate and Refine Long-Term Procurement Planning Requirements (“IRP Proceeding”).  In that proceeding, the CPUC will finalize the first cycle of its integrated resource planning efforts and identify replacement power in light of the likely retirement of the Diablo Canyon Power Plant (“Diablo Canyon”).

The Reference System Plan adopted in the CPUC’s IRP Proceeding, includes approximately 9,000 megawatts (“MW”) of utility-scale solar by 2030, corresponding to 73 percent of the new resources that will be added in the next dozen years. However, the Reference System Plan is based on a model that assumed an annual average decrease of 2.3 percent in the implied levelized cost of energy (“LCOE”) for solar resources over the next four years (2018 to 2022). The new import tariffs are expected to increase the cost of the most important components of solar generation by 34 percent, thereby causing the overall resource to become less cost-competitive than originally anticipated in the Reference System Plan.

In Decision 18-02-018, the CPUC acknowledged that “the solar import tariff is likely to have an impact on the cost-effectiveness of certain solar resources and therefore the likelihood of a need for certain other types of generation resources between now and 2030.” (p. 150) The Decision also indicated that the “individual LSEs [Load Serving Entities, such as Pacific Gas and Electric Company] IRPs filed later this year will reflect and take into account the solar import tariff and any new information available in the interim.” (p. 151)

What happens next?

It is unclear whether the CPUC will accept discrepancies between the Reference System Plan and the aggregated LSEs’ integrated resource plans, or whether the CPUC will adjust the former to mirror the latter. Regardless of the process that the CPUC will adopt to reconcile the Reference System Plan and the aggregated individual plans, preliminary sensitivity analysis modeling indicate that less solar generation than initially anticipated (i.e., 9,000 MW) will be included in the individual LSE’s integrated resource plans, and that other resources could have a more prominent role in those plans than originally expected. The IRP Proceeding will direct the planning and procurements strategies for utilities and other load serving entities in California over the next twelve years.

The decisions that the CPUC will adopt in this proceeding will impact not only the solar industry, but also renewable energy development in California for years to come. Developers, lenders, industry associations, ratepayers, and any party with an interest in the renewable industry should monitor and consider participation in the IRP Proceeding. Further, participants in ongoing CPUC proceedings should closely watch the IRP Proceeding, which is likely to guide CPUC’s activities in connection with energy policy (such as those related to resource adequacy, the Renewable Portfolio Standard, and the Power Charge Indifference Adjustment for Community Choice Aggregators, among others) and investor owned utility procurement.