The Changing Landscape of the U.S. Energy Market. The Political Dimensions of China s Entry into the U.S. Solar Power Sector.

Transcription

1 The Changing Landscape of the U.S. Energy Market The Political Dimensions of China s Entry into the U.S. Solar Power Sector

2 1 The Political Dimensions of China s Entry into the U.S. Solar Power Sector Allen & Overy LLP 2012

3 2 China s phenomenal penetration of the U.S. solar energy market over the past five years has been fueled by the heavy reliance on Chinese solar cells, modules and other solar components, as well as Chinese investment. Chinese wind turbine manufacturers aspire to follow suit. Two recent events, however, highlight the sensitivity to the growth of Chinese renewable energy participation in the U.S. and its connection with U.S. politics: (1) the Currency Exchange Rate Oversight Reform Act of 2011 (the Currency Bill) passing the Senate and (2) a filing by a company known as SolarWorld Industries America, an Oregon solar manufacturer, and six other U.S. solar manufacturers at the U.S. Department of Commerce (DOC) and U.S. International Trade Commission (ITC) accusing Chinese solar panel manufacturers of illegally dumping solar components in the U.S. (the Complaint). The Complaint also accused the Chinese government of providing illegal subsidies to Chinese solar manufacturers. Moreover, in October of 2011, Westinghouse Solar, Inc. and Andalay Solar, Inc. filed a complaint with the ITC under Section 337 of the Tariff Act of 1930 alleging that certain companies based in China supply solar panels that infringe at least two United States patents. Under Section 337, the remedy for such infringement would be an exclusion order that directs U.S. Customs to seize all infringing products before they are allowed entry into the United States. One thing that the ITC is likely to consider in the context of the Section 337 investigation is the public interest in ensuring that green energy is available in the United States. As discussed in greater detail below, these events have caused uncertainty as to the cost of Chinese investment in the U.S. and its overall future, which in turn has resulted in higher financing costs and hesitant investors. This slow-down is likely to be a temporary bump in the road, however, given the rising U.S. demand for renewable energy and growing reliance on Chinese products and investment in this sector.

4 3 The Political Dimensions of China s Entry into the U.S. Solar Power Sector 1_Introduction Chinese solar panel and wind turbine manufacturers have approached the opportunities that the U.S. renewables market presents with considerable resolve over the past five years as a response to both domestic Chinese market competition driving manufacturers offshore and the immense demand for renewable energy in the U.S. The growth statistics are astounding. U.S. imports of Chinese components for solar panels skyrocketed 1,500% between 2006 and U.S. imports of Chinese solar products reached $1.5 billion in the first three quarters of 2011, compared with $1.2 billion in all of Worldwide, China s share of the global export market has almost tripled since 2006 as the global market itself has almost quadrupled. 3 In addition, although still lagging behind solar with respect to the acceptance of their technology, Chinese wind turbine manufacturers have continued to make measured inroads into the U.S. market. At the same time, U.S. domestic demand for solar energy is exploding. Solar capacity doubled in the U.S. in 2011/ In fact, new solar capacity installed in the U.S. has been growing more than 70% a year since The U.S. is projected to become the world s largest solar market by In 2010, the U.S. solar market grew to $6 billion, up from $3.6 billion only one year earlier. 7 The rapidly increasing U.S. demand for renewable energy, due in large part to renewable portfolio standards implemented by twenty-nine states and the District of Columbia, has been fueling these efforts. Solar facts 1,500% increase in imports from China to U.S. $1.5billion of Chinese products imported to U.S. 70% increase in new solar capacity in U.S. $3.6billion 2009 U.S. solar market. $6billion 2010 U.S. solar market. 1 Platts, Inside Energy, October 24, 2011, p. 15, citing data from the International Trade Commission. 2 Id. 3 Id. 4 Ernst & Young, Renewable Energy Country Attractiveness Indices, 10 (November 2011). 5 Keith Bradsher, Trade War in Solar Takes Shape, The New York Times, November 9, Platts, Inside Energy, December 8, 2011, p Solar Energy Industries Association, U.S. Solar Market Insight: 2010 Year in Review, Executive Summary at 2-3 (2010). Allen & Overy LLP 2012

5 4 Increased demand for renewable energy in the U.S., expanding at the same pace as Chinese solar manufacturing capability and investment provide the synergy for Chinese and U.S. interests to work together toward a common goal. Political considerations and financing, however, may be obstacles to the unimpeded flow of Chinese investment in the U.S. renewable energy market. Solar energy is a particularly politically charged issue due to the bankruptcy in August of a U.S. solar panel maker, Solyndra, after it had received $535 million in federal loan guarantees. 8 The Currency Bill passing the Senate and the trade filings at the DOC and ITC demonstrate the sensitivity (perhaps political, but certainly commercial) of Chinese investment in and export of such green energy products to the U.S. Both will no doubt have an impact on any attempts to slow U.S. imports of Chinese goods. This note discusses the effects these events have had on Chinese investment in the U.S., specifically higher financing costs and uneasy investors. Given the deep integration and mutually beneficial relationship between U.S. demand for renewable energy and Chinese products and investments, long-term divestment is undesirable. Nor does it appear to be technically or commercially feasible. 8 Steven Mufson and Carol D. Leonnig, Where Solyndra Said Yes, Others Demurred, Washington Post, September 27,

6 5 The Political Dimensions of China s Entry into the U.S. Solar Power Sector 2_Currency Exchange Rate Oversight Reform Act of 2011 On October 11, 2011, the U.S. Senate passed a bill aimed at challenging China s alleged policy of undervaluing its currency, the RMB. The Currency Bill seeks to impose duties on goods from countries whose currency is found to be undervalued. The Secretary of the Treasury is charged with identifying those currencies that are fundamentally misaligned ; defined as significantly and sustainably undervalued compared against what the exchange rate would be if the currency were freely floating on foreign exchange markets. If passed into law, the Currency Bill would impose import duties on goods denominated in a fundamentally misaligned currency to adjust export prices to the normal value. In addition, under the Currency Bill, the Secretary of Commerce must investigate whether the currency undervaluation effectively constitutes a countervailing subsidy. The Currency Bill empowers the Secretary of the Treasury to further designate a fundamentally misaligned currency for priority action if it finds that a foreign government has engaged in excessive currency manipulation. Imports from priority action countries are subject to even greater penalties. For example, the federal government is prohibited from procuring goods or services from a priority action country, OPIC is banned from financing projects located in a priority action country, and a priority action country could potentially face WTO action. Although the Currency Bill does not specifically name China, it is clearly intended to target China, as evidenced by Senators statements in support of the Currency Bill. There is widespread perception in the U.S. that China s undervaluing the RMB widens the trade deficit, causes the loss of American jobs and harms the economy. Arguing in favor of the Currency Bill, Senator Charles Schumer of New York estimated that almost 3 million American jobs have been lost as a result of increased trade with China and China s currency manipulation. 9 9 Floor speech on S The Currency Exchange Rate Oversight Reform Act of 2011, October 3, 2011 (statement of Sen. Charles Schumer). Allen & Overy LLP 2012

7 6 Furthermore, he aggressively blamed China s currency policy for current U.S. economic woes: the decimation of our middle-class, our manufacturing sector, and the American economy as a whole is due, in part, to developing countries like China employing currency manipulation and other aggressive, mercantilist tactics to tilt the playing field in their favor. 10 Senator Carl Levin, also supported the Currency Bill, because [c]urrency manipulation makes Chinese exports unfairly cheap and U.S. products more expensive in China, displacing U.S. production and jobs. 11 These sentiments extend beyond the Congressional debates surrounding the Currency Bill. In a hearing on U.S.-China relations on October 25, 2011, Senator Levin predicted that correcting the currency misalignment would create one million American jobs, mainly in manufacturing. 12 In the same hearing, Congressman Xavier Becerra claimed that two million American jobs were lost due to China s currency manipulation, 13 and Congressman Shelley Berkley alleged that China s currency manipulation eliminated 15,000 jobs in Nevada. 14 Politicians have been calling on China to appreciate its currency as a quick fix to the economy. The progress of this bill and its effects on the U.S. and China economies (as well as the U.S.-China relationship, if enacted, bear further attention....almost 3 million American jobs have been lost as a result of increased trade with China and China s currency manipulation. 10 Id. 11 Floor Speech on Chinese Currency Manipulation, October 5, 2011 (statement of Sen. Carl Levin). 12 Hearing on U.S.-China Economic Relations, October 25, 2011 (statement of Sen. Carl Levin). 13 Id (statement of Rep. Xavier Becerra). 14 Id (statement of Rep. Shelley Berkley).

8 7 The Political Dimensions of China s Entry into the U.S. Solar Power Sector 3_Anti-dumping complaint against chinese solar manufacturers The week after the Currency Bill passed the Senate, SolarWorld Industries America, an Oregon solar manufacturer, and six other U.S. solar manufacturers filed, on October 19, 2011, a petition with the DOC and ITC alleging that Chinese solar firms were illegally dumping crystalline polysilicon solar (CPS) cells and panels on the U.S. market and benefitting from illegal subsidies from the Chinese government (the Trade Filing). 15 The complaint alleges that products sold in the U.S. are below cost and that Chinese exporters are engaging in predatory pricing. Specifically, the petition points to subsidies from China that include cash grants, preferential loans, discounts on raw materials, tax incentives, and currency manipulation. To succeed in proving their case, the petitioners must demonstrate that the domestic industry for CPS cells and panels is materially injured, or threatened to be materially injured, by imports of similar products from China. This involves showing: (1) the volume of imports, (2) the effect of such imports on the price in the U.S. market and (3) the impact of the imports on domestic producers. First, the Trade Filing maintains that imports of CPS cells and panels increased 350% between 2008 and 2010, and an additional 157% in the first eight months of Second, the price of solar products has dropped drastically. Although dollar amounts are redacted in the complaint, the New York Times reports that the price of solar panels has dropped from $3.30 in January 2008 to $ today. 17 Third, as evidence of the impact on the U.S. domestic industry, the Trade Filing cited the bankruptcy of several U.S. firms and industry-wide lay-offs and factory closings at a time when demand for solar generating capacity was exploding domestically. The petitioners have used this anecdotal evidence to make their case for an adverse effect on the U.S. domestic market resulting from imports of Chinese CPS products. 15 Petition for the Imposition of Antidumping and Countervailing Duties at 26, Nos. A and C (DOC and ITC October 19, 2011). 16 Id. 17 Supra, note 2, at p. 2. Allen & Overy LLP 2012

9 8 The Trade Filing comes shortly after the U.S. Trade Representative (USTR) accused China of failing to report more than 200 subsidy programs to the WTO, of which are alleged to be clean energy subsidies. 19 WTO members are required to regularly disclose information on its subsidy programs so that members may assess the nature and extent of such programs, and evaluate those programs in the context of a country s trade policies. Since becoming a WTO member in 2001, China has submitted only one notification. The USTR s move at the WTO raises tensions with China at a time when trade relations are strained. In December of last year, the ITC unanimously determined that Chinese solar panel and cell imports were harming the American solar manufacturing industry. The DOC decided, on December 2, 2011, to institute an investigation based on the allegations in the Trade Filing to determine whether the U.S. CPS industry is materially injured or threatened with material injury by imports from China. 20 Although the investigative process may span (without any applicable postponements or extensions) a period of up to 287 days (for anti-dumping) or 212 days (for countervailing duties), the DOC would be able to impose preliminary tariffs and require the posting of bonds or cash upon an interim preliminary determination of the viability of the claim. In the case of a countervailing duty investigation, the DOC issued a preliminary decision on March 19, 2012, finding that Chinese solar companies received unlawful government subsidies in amounts ranging from 2.9% to 4.73%. As a result of the preliminary decision, customs officials have been instructed to collect bonds or cash on imported Chinese CPS products that have entered the U.S. since December 20, The DOC may impose retroactive tariffs upon an affirmative finding of critical circumstances, which involves an assessment as to whether there have been massive imports of the relevant merchandise over a relatively short period of time. If the DOC were to make such a finding in respect of the Trade Filing, retroactive tariffs could be imposed on all modules processed through United States Customs from a date that is as early as November 8, 2011 (in the case of countervailing duties) and December 29, 2011 (in the case of an anti-dumping tariff). 18 Press Release, United States Trade Representative, United States Details China and India Subsidy Programs in Submission to WTO, October 6, Platts, Inside Energy, October 24, 2011, p United States International Trade Commission, Notice, Crystalline Silicon Photovoltaic Cells and Modules from China, December 2,

10 9 The Political Dimensions of China s Entry into the U.S. Solar Power Sector 4_Impact on Chinese investment in the U.S. renewable energy industry Although the Currency Bill is not yet law, its passage in the Senate, together with the Trade Filing, have caused uncertainty for Chinese investors considering opportunities in the U.S., as well as the future cost of Chinese trade with the U.S. The Currency Bill has had several immediate, negative impacts on the environment for Chinese investment in the U.S. Loan pricing from domestic Chinese lenders for loans to U.S. renewable projects using Chinese equipment saw an uptick following the Senate s passage of the Currency Bill, putting pressure on projects and investors that were relying on China-based financing for U.S. investments. Financing for Chinese companies looking to export renewable energy-related goods to the U.S. increased by bps over comparable export loans in other industries. Various Chinese-based equity investors considering U.S. renewable energy projects have reconsidered the use of Chinese supplied turbines, and overall investment, fearing that potential tariffs on goods shipped in the future would raise costs to uneconomic levels and, as a result, lower returns to an unacceptable level. In general, insecurity about the future due to the Currency Bill has created a climate inhospitable to Chinese investors, especially those looking to come to the U.S. for the first time. The Trade Filing has resulted in mixed reactions, from both within and outside of the U.S. Those who made the Trade Filing believe that Chinese manufacturers, along with subsidies provided by the Chinese government, have resulted in a flood of cheap Chinese solar panels in the U.S. market, to the detriment of U.S.-based manufacturers. The Coalition for American Solar Manufacturing, the group consisting of U.S. solar manufacturers that filed the Trade Filing, estimates that approximately 2,000 high-tech American jobs were lost nationally due to unfair competition from Chinese solar manufacturers. Two U.S. solar manufacturing companies, Spectrawatt and Evergreen Solar, filed for bankruptcy protection in August, both citing an inability to compete with Chinese products as a reason for their failures. Proponents of the Trade Filing argue that the playing field is not level and that competitors are not following the rules. 21 They point to job losses and bankruptcies as evidence that China is not competing fairly. 21 Id. at p Allen & Overy LLP 2012

11 10 Opponents of the Trade Filing fear it could spark a trade war between the U.S. and China. The Chinese Renewable Energy Industries Association has accused the White House of engaging in a political farce in order to gain votes in the coming election. 22 Some U.S. buyers and installers of solar energy projects formed a new trade group that, along with some environmentalists, argue that restricting importation of Chinese solar components could slow the adoption of clean energy technology and could cost thousands of American jobs, such as solar installation and services workers. A spokeswoman for China-based Yingli Solar, a company named in the Trade Filing, expressed concern that protectionism would inhibit solar technology s ability to compete with traditional forms of electricity generation. 23 Without the maximum investment in solar energy, development of technology would be stymied, harming manufacturers, investors and consumers globally. Others doubt the whether tariffs would actually achieve the intended result; more likely, they argue, if Chinese products were more expensive, production or sourcing will shift to other countries, rather than back to the U.S See supra, note Platts, Inside Energy, October 24, 2011, p U.S.-China Business Council, Issues Brief: Tariffs on Chinese Tires Two Years Later Right or Wrong Remedy? (September 2011). Although the article focused on the punitive damages imposed on imports of Chinese tires, the same argument could be made for imports of any goods.

12 11 The Political Dimensions of China s Entry into the U.S. Solar Power Sector 5_Future of Chinese investment in the U.S. renewable energy industry Recent events have erected further obstacles to Chinese investment, and the import of Chinese products for use in U.S. renewable energy projects. Should economics prevail, however, these developments are unlikely to have a significant adverse impact in the long run. Rapidly rising U.S. demand for all types of renewable energy invites investment opportunities at the same time that fierce domestic competition in China is driving Chinese manufacturers abroad. Chinese companies must expand internationally to survive, just as the U.S. must look to outside investors to satiate its appetite for renewable energy. This economic reality provides a basis that neither country will benefit from permanent divestiture. Political machinations could well lead to a different result. For all the rhetoric and unease it has sparked, the Currency Bill has yet to become law, and may never get through the House or come before the President. Speaker of the House John Boehner and other Republican leaders of the House have declined to bring to vote the House bill that corresponds to the Currency Bill, expressing concerns that it could spark a trade war. 25 Similarly, the White House has criticized the Currency Bill as potentially violating international law. 26 The Trade Filing investigation has only commenced, the parties for or against are just beginning to line up, and the final outcome remains months away. Policy-makers are already looking forward. Following the 22nd Session of the U.S.-China Joint Commission on Commerce and Trade in November 2011, where top officials from both the U.S. and China met to discuss the future of U.S.-China economic ties, China announced a plan to invest $1.5 trillion in the next five years in strategic emerging industries, including energy-saving and environmentally friendly technologies and renewable energy. 27 The clear message is that despite recent setbacks, U.S. and global demand for renewable energy products is rapidly rising, arguing for Chinese products and investment continuing to play a prominent role in the trend. Political winds charting a result to the contrary would lead to unfortunate consequences for the sector s development and consumers. 25 Felicia Sonmez, China Currency Bill Demands House, White House Action, Senators Say, Washington Post, October 12, Alan Beattie, White House Voices Concern Over Currency Bill, Financial Times, October 5, Press Release, United States Department of Commerce, U.S. and China Conclude 22nd Session of the Joint Commission on Commerce and Trade, November 21, Allen & Overy LLP 2012

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14 13 The Political Dimensions of China s Entry into the U.S. Solar Power Sector Mitchell Silk Partner New York Tel mitchell.silk@allenovery.com Mitch is a partner in the Projects, Energy and Infrastructure group and head of the U.S. China Group in the New York office. Mitchell concentrates on project finance, banking and direct investment matters and also has significant experience advising on joint ventures. Mitchell has particular expertise in the power (including renewables), energy and water sectors. He advised on many of China s landmark project financings in a number of sectors and on China s largest investment in Colombia, as well as on major renewable, traditional and nuclear power project acquisitions and financings in the U.S., including a 270MW solar PV power plant in California. Mitchell is fluent in Mandarin and Cantonese Chinese. Gary Lazarus Senior Counsel New York Tel gary.lazarus@allenovery.com Gary is senior counsel in the Projects, Energy & Infrastructure group and a member of the U.S. China Group in the New York office. He has a wide range of experience with renewable energy and natural resource projects, general bank finance and refinancings, bond offerings and private placements, and has represented borrowers, lenders, developers and borrowers in both U.S. and international transactions. He has advised on a wide variety of energy projects and transactions including power plants and energy-based investment funds, and has recently advised the U.S. Department of Energy on a guaranteed loan to a 150MW utility-scale PV generation facility in Arizona. Gary is fluent in Mandarin Chinese. Allen & Overy LLP 2012

15 14 Jillian Ashley Associate New York Tel Jillian is an associate in the Projects, Energy & Infrastructure group and a member of the U.S. China group in the New York office. She has a range of experience representing financial institutions and corporations in project financings, mergers and acquisitions, and funds transactions around the world. Jillian has advised on a significant number of power transactions, including advising the U.S. Department of Energy on a guaranteed loan to the 230 MW Antelope Valley Solar Ranch PV generation project in California and a major solar developer in the bidding and negotiation of EPC, O&M and equipment supply arrangements in connection with a 200+MW solar PV power plant in California, among others. Jillian is fluent in Mandarin Chinese. Lillian Samet Associate New York Tel lily.samet@allenovery.com Lily is an associate in the Banking practice and a member of the U.S. China group in the New York office. Lily has experience with solar projects in the United States including advising the U.S. Department of Energy on guaranteed loans to the 230 MW Antelope Valley Solar Ranch PV generation project in California and the 290 MW Agua Caliente solar PV generation project in Arizona and a major solar developer in the bidding and negotiation of EPC, O&M and equipment supply arrangements in connection with a 200+MW solar PV power plant in California.

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