Trade Barriers Dim Renewable Energy’s Prospects

Protectionism in the renewable energy industry takes many forms depending on location and sector. For example, in the U.S., Ohio is stringently enforcing a law that half of its mandated renewable energy must be supplied through in-state production.

Partly to avoid problems with the Constitution’s commerce clause in relation to interstate transactions, other U.S. states are less obviously protectionist but nevertheless still require a degree of local production. Some states such as Colorado and Missouri apply a 1.25 multiplier to renewable energy certificates produced from in-state resources.

The theory is that bringing in large-scale renewable energy imports before local development has a chance to get going could kill nascent local renewables industries.

The good news for free-marketeers is that not every state has jumped on the protectionist bandwagon. Indeed, California has taken a strong stance against it, with former state governor Arnold Schwarzenegger welcoming clean energy from other states in order to keep electricity prices low.

“I am totally against protectionist policies because it never works,” Schwarzenegger said while he was still in office, adding: “You have to understand that we get our water from outside California. We get it from the Colorado River, for instance. Why can we get the water from the Colorado River but we can’t get renewable energy from outside the state? We get most of our cars from outside the state; why can’t we get renewable energy?”

Schwarzenegger’s stand — taken in response to bills in the California state legislature that would also have boosted requirements for solar, wind and other renewable resources but required a large amount of the generation to come from within California — contrasts with the explicit encouragement given to in-state production in some other states’ renewable energy requirements, which are seen as job-creating mechanisms.

Protectionism in the Solar Sector

Protectionism in the industry is not just location-specific but also varies across sectors. Solar is a particular cause for concern among policymakers considering issues related to subsidies. Overall, the solar sector has seen a massive boom, growing by more than 150 percent in 2010 due to falling solar product prices and increasing subsidies from governments looking to mitigate climate change, reduce their dependence on oil, and cut carbon emissions.

But most of the world’s solar panel production has become concentrated, with almost 60 percent occurring in China and Taiwan due to lower labour costs, access to capital and good infrastructure. In many cases, European solar module manufacturers have been unable to compete with their Asian counterparts.

In the face of this competition certain European states have shifted their solar policies. For example, France cut subsidies to the solar power industry, citing massive imports of cheap solar panels from China.

A similar shift is occurring on the other side of the Atlantic in the heavily industrialised Canadian province of Ontario. There, a comprehensive solar subsidy policy mandates that a large percentage of solar components must be manufactured in Ontario in order to benefit from feed-in tariffs (FiTs). The goal is to generate 13 percent of Ontario’s energy from renewable sources by 2018, and zero from coal by late 2014. The government says that the clean energy sector has created more than 13,000 jobs and is on track to reach 50,000 by the end of 2012.

Protectionism policies could substantially slow Europe’s transition to a low-carbon economy (Source: Earthly Pictures)

Ontario has also managed to attract significant manufacturing investment due to its local content requirements stipulating that around 50-60 percent of solar modules use locally-produced parts. This has encouraged solar companies like Silfab and Canadian Solar to set up module plants while companies including Enphase, Schneider and SMA have established inverter plants in the province.

Ontario’s protectionism has, however, angered other states. Japan, which is also a large manufacturer of solar panels with major solar companies like Sharp and Kyocera, has taken Canada to the World Trade Organisation (WTO) citing anti-competitive practices.

Ontario’s plans have also proved unpopular locally and the scheme could soon be scrapped, just two years after its 2009 launch. Critics say the ratepayer-funded program is an expensive experiment that is increasing costs for consumers.

Ontario’s opposition Progressive Conservative party, which is leading in the polls ahead of an October election, has vowed to scrap the program. Even if the system survives it is likely to face numerous legal challenges, which could force its eventual closure.

Further afield, Italy has brought in a solar subsidy law called Conto Energia 4, which offers additional 5-10 percent in incentives for solar components manufactured in the EU. This law is also likely to prove unpopular in the long run, not least because much of the manufacturing that feeds Italy’s solar industry occurs in Spain and Germany. It could also lead to China and other manufacturing nations taking Italy to the WTO.

India, too, has a law that states that solar modules must be produced in the country to benefit from FiTs. Indeed, the law is expected to become stricter, specifying that solar cells must also be produced within India in future despite evidence that, in the long run, such policies are almost always counterproductive, economically inefficient and unsustainable.

More than One Trade Barrier

So-called “green protectionism” covers two types of trade barriers: tariff and non-tariff. Under the former, a country taxes imported wind, solar or other renewable parts or units. In India, for example, renewable energy components are levied a 7.5 percent tariff, while China’s tariff stands at eight percent. Brazil recently imposed a 14 percent tariff on wind turbines up to a specific size.

Despite being less obvious, non-tariff trade barriers can often be even more restrictive and onerous for overseas companies to address. For example, China requires foreign companies that wish to enter the Chinese market to form a local joint venture, giving Chinese partners 51 percent ownership. Portugal has issued a wind tender, announcing that it would award contracts only to bidders engaged in research collaborations with local universities.

Even apparent victories can come with a hitch or two attached. For example, the wind industry succeeded in persuading the Brazilian government to drop its explicit local content requirement from a public tender in December 2009. However, most of the developers that won projects there will seek local funding, and the Brazilian national development bank only provides financing if a certain percentage of the content is produced locally, meaning that the local requirement is still effectively in place.

Protectionism is the Wind Sector

Lobbying the European Commission to recognise international opportunities for discussion of the elimination of tariffs and non-tariff barriers to wind and other renewables, comes the European Wind Energy Association (EWEA), says its policy director, Justin Wilkes.

The wind industry has also been promoting the adoption of policies such as Sustainable Energy Free Trade Areas (SEFTA) or an Environmental Goods and Services Agreement (EGSA), both of which offer free trade in renewable energy technologies, among other measures.

“We have been working closely with Vestas and other leaders in the green economy to open up trade in technologies and services that support the fight against climate change,” said Thaddeus J. Burns, GE’s senior counsel for intellectual property and trade. “We support an EGSA that lowers tariffs and opens up markets.”

Likewise, Vestas wants governments to commit to reducing the costs they impose on environmental goods and services, said Michael Zarin, the company’s director of government relations. “Removing or at least substantially lowering these barriers would provide both an important contribution to global climate change goals and a unique opportunity for a sustainable, green-growth European business model,” he said.

Protectionism in Europe

The fear is that protectionism could substantially slow the transition to a low carbon economy. One area of concern in this regard is the EU’s Renewable Energy Directive, which contains a number of trade barriers that could not only land the Union in court but could also slow Europe’s shift from fossil fuels.

The Directive is a central aspect of the EU’s 20/20/20 strategy to combat climate change, and it is also a much-vaunted element of other policy strategies such as steering the Common Agricultural Policy (CAP) towards energy crops to make it more market-oriented.

European biofuels protectionism is a case in point. Biofuel production is heavily subsidised in the EU. Not only is it protected by tariffs of up to 63 percent, but the Global Subsidy Initiative’s 2007 study charged that subsidies now stand at up to €0.5/litre of biodiesel and €0.74/litre of ethanol.

Solar panel manufacturer Abound Solar benefited from a $400 million loan guarantee from the US Department of Energy (Source: Abound/SolarOne)

Despite the subsidies, significant parts of the European biofuels industry remain uncompetitive. But last year the European Centre for International Political Economy (ECIPE) released a report criticising the EU’s biofuels policy. According to the report, substantial subsidies, import tariffs and standards are used to favour domestically produced biofuels, in “a classic example of ‘green protectionism’ – protectionism that is not motivated for the benefit of the environment, but which uses environmental concerns to pursue non-environmental objectives.”

The study focused specifically on the Renewable Energy Directive (RED), which sets a binding target for 20 percent of the EU’s energy use to come from renewable sources by 2020. Of this, biofuels are to constitute a 10 percent share of transport-related energy in all EU countries. In order to contribute towards these targets, biofuel producers are expected to meet complex production criteria, including a gradually increasing minimum level of saved greenhouse gas emissions, and to avoid converting biodiverse areas or carbon-rich soils used for growing feedstocks.

ECIPE has pointed out that foreign exporters may not be able to prove compliance, effectively cutting them off from the EU market, especially where eligibility for subsidies may be tied to meeting the RED criteria. The Centre also noted that the EU fails to specify how it could prevent the manipulation of ambiguities in the calculation of carbon reductions, leaving it open to accusations of bad faith. Europe’s lack of negotiation with other countries is identified as the key problem with its approach.

ECIPE’s report argues that a careful reading of the General Agreement on Tariffs and Trade (GATT) and the Agreement on Technical Barriers to Trade (TBT) shows that the EU’s biofuels policy ‘clearly violates WTO principles and rules’, and is unlikely to qualify under any of the GATT criteria for exceptional treatment.

Qualified Success

With protectionism a fact of life around the globe, many will question whether anything can be done about it unless, as in California and possibly Ontario, the political will exists to remove barriers to renewable energy.

There have been some notable victories in resolving trade disputes in recent months, although reading too much into such victories could possibly be misleading.

For example, in June of this year U.S. trade representative Ron Kirk announced that subsidies for wind power manufacturers given by the Chinese government from a public fund to domestic companies would be discontinued.

The fund, which provided grants worth between US$6.7 million and $22.5 million, had become a contentious issue between China and the US, with the latter charging that the grants violated Article 3.1 of the Subsidies and Countervailing Measures Agreement because they were contingent upon the use of local input.

“We challenged these subsidies so that American manufacturers can produce wind turbine components here in the U.S. and sell them in China. That supports well-paying jobs here at home,” said Kirk, despite reports that the move was more a political gesture than a first step towards a more free-market approach by the Chinese.

This view was echoed by EWEA, which urged China to go further in its efforts to create a fair market. “The government of China needs to take further steps in order to eliminate other discriminatory practices which favour Chinese wind turbine manufacturers over non-Chinese manufacturers,” said EWEA.

Not an Insurmountable Barrier

But while protectionism is undoubtedly a barrier to export, particularly in countries with high labour costs, it is by no means an insurmountable one, particularly if support from other government departments is available.

Abound Energy was a three-person startup in 2007, working out of a Colorado State University research laboratory. Now, despite strong competition from Asian manufacturers, it is a globally competitive solar panel manufacturer that employs 350 people, and will soon be three times as large with factories in Colorado and Indiana.

The company benefited from a $400 million loan guarantee from the US Department of Energy in 2010, allowing it to expand its existing manufacturing facility in Longmont, Colorado and build a new plant in Tipton, Indiana, which is expected to be on-line in 2014. When both projects are completed Abound will be able to produce some 840 MW of solar modules per year at full capacity — a scale that makes it possible to build more panels for less money, sharpening the company’s competitive edge and driving job creation.

While it is arguable that such loan guarantees are also a form of indirect subsidy, there is no doubt that these funds gave the company the means it needed to improve and demonstrate its innovative thin-film technology and thus emerge as a commercially viable enterprise.

In July 2011, the Export-Import Bank of the US (Ex-Im Bank) loaned Abound and another thin-film manufacturer, First Solar, the funds to support their export efforts to India. First Solar will take a $16 million long-term loan to support exports to Azure Power Rajasthan Pvt. Ltd. in New Delhi, while Abound Solar will be given $9.2 million to support exports to Punj Lloyd Solar Power.

“Selling to India is incredibly different than selling to an established market like Germany,” says Abound marketing manager Mark Chen. Contract enforcement is a different culture in India, which is one reason why support from a credible financial entity like the Ex-Im Bank is so crucial to executing a major project. Shipping to Indian installations also takes longer, which companies must consider when targeting certain incentives.

And yet, Abound Solar focuses on international sales. The company sold 90 percent of its cadmium telluride modules internationally in 2000, primarily to Germany and Italy. In 2011 India has joined the ranks of their top export customers, and the company is focused on selling to countries including Turkey and China.

The repayment of Ex-Im’s loans is based on cash flows generated by the sale of electricity to NTPC Vidyut Vyapar Nigam Ltd. (NVVN), a wholly-owned power trading subsidiary of India’s National Thermal Power Corporation and the agency responsible for the purchase and sale of solar power under the first phase of India’s National Solar Mission. The Indian government has furthermore provided special power-price incentives through NVVN.

Clearly, having an independent federal agency that fills gaps in private export financing at no cost to U.S. taxpayers is crucial, and Ex-Im Bank more than adequately fulfils this role. The Bank has a Congressional mandate to increase support for U.S. renewable energy and other environmentally beneficial exports. The Bank also provides a variety of financing mechanisms, including working capital guarantees, export-credit insurance, and financing to help foreign buyers purchase US goods and services. Indeed, already in 2011 the Bank has approved financing totaling approximately $75 million for four solar projects in India.

The Future

The bottom line is that renewables are likely to continue to be protected in one form or another – whether through tariffs, subsidies, development grants, favourable loans or export credits. Examples of territories turning their backs on protectionism, as has happened in California and could yet happen in Ontario in October, are rare. The impact this will have on the transition to a low carbon economy is harder to gauge but looks set to endure, particularly in a time of economic crisis when many politicians are keen to appeal to the perceived self-interest of voters.

Richard Baillie is a freelance journalist focusing on the energy sector.

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