New tariffs on solar panels give Tesla Inc. an escape hatch if it can't deliver on its job creation and investment promises at its sprawling solar panel factory in South Buffalo.
The escape hatch could allow Tesla to avoid paying up to $41.2 million a year in penalties to the state if the South Park Avenue factory fails to turn into the job-creator that both the company and state officials planned.
Because of the way Tesla's contract with the state is structured, the new tariffs don't necessarily give Tesla a "get out of jail free card" if it doesn't meet its timetable to create the 2,900 jobs it promises at the factory and among its suppliers and service providers, said William Savino, a Buffalo business attorney.
But it does potentially give the company more wiggle room – and a way to possibly get more time – to meet its targets without facing millions of dollars in penalties if the tariffs slow the residential solar market, Savino said.
No one is saying that Tesla is going to walk away from the Buffalo factory. In fact, the company and its partner, Panasonic, have been ramping up production since last summer, with total employment there now approaching 500 people. They still are planning to turn it into the biggest solar panel factory in the Western Hemisphere.
"Tesla is committed to expanding its domestic manufacturing, including Gigafactory 2 in Buffalo, New York, regardless of the solar tariff decision,” the company said in a statement after the tariffs were announced.
The move last month by President Trump to impose new tariffs on imported solar panels adds duties of up to 30 percent on imported panels in the first year that would gradually decline over the following three years. The Trump administration imposed the tariffs as a way to protect U.S. panel manufacturers, including Tesla.
But the tariffs also have an unintended consequence because of an obscure clause in Tesla's state contract.
The state used $750 million in taxpayer money to build and equip the South Buffalo factory as the centerpiece of the Buffalo Billion economic development initiative. The contract includes penalties meant to help the state recover at least part of its investment in the project if it doesn't pan out as planned. Those penalties can be triggered if Tesla doesn't meet annual employment targets or if its total investment in the Buffalo factory, including payroll, doesn't reach certain levels.
But the contract also lets Tesla avoid penalties if circumstances arise that are beyond its control. In the broadest terms, it means Tesla can avoid the penalties if the company is beset by an Act of God – things like landslides, earthquakes, fires, floods and epidemics. But Tesla's contract with the state, in a revision made in late 2015, included other specifics circumstances beyond natural disasters.
Those included "significant increases in tariffs or duties relating to components necessary for the operation of the manufacturing facility." The Trump administration tariffs would do that, since the factory currently relies on solar cells that Panasonic imports from its facilities in the Malaysia and Japan. Each solar panel has several dozen solar cells.
Tesla could, ultimately, make the tariffs less of a concern, if not render them entirely moot. Panasonic is starting to make solar cells in Buffalo and plans to ramp up their production steadily.
Neither Tesla nor Empire State Development Corp. officials would comment. But Savino said the triggering of the clause does not give Tesla a simple and broad-based way of getting out of its contract with the state. It could open the door for further negotiations with the state if Tesla's solar business falters.
Solar energy market slows
Until Tesla starts making its own solar cells, the company must cope with the higher panel costs that the rest of the industry now faces.
Those higher panel costs are expected to further dampen demand in an already slowing solar energy market. GTM Research predicts that, through 2022, the tariffs could lead to an 11 percent drop in solar installations at a time when Tesla already has been scaling back.
Through the first three quarters of this year alone, Tesla’s total solar installations – which include an undisclosed number of commercial projects – were down by 32 percent. Tesla's share of the residential solar market shrank from 35 percent in 2015 to 14 percent during the third quarter, according to Reuters.
Less demand, stemming from higher prices, will make it harder for Tesla to grow its solar energy business, even as it begins rolling out its long-awaited solar roof, which looks like a conventional roof but has solar cells inside. While Tesla will guarantee the solar roof for as long as a homeowner owns the home, the roof costs much more than a conventional roof and, even with energy savings factored in, has a payback period that spans more than two decades.
Higher solar cell prices will only extend that payback period for all types of solar energy and could make solar projects uneconomical in markets, especially in places like Texas and the Southeast, where electricity prices currently are just barely high enough to make them feasible, said Abigail Hopper, president and CEO of the Solar Energy Industries Association, a solar advocacy group.