Milos Muller for Getty
Yesterday was an interesting and puzzling day in solar energy stocks. Two of the biggest names, First Solar (FSLR) and SunPower (SPWR), dropped dramatically, while others, such as Canadian Solar (CSIQ) and Jinko (JKS), posted big gains on the day. That bifurcation was caused by an announcement from the U.S. trade delegation that a particular type of solar panel was being removed from the tariff list.
It should come as no surprise to anybody right now that a large part of the reason for the contradictory moves came out of the ongoing trade negotiations between the U.S. and China, as it seems that everything that moves markets these days has some connection to those talks, but this decision contains some interesting lessons for investors.
The products involved are known as “bifacial” solar panels. As the name suggests, both sides of these panels carry power producing cells. That enables them to collect reflected as well as direct sunlight and makes for a more efficient use of space in solar power generation. Obviously, that is a good thing for those in favor of renewable energy generation, but, for the U.S. at least, there is a problem.
Production of bifacial panels is dominated by Chinese companies, and they are an example of the kind of practice that Donald Trump frequently uses to justify the trade war. Since the 1990s, the solar panel industry in China has benefited from several rounds of big subsidies and other government help. The details and history can be found in this "Scientific American" article.
As a result, the market has been flooded by cheap Chinese panels and that has damaged U.S. producers such as FSLR.
Protecting the domestic market for those manufacturers by imposing tariffs on imports from China seems like a good idea if you don’t think too deeply about it. If you do, however, it just isn’t that simple.
Firstly, the U.S. solar industry is not just about manufacturers. There are also those that install systems for homes, businesses and utilities. Their competition is not China, but oil, natural gas, coal, and any other method of power generation. Forcing up their costs by taxing the panels they need puts them at a big disadvantage, and if the domestic usage of solar were to collapse as a result, that would hurt the manufacturers as well, probably more than the tariffs will help.
That is why the lobby group for that industry has been fighting hard to get solar panels, and bifacial panels in particular, excluded from the tariff list, even though they should be taxed based on the stated logic of the policy. The fact that they have been successful in their efforts tells you everything you need to know about the consistency and value of that logic.
It also raises a lot of questions about the more generalized use of tariffs to benefit one group or another and is a good example of the kind of swamp that Trump often said he would drain.
Logical, ethical, and political considerations aside though, this news and the market reaction to it have resulted in some opportunities for investors.
The first is the obvious one. Even though both CSIQ and JKS both jumped yesterday, they are still probably good places to be. It is possible that now that this administration has shown it can be persuaded by lobbyists to change course the manufacturers will force a change back, but until and unless that happens, the Chinese-owned and based panel manufacturers have a big advantage.
The second is a bit more obscure. The primary use for bifacial panels right now is in large solar arrays deployed by utility companies. That is an area from which First Solar derives good revenue, but SunPower has moved away from that to concentrate on smaller scale projects for homes and businesses. With that in mind, the drop in SPWR look like a knee jerk reaction, and a quick bounce back can be expected.
Of the two possible trades, I prefer the second, as a downside has already been established. Either one is viable, though, and whether you choose one, both, or neither, the solar panel news is instructive.