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How and Where Solar Tariffs Would Disrupt the Solar Industry

Solar on the roofs of college housing on campus.

On Tuesday, the U.S. International Trade Commission held the first public hearing on Suniva and SolarWorld 's Section 201 trade case, asking for tariffs or a price floor on solar imports. The two bankrupt, foreign-owned, domestic manufacturers of solar modules are proposing a price floor of $0.40 for solar cells coming into the country and $0.78 for solar modules.

The proposed pricing scheme would double solar component prices in the U.S. and make a lot of solar installations impossible to make work economically. And while the ITC may propose a different scheme, and President Trump, who ultimately has the power to decide on tariffs or pricing, can change it as well, it's worth considering who will be hurt, or helped, by the proposed policies.

Solar on the roofs of college housing on campus.

Image source: SunPower.

Large-scale developers are screwed

The biggest hit will come to utility-scale solar developers, who are most price-sensitive in the solar market. According the GTM Research , a single-axis solar tracking system costs $1.08 per watt to build today and will cost $1.56 per watt if tariffs are implemented as proposed. No project under development today could absorb a 44% increase in costs, which is a big problem for the solar pipeline.

Ironically, this comes as leading solar manufacturers First Solar (NASDAQ: FSLR) and SunPower (NASDAQ: SPWR) wind down their project development business, so most of the project risk will fall on utilities and smaller developers. AES (NYSE: AES) , who recently bought half of solar developer sPower in a deal worth $1.6 billion, could see its pipeline of 10 GW dry up rapidly. Utilities like NextEra Energy (NYSE: NEE) , NRGEnergy (NYSE: NRG) , and Duke Energy (NYSE: DUK) have also begun developing their own projects rather than just buying them from third parties. Nothing would kill their development quicker than a major increase in costs.

GTM Research predicts that solar installations would drop as much as 70% under the proposed tariffs . Anyone with exposure to the U.S. utility-scale solar business would be hit hard because the industry is so price-sensitive.

Distributed solar is a different story

While utility-scale projects will be hit hard, commercial and residential developers may not see as much of a negative impact. The reason comes down to the higher cost of these distributed solar systems. According to GTM Research, an average residential system cost $2.84 per watt to build in Q1 2017, and a commercial solar system cost $1.56 per watt. A similar cost increase of $0.48 per watt as utility projects highlighted above would result in a 17% increase in residential solar costs and a 31% increase in commercial solar costs. That increase won't be good for business at installers such as Vivint Solar (NYSE: VSLR) and Sunrun (NASDAQ: RUN) , but it won't be as devastating as the increase in utility-scale solar costs.

Solar carport with SunPower solar modules on a sunny day.

Image source: SunPower.

The other dynamic at play, here, is that residential and commercial customers are space-constrained in their installations and therefore trend more toward high-efficiency solar modules. These are also higher cost, so if a price floor is put in place, the high-efficiency modules made by SunPower , for example, wouldn't be as negatively impacted by trade protections. But the devil is in the details of how any tariff or pricing scheme is written.

Two potential winners in the trade case

If tariffs or price floors are put in place, the two likely winners will be First Solar and SunPower. First Solar has about 550 MW of capacity in Perrysburg, Ohio, and the ability to build out about 1.1 GW at that plant. That could give the company a strong market position in the U.S. utility-scale solar market.

SunPower has 400 MW of P-Series capacity in Mexico, which may be exempted from tariffs due to NAFTA. But the company could also open more P-Series capacity within the U.S. with only about six months of ramp time at relatively low cost, potentially making a module with imported cells but domestic modules. It also recently opened a pilot line for a next-generation solar module that will be 5 MW of capacity by the end of the year. As it evaluates where to build a full production line, tariffs could push the company to build in the U.S. And given its strong market share in U.S. residential and commercial solar, that could be a good move long term.

What we do know is that an ITC recommendation, and the president's decision, to implement any tariffs or price floors will throw the solar industry for a loop. And that's not good news because it's just getting its footing as it competes against fossil fuels.

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Travis Hoium owns shares of First Solar and SunPower. The Motley Fool owns shares of NRG Energy. The Motley Fool recommends First Solar. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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