SolarCity (NASDAQ: SCTY ) , the leader in residential solar installations, is off to a bright start in 2014. Expanding into Nevada, the 15th state in which it operates, the company recorded 136 MW of bookings in the first quarter -- an all-time record. Sourcing its PV modules from a variety of Chinese companies, SolarCity offers its customers competitive pricing by mitigating the risks associated in dealing with only a few suppliers. An invaluable customer to companies like Trina Solar (NYSE: TSL ) and Yingli Green Energy (NYSE: YGE ) , SolarCity dealt its Chinese suppliers a crushing blow when it recently announced an agreement with REC Group.
Why the bears are growling
Earlier in the week, the U.S. Department of Commerce dealt the first blow to the Chinese PV suppliers when it announced, in a preliminary ruling, that the Chinese companies unfairly benefited from government subsidies. The U.S. International Trade Commission is expected to make its final ruling on the issue in October. According to the Commerce Department, the Chinese products affected by the ruling amounted to approximately $1.5 billion in 2013.
Imposing a preliminary duty of 18.56% on imports of Trina Solar, the Commerce Department imposed a duty of 26.89% on most other Chinese companies. Following the news, shares of Yingli Green Energy dropped nearly 10% while shares of Trina Solar dropped nearly 6%.
Salt on the wound
In an effort to diversify where it sources its panels from, SolarCity announced an agreement in which it will purchase a minimum of 100 MW and up to 250 MW of solar panels from REC Solar during a 12 month period beginning in Q4 2014. Addressing the deal, Tanguy Serra, SolarCity's chief operating officer, said, "The availability of competitively priced, U.S. trade-compliant PV modules is an important development for the global solar industry."
Following the Commerce Department's preliminary ruling, SolarCity's decision to move away from Chinese suppliers was expected. In the company's 10-Q SEC filing, it states:
...business and financial results may be harmed as a result of increases in the cost of solar panels or tariffs on imported solar panels imposed by the U.S. government." Furthermore, the company states that "the declining cost of solar panels and the raw materials necessary to manufacture them has been a key driver in the pricing of our solar energy systems and customer adoption of this form of renewable energy.
The deal with REC Solar will not fully meet SolarCity's expected demand for solar panels in 2014. Having booked 136 MW in the first quarter, this translates to an annualized rate of 544 MW. Should SolarCity deem the supply agreement a success at the end of the year, REC solar could benefit substantially in that SolarCity is guiding for a range of 900-1,000 MW to be deployed in 2015.
The Foolish conclusion
I've been bullish on SolarCity's disruptive business model for a long time, and the recent findings from the Commerce Department are not changing my opinions in the slightest; nonetheless, it is something to definitely keep an eye on. SolarCity's customer base is growing by leaps and bounds. From 2010 to mid-2015, the company is guiding for a CAGR of 98%, and it will be critical that it find solar panel suppliers to meet that demand.
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