The Trump Administration will decide in the next two weeks whether or not to implement tariffs on solar imports into the U.S. If it does, panels from nearly every manufacturer except First Solar, Inc. (FSLR -2.09%) will see their effective selling price go up in the U.S. in 2018.
First Solar will likely escape tariffs because its thin-film panels weren't included in the trade case and it already has 600 MW of manufacturing capacity in the U.S. But the market has been pushing First Solar's stock higher on the assumption that First Solar will be the biggest winner from the tariff decision, which is why it has the most to lose if tariffs are low or include major loopholes.
Image source: First Solar.
The best case scenario is already priced in
I think it's important to point out that First Solar's operational performance in 2017 and more than 6.7 GW of bookings are what have caused the stock to more than double in the past year. But these could be one-time events. The company benefited from strong demand for projects it was selling, resulting in about $150 million in extra value that management wasn't counting on coming into the year. But the bigger windfall was the threat of solar tariffs from Suniva's Section 201 trade case.
Developers in the U.S. were faced with the threat of sharply higher solar panel costs in 2018 if tariffs are implemented, which would pose a major risk to their projects. A final decision is due by the end of the month. Many decided to lock up solar panels on long-term contracts with First Solar, the one company that was excluded from the case because it makes thin-film solar panels. That unique position is why First Solar has 7.7 GW of solar panel sales contracted through 2020, about three years of production at its current pace, likely at an above market price.
What investors need to keep in mind is that 2017 was a best-case scenario for First Solar. Developers were willing to pay a premium for tariff-free solar panels just because of the threat of tariffs. Within a few weeks we'll know what tariffs will look like, and if they aren't as high as expected, or include major loopholes, First Solar may not see that windfall of bookings continue.
Thin-film technology could be a problem
The windfall is important because it kept First Solar's competitive position strong, despite market forces working against the company. First Solar has always had lower efficiency than competing silicon-based solar panels, but it's been able to compete because it had lower costs and thin-film panels offered better production in harsh conditions. Those advantages may be disappearing.
Current Series 6 solar modules are 17% efficient in capturing the sun's energy, slightly higher than traditional multi-crystalline solar panels. But silicon manufacturers are rapidly upgrading to mono-crystalline and mono-PERC solar cells, which are even more efficient than First Solar's 17%.
Image source: SunPower.
For example, SunPower's (SPWR -2.17%) P-Series solar panels are now up to 19.6% efficient, and that's from a mono-crystalline cell construction. When mono-PERC cells begin production in P-Series, efficiency could be over 21%.
This is important both because it means higher efficiency and because PERC construction reduces the performance advantage thin-film has in harsh environments. And with tens of gigawatts of mono-PERC construction expected to come online by the end of the decade, it's unlikely thin-film will be able to maintain a cost advantage.
A lot riding on solar tariffs
After using the threat of solar tariffs brilliantly in 2017, First Solar could use the help tariffs would provide in 2018. The company is expanding production to 5.7 GW by the end of the decade, and if it doesn't have some protection from silicon-based manufacturers it could be in a weaker competitive position than it was last year. For better or worse, First Solar has a lot riding on President Trump's tariff decision.
