The Trump administration has announced it will impose tariffs on solar cells and panels imported into the U.S., and while they aren't as high as they could have been, they're high enough to damage the U.S. solar industry overall in 2018 and beyond.
The degree of impact will vary by company, but there aren't many potential winners under this scenario. Indeed, in an odd twist, the tariffs may not even be high enough to provide a big benefit to the only clear winner so far, First Solar (NASDAQ:FSLR) which is exempt from these tariffs.
Trump's solar tariffs
Below is a chart the Trump administration released in its tariff release. You can see that a 30% tariff will be implemented in Year 1, falling to 15% in Year 4. Note that 2.5 GW of imported cells will be exempt from the tariffs.
According to GTM Research's U.S. Solar Market Insight report in Q4 2017, solar modules were selling for $0.45 per watt in the third quarter, so the tariff will increase prices by $0.135 per watt to $0.585. But prices were $0.38 per watt as recently as Q1; at that level, the tariff would result in prices of $0.494 per watt. Depending on what the underlying prices of panels coming into the U.S. are, the impact of tariffs might not be all that much greater than the sorts of price fluctuations driven by natural supply and demand.
Under the 30% tariff regime, First Solar is a clear winner because it won't have to pay them, even on its imports. Tesla (NASDAQ: TSLA) could also be a winner thanks to the Gigafactory 2, located in Buffalo, New York -- although we don't have any information on its price performance right now. But the benefit may not be as big as you'd think.
The elusive exemption
The 2.5 GW of cells exempted from import tariffs could be important to the industry. But currently, there is not 2.5 GW of module manufacturing capacity in the U.S. to utilize those cells. Before going bankrupt, SolarWorld had the nation's biggest module manufacturing capacity at 540 MW, although it had 430 MW of cell capacity as well. Mission Solar had 200 MW of module capacity, but it has laid off most of its workforce, and its status is unclear. Other small module assembly companies exist, but there's just not a lot of domestic capacity today.
It's also not clear what companies would want to build new capacity. SunPower (NASDAQ:SPWR) might have some incentive if it can produce P-Series and X-Series panels at competitive costs. Management has said in the past that it could build additional P-Series module capacity with just six months of lead time, and this should have been an option they're prepared for given the last year of tariff threats.
JinkoSolar (NYSE:JKS) has also reportedly considered building a module assembly plant in Florida. I don't see many Chinese solar manufacturers building module or cell plants here given the cost advantage in their home market. I doubt they could save enough money by avoiding the 11 to 13 cent tariff cost to justify moving production to the U.S. And it would take them a year or two to build capacity, by which time the tariff will fall to less than 10 cents per watt. It's just not enough to justify changing your whole supply chain.
Who wins and who loses?
The winners are few and far between in this tariff scenario. First Solar will likely be seen as a winner, but it may not benefit as much as you might think. It's already sold most of its production through the end of 2019, booking more than two years of production in the last year as the threat of tariffs loomed over the industry. By 2020, tariffs will only be 20% on solar imports, 2.5 GW of cell imports may have module capacity here, creating more tariff-free supply. Then there's the risk the challenges from South Korea, Mexico, and China on the grounds of violating WTO or NAFTA rules may end tariffs early for some suppliers. It's difficult to know how much First Solar will benefit in 2020 and beyond given these tariff rates, but the easy profit is probably already booked.
The same narrative can be used for Tesla, who says it will have 1 GW of cell and module capacity but hasn't proven the ability to produce or sell solar panels on a mass scale. It's a potential winner, but we need to see evidence it can build solar panels competitively before thinking this is a guaranteed windfall.
Losers are clearly solar developers. Sunrun (NASDAQ:RUN) and Vivint Solar (NYSE:VSLR) are the two publicly traded residential solar installers who will likely be hit by higher costs. Utility-scale solar will be more impacted because the solar panel is a larger percentage of an installation's cost. AES (NYSE:AES) has a solar development arm called sPower and NextEra Energy (NYSE:NEE) has become a large developer as well, so they're worth watching as tariffs hit the industry.
Jobs are also expected to be lost, mainly because only 14% of solar jobs in the U.S. are in manufacturing with most in the installation of panels. The Solar Energy Industries Association expects 23,000 solar jobs to be lost in 2018 as installations fall 8.3% versus no tariffs at all.
Virtually no upsides for investors
There are a lot of moving parts in this tariff plan, including upcoming challenges to it from the industry, as well as nations that export solar products to the U.S. -- not to mention the prospect of retaliatory trade moves against us. But for investors, there's very little to like. U.S. demand for solar panels overall is expected to decline between 2018 and 2021 compared to a no-tariff scenario, and many companies will see higher costs.
First Solar will be the incremental winner, but it's unclear if the tariffs will be high enough to give it a sustainable advantage beyond the constrained supply the market will experience through 2019.
On the less bad side, these tariffs aren't as bad as they could have been. I don't expect any industry players will go out of business because of them, but we'll have to wait and see how much damage they do to specific companies' bottom lines.