One constant in the solar industry over the last 30 years has been the falling cost of solar panels. Core raw materials like silicon have become cheaper, manufacturing technology has made making panels faster and more efficient, and scale has helped lower costs. In almost every part of the value chain costs have been trending lower for decades. But in 2017, the trend reversed itself in the U.S.
According to GTM Research, solar panel prices jumped nearly 25% in 2017 and global prices increased as well. There were a few factors that drove higher pricing, and if the trends continue, it could impact a wide range of solar companies in 2018.
The rising cost of solar panels
The table below shows the rising cost of polysilicon (raw material), slices of silicon called wafers, solar cells, and ultimately an assembly of cells that make up solar modules, according to GTM Research. The rock-bottom prices in late 2016 and early 2017 reversed course in the second half of the year as installers rushed to buy solar panels.
Supply and demand account for some of the increase in module prices, which allowed First Solar (NASDAQ:FSLR) and SunPower (NASDAQ:SPWR) to keep manufacturing plants running at full speed all year. As a result, margins and earnings were stronger than expected in 2017.
First Solar and SunPower also have some company-specific tailwinds that will help them in 2018 as well. First Solar is the biggest solar manufacturer in the U.S., which gives it a unique position of avoiding the 30% tariff on solar imports implemented earlier this year. Until competitors build U.S. manufacturing (something they haven't seemed eager to do), the company should have a price advantage and will likely see strong margins as a result.
SunPower is a high-efficiency solar manufacturer, so it sells most solar panels into residential and commercial markets, which are less price sensitive to the solar panel itself. Rather, they want to squeeze more power from limited roof space. That makes SunPower's product attractive, especially as commodity solar panel prices rise. Referrning to margins on residential installations, CFO Charles Boynton said in the most recent conference call that "longer term, I think we still continue to believe it should be low-20%s to mid-20%s, and in some cases, low-30%s" and in commercial solar margins in the "low-teens to high teens" are expected. That's better than most of the industry because of SunPower's superior technology.
Why solar manufacturers aren't getting a windfall
As we think about how higher solar panel prices impact the industry, we're not seeing benefits spread evenly. I outlined why First Solar and SunPower had better years than expected, but some manufacturers are seeing higher input costs squeezing margins. You can see below that gross margins for JinkoSolar (NYSE:JKS), JA Solar (NASDAQ:JASO), and Hanwha Q-Cells (NASDAQ:HQCL) were all down in 2017, despite the rising panel price trends.
Each of these manufacturers produces only some of the polysilicon in their solar panels. Hanwha Q-Cells had an estimated capacity of just 1.6 GW for polysilicon in Q4 2017 compared to 4.3 GW of solar panel capacity. JinkoSolar ended the year with 8 GW of panel capacity but bought most of its polysilicon and a large portion of solar cells as well. As a result, costs increased slightly late in the year and margins fell.
These manufacturers give a glimpse of what the commodity solar panel market looks like given their large panel capacity. Even when prices are strong, it's tough to make money in solar manufacturing.
Why higher solar panel prices won't benefit everyone equally
Demand and pricing for solar panels appear to be strong even into 2018, leaving very little excess supply in the market, especially from top-tier manufacturers. But that doesn't necessarily mean everyone will have a profitable year.
In the U.S., First Solar is the only major manufacturer who is going to completely avoid tariffs, leaving the company with a windfall of profits over the next few years. But Asian manufacturers and U.S. based SunPower, who manufactures solar cells in Asia, will be hit by higher costs. Even if they import panels to the U.S. the margins may not be attractive to investors.
High polysilicon prices will also hurt margins for solar manufacturers who don't have enough capacity in-house. Even if solar panel prices remain elevated in 2018, margins may not improve because raw material costs are negating the higher price.
Solar panel prices will swing based on supply and demand and technology changes, but cost drops of 30% or more in a single year may be a thing of the past. For companies with a unique geographic advantage, like First Solar, or a technology advantage, like SunPower, the end of falling prices may leave them with a competitive advantage over commodity suppliers who didn't see higher profits despite higher prices in 2017.