The news of tariff exemptions didn't receive much attention in the residential solar world last week, but residential solar installers may have seen a niche competitor get a lot more powerful. SunPower Corporation (NASDAQ:SPWR) got an exemption from solar tariffs for its high-efficiency solar panels, which could be a cost advantage over competitors. The three biggest residential solar installers are Sunrun (NASDAQ:RUN), Vivint Solar (NYSE:VSLR), and Tesla (NASDAQ:TSLA), and we could see them lose market share to SunPower.
SunPower has always been a more niche player in residential solar and doesn't install systems itself, choosing to use channel partners for installation. The biggest factor limiting SunPower's growth has been its premium-priced products. But an exclusion from tariffs that everyone else is paying could flip the cost structure over the next few years.
The tariff exclusion
After solar tariffs were announced earlier this year, SunPower requested an exemption, contending that its high-efficiency solar cells, which are made using a unique back contact construction, are a different technology than commodity solar panels made in China. The Trump administration agreed with that argument, allowing SunPower's back contact solar panels, known as E-Series and X-Series, to be imported into the U.S. tariff-free.
SunPower doesn't release its manufacturing costs or exact tariff expense, but management has said it has been spending $2 million per week in tariff costs. That's in the neighborhood of $100 million in direct cost savings for SunPower on an annualized basis, savings that no other installer would have.
Solar installers were already under pressure
Even before the exclusion, SunPower was gaining market share in residential and commercial solar. The company's efficiency advantage is starting to pay off, squeezing more electricity from every installation than competitors, making up for a cost disadvantage. But the cost disadvantage may be a thing of the past.
Analysis by EnergySage shows that an equipment package (not including install) with SunPower solar panels and inverters was 24.6% more expensive than the low-cost baseline system and 10.5% more expensive than a system with Trina Solar panels and a SolarEdge inverter, which is standard equipment for installers like Sunrun and Vivint Solar.
After the tariff exclusion, which will cut solar panel costs by nearly 25%, it's likely SunPower's equipment will be less expensive than a Trina Solar and SolarEdge package and potentially less than a baseline system. The only thing holding back SunPower from taking market share may be its own capacity constraints at existing manufacturing facilities in Asia and long lead time of 1-2 years to build new manufacturing capacity.
Will installers partner up with SunPower?
If the tariff exclusion leaves SunPower with a cost advantage to go along with its efficiency advantage, it will be interesting to see if one of the large installers tries to partner with the company. Sunrun (or Vivint Solar) could get a higher-efficiency product and install more watts per roof by using SunPower panels, differentiating it from other installers at a time when differentiation is low and sales and marketing costs are rising. Tariffs will sunset over the next four years, but any kind of market share gain or reduction in sales and marketing costs per watt installed is big for residential solar companies given the precarious financial position they're in. For SunPower, selling in bulk could be more cost-effective than its normal channel distribution, reducing its own sales and marketing costs.
What we do know is that SunPower's exclusion gives it a leg up over other solar manufacturers and that bleeds down to the partners it works with, most of which were already facing challenges from rising marketing costs and tariffs on their own imports. Over the last year, SunPower has gained market share in residential solar as efficiency has become more valuable and now Sunrun, Vivint Solar, and Tesla may be in an even more challenging position now that high-efficiency solar panels are more cost effective against commodity competition.