There weren't a lot of winners from Wednesday's announcement that the U.S. will levy tariffs on Chinese solar modules, but two companies who came out ahead were SunPower (SPWR +0.00%) and First Solar (FSLR 0.76%). Both companies are U.S. based and manufacture their solar panels in The Philippines and Malaysia respectively, meaning they aren't subject to import tariffs.
While this doesn't mean SunPower and First Solar suddenly get a monopoly on the U.S. solar industry, it does mean that their competitive position is significantly enhanced. Residential, commercial, and utility scale solar is booming in the U.S. and China provides a majority of the panels so if costs are going up for everyone else it's easy to assume that SunPower and First Solar will gain some competitive advantage as a result.
Utility scale projects like First Solar's Blythe project still account for most of the solar installed in the U.S. Source: First Solar.
A step ahead in the utility business
The biggest impact will come in utility scale solar, where the panel itself is a higher percentage of the installation cost. It's also the largest market in the U.S., accounting for 66% of the 1.33 gigawatts of solar installed in the first quarter.
SunPower and First Solar go at utility scale solar slightly differently with SunPower building high efficiency panels that lower balance of system costs and First Solar making lower cost and lower efficiency panels but building plants extremely efficiently.
Even SunPower's headquarters is lined with solar panels. Source: SunPower.
Tariffs will increase costs slightly for many competitors and even just a few cents per watt is meaningful in a utility scale solar. According to GTM Research, the average utility scale project cost just $1.85 per watt and even before tariffs both companies were competitive. First Solar recently sold the 50 megawatt Macho Springs project to Southern Company and NextEra Energy bought the 250 megawatt Silver State South project. SunPower just agreed to build a 50 megawatt project for Xcel in Colorado and is building a 19 megawatt project for the Air Force.
Expect more project wins by both companies in the future now that they're more cost effective against competitors.
Catching up in residential solar
In the residential market, SunPower will also become slightly more competitive against companies like SolarCity. In effect, either SolarCity will keep its prices the same and take a lower margin as module prices go up or it will pass the (small) cost increase on to customers.
Residential solar is a growing market and SunPower's product just got more competitive. Source: SunPower.
If SolarCity's prices go up even a little it'll make SunPower more competitive in the residential space. I wouldn't expect there to be a wholesale shift in the balance of power and, as I said earlier, modules are a smaller percentage of the cost in residential solar than utility, but tariffs make SunPower incrementally more competitive in this market.
Foolish bottom line
Tariffs on Chinese solar imports have long been a risk for both Chinese manufacturers and U.S. installers who buy them. Yesterday that risk became a reality and installers are scrambling to adjust to the new reality.
SunPower and First Solar, on the other hand, sat back and gained a competitive advantage without lifting a finger. That's why these are two of the best solar stocks for investors and will be for years to come.
