What American Solar Tariffs on China Mean for SolarCity

The solar industry learned Wednesday that imports of solar products from China will be hit with tariffs between 18.56% and 35.21% and the response hasn't been positive. Chinese manufacturers like Trina Solar (NYSE: TSL) have come out against them, but so has the Solar Energy Industries Association.

The SEIA's President and CEO Rhone Resch said, "These damaging tariffs will increase costs for U.S. solar consumers and, in turn, slow the adoption of solar within the United States." One of the big reasons the SEIA is concerned about tariffs is because most of the people employed in solar in the U.S. are installing panels, not manufacturing them. As the most visible employer, installer, and buyer of Chinese solar panels, SolarCity (SCTY.DL) is a proxy for what the entire industry will deal with. 

Community solar projects like this one may get more expensive now that the U.S. has put tariffs on Chinese solar modules. Source: SolarCity.

How SolarCity will be affected by tariffs
SolarCity generates value for shareholders by signing customers to leases that generate net positive cash flow over a 20+ year period. The biggest outflow comes when the project is built and modules, racking, inverters, labor, and other costs are paid for.

The cash outlay for the module is what's in question with the Chinese solar tariffs because they may make panels more costly to acquire. Trina Solar has recently been a major supplier and based on first quarter results their panels were selling for around $0.80 to $0.85 per watt last quarter in the U.S. Even with the smallest tariff of 18.56%, Trina Solar's prices would go up to around $1 per watt.

All else equal, SolarCity will either generate less retained value per watt because of the higher cost of using Trina Solar panels, or it will have to use another supplier, who presumably has higher costs or they would have been the original supplier.

This is a concern for SolarCity because retained value per watt has been falling in recent quarters. Competition in the residential and commercial markets is picking up and prices are falling, squeezing margins.

Source: Comments on SolarCity's quarterly conference calls.

Tariffs do nothing to abate that and will potentially make it worse. Even if it's just a few cents per watt the impact will be significant when multiplied by 500+ megawatts of solar installed this year and as much as 1 gigawatt next year. For every penny lost in retained value, it's a $5 million hit to retained value based on 500 megawatts installed and $10 million when installations hit 1 gigawatt.

SolarCity's workers will stay busy in 2014 but they may be installing different panels than in the past. Source: SolarCity.

How SolarCity will adjust
I point this out as the downside of tariffs, but don't think that SolarCity, or any other installer, is somehow going out of business because of tariffs. The advantage of SolarCity's position, as a large buyer of solar panels, is that it can pick and choose who it buys from. So, if the cost of Chinese solar panels is going up, they can change to non-Chinese suppliers.

On que, SolarCity signed a 100 megawatt supply agreement with REC Group this morning that could be worth 240 megawatts at SolarCity's option. REC currently manufactures in Singapore and won't be subject to tariffs.

Other manufacturers in Singapore, Taiwan, and even the U.S. will fill the void opened by these solar tariffs and it likely won't cost more than a few cents more per watt for SolarCity.

Should you be concerned?
Solar tariffs aren't a positive for SolarCity, but I also don't see them as a deal breaker. There are plenty of global suppliers who can fill the void and as one of the world's largest buyers of solar panels SolarCity can still get a good price.

But this will likely affect retained value per watt for the rest of the year, which is worth keeping an eye on. Growth and retained value are the two value adders for shareholders and I'll be watching the latter number closely in coming quarters.