What is a solar panel installation company to do when government regulation significantly increases the cost of the very panels it has made a business out of installing? That question is currently troubling Sunrun and other United States-based installation companies. Following a petition and comment process through the United States International Trade Commission (USITC), President Donald Trump must now decide whether to impose tariffs or other restrictions on imported crystalline silicon photovoltaic (CSPV) cells, a key component of solar panels. This decision may have far reaching implications on Sunrun and the broader solar power industry.
How did we get here? In May 2017, Suniva, a CSPV cell manufacturer with US operations, filed a petition to the USITC to impose tariffs on imported cells. The company argued that such cells, which are cheaper than domestically produced cells, are harming the company and rendering it uncompetitive in the US market[i]. Suniva filed for Chapter 11 bankruptcy in April[ii]. Outside of Suniva and SolarWorld (another installation company), the solar industry has generally criticized the potential tariff and has lobbied the USITC and other government bodies to that effect[iii]. After months of deliberation and incorporating input from interested parties, the USITC announced its recommendation to impose tariffs on October 31[iv] and delivered its final report to President Trump on November 13[v]. He has 60 days to consider the recommendation and determine the final course of action. See Exhibit 1 for a detailed timeline.
For Sunrun and other domestic solar panel installation companies, a tariff would be problematic. As foreign cell manufacturers will likely increase prices to compensate for the tariff, Sunrun is left with the options of maintaining current pricing (and losing margin – see Exhibit 2 for company financials) or passing the cost on to its customers (and potentially losing sales as a result). If Sunrun chooses the latter, the company will see its competitive position erode relative to other forms of electricity and solar panels. In recent years, Sunrun has been able to compete and win business on price, as solar costs have declined while residential utility rates on coal- and gas-powered electricity have increased[vi],[vii]. Even commercial utilities in certain cases have switched to solar panel fields, as costs can be comparable to plants powered by fossil fuels[viii]. Additionally, other types of solar panels, such as thin film cadmium-telluride models produced by Arizona-based solar panel maker First Solar, would become less expensive relative to CSPV panels, as the USITC petition is limited in scope to CSPV panels and derivatives[ix],[x]. While the specific financial impact of a tariff on Sunrun is difficult to quantify, Guggenheim research estimates that a tariff of the magnitude requested by Suniva would shrink the economically viable US residential rooftop solar panel market by 58-69%[xi]. President’s Trumps ultimate decision could have massive implications on Sunrun’s ability to compete and survive.
The politics surrounding President Trump’s decision have created uncertainty around Sunrun’s future, and its stock priced has lagged peers as a result (Exhibit 3). The decision forces the president to weigh two core components of his economic agenda, job creation and tariffs against Chinese imports. While the US solar panel installation industry supports far more jobs than the manufacturing industry[xii], President Trump’s unpredictable nature and focus on tariffs[xiii] make this a highly uncertain situation. Other than stockpiling solar panels at current market prices and supporting the industry lobbying force opposing the tariff, there is little Sunrun can do in the immediate near term to offset this risk.
In the intermediate and long terms, there are several steps Sunrun could explore to make the company a more competitive player in the industry. If Sunrun can still viably operate under a tariff (albeit less profitably), the company could use the dislocation caused by the tariff as an opportunity to consolidate the installation industry by taking share from or acquiring smaller, regional competitors that are unable to weather the impact of the tariff. The residential installation market is fragmented, with the top three players accounting for 30-40% of market share[xiv]. In the longer term, Sunrun should consider diversifying its product offerings to include thin film solar panels in addition to crystalline silicon. Trade disputes such as the one initiated by Suniva are unpredictable and unlikely to cease in the solar industry, with its high growth, volatility, and exposure to government regulation. A broader mix of products would help the company weather any future storms.
Key outstanding questions related to this ongoing dispute:
- Is it in the US’s long-term interest to have a competitive solar panel manufacturing industry, or should the US be comfortable ceding nearly all market share to China and specializing in installations?
- What are the best mechanisms at a government’s disposal to encourage investment in renewable energy?
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Exhibit 1 Timeline of developments with the United States International Trade Commission
Exhibit 2 Sunrun Summary Income Statement and Select Cash Flow Metrics
Exhibit 3 Sunrun, Sunrun Peer, and Select Index Percent Change YTD 11/14/17
[i] United States, International Trade Commission, Washington, DC, and Mary Messer. “Crystalline Silicon Photovoltaic Cells (Whether or Not Partially or Fully Assembled into Other Products).” 17 May 2017. www.usitc.gov/secretary/fed_reg_notices/safeguard_201_204_421/201_3218_notice_05232017sgl_1.pdf.
[ii] Roselund, Christian. “Suniva Files for Chapter 11 Bankruptcy.” Pv Magazine International, 18 Apr. 2017, www.pv-magazine.com/2017/04/18/suniva-files-for-bankruptcy/.
[iii] “U.S. Trade Support for Foreign Companies Hurts More Americans Than It Helps.” Solar Energy Industries Association, 8 Nov. 2017, www.seia.org/blog/us-trade-support-foreign-companies-hurts-more-americans-it-helps.
[iv] “USITC Announces Remedy Recommendations in Its Global Safeguard Investigation Involving Imports of Crystalline Silicon Photovoltaic Cells (Whether or Not Partially or Fully Assembled into Other Products.” USITC, 31 Oct. 2017, www.usitc.gov/press_room/news_release/2017/er1031ll857.htm.
[v] Walton, Robert. “60-Day Clock Starts for Trump to Decide on Solar Panel Tariffs.” Utility Dive, 14 Nov. 2017, www.utilitydive.com/news/60-day-clock-starts-for-trump-to-decide-on-solar-panel-tariffs/510851/.
[vi] “Sunrun Inc Form 10Q.” Securities and Exchange Commission, 8 Nov. 2017, www.sec.gov/Archives/edgar/data/1469367/000146936717000022/sunrun10q2017q3.htm.
[vii] “Sunrun Investor Overview Presentation – September 2017.” http://investors.sunrun.com/static-files/4b4ca882-be69-4ecf-97ae-c1e064f296ab
[viii] Salzman, Avi, and Bill Alpert. “There Goes The Sun.” Barron’s, 2 Oct. 2017.
[ix] Salzman, Avi, and Bill Alpert. “There Goes The Sun.” Barron’s, 2 Oct. 2017.
[x] United States, International Trade Commission, Washington, DC, and Mary Messer. “Crystalline Silicon Photovoltaic Cells (Whether or Not Partially or Fully Assembled into Other Products).” 17 May 2017. www.usitc.gov/secretary/fed_reg_notices/safeguard_201_204_421/201_3218_notice_05232017sgl_1.pdf.
[xi] Karp, Sophie. “RUN, Sunrun, Run. Maintaining a Buy, $11 PT, Despite N-T Suniva Headwinds.” 25 July 2017. Guggenheim Securities, LLC Equity Research.
[xii] Salzman, Avi, and Bill Alpert. “There Goes The Sun.” Barron’s, 2 Oct. 2017.
[xiii] Swan, Jonathan. “Exclusive: Trump Vents in Oval Office, ‘I Want Tariffs. Bring Me Some Tariffs!”.” Axios, 27 Aug. 2017, www.axios.com/exclusive-trump-vents-in-oval-office-i-want-tariffs-bring-me-some-tariffs-2478121273.html.
[xiv] Karp, Sophie. “RUN, Sunrun, Run. Maintaining a Buy, $11 PT, Despite N-T Suniva Headwinds.” 25 July 2017. Guggenheim Securities, LLC Equity Research.