The US International Trade Commission’s recommendation to institute tariffs on solar panel imports, ostensibly to provide relief to domestic manufacturers,1 inadvertently threatens tens of thousands of more jobs than it preserves by introducing supply chain frictions. At stake is a potential net loss of over 80,000 jobs in the US solar energy sector from industry behemoths and small mom-and-pop businesses alike.2 Through increased solar panel costs and reduced purchase activity, tariffs will—in addition to impeding crucial adoption of renewable energy technologies—weigh heavily on solar installers, most prominently Sunrun, the nation’s largest dedicated residential solar provider.3
Figure 1: Proposed tariffs render residential solar energy economically unviable in several US states4
Tariffs on Sunrun’s foreign manufacturers have significant consequences downstream in the supply chain, exacerbated by the highly price-sensitive nature of consumers of residential rooftop solar.5,6 In particular, to avoid compression of its gross profit margins, Sunrun will be compelled to pass its higher import costs along to its customers; this response, however, will make residential solar economically uncompetitive relative to drawing electricity from the grid in several states, should tariffs be instituted at the levels initially proposed.4 In the absence of the value proposition of saving money on utilities through solar adoption, customers overwhelmingly withhold purchasing and installing solar panels. Consequently, Sunrun’s addressable market of solar-viable rooftops in the US, under a protectionist policy regime, could shrink by upwards of 60%.7
Notwithstanding management’s public assertions of confidence in resilience of the business, Sunrun has a plan to mitigate downside risks. In the near term, the company reportedly intends to proactively manage its working capital, stockpiling inventory prior to the anticipated rollout of tariffs to reduce immediate exposure to increased costs.8 In the medium term, Sunrun is aggressively pursuing greater penetration of solar-viable markets while simultaneously publicly advocating to eliminate unfavorable trade policies.3,9
Figure 2: Declining solar costs have driven growth in Sunrun panel installations10–13
Although Sunrun faces capital costs associated with accumulating inventory, doing so reduces the need to purchase from suppliers later, in the immediate aftermath of a potentially sharp increase in solar panel costs.7,14 Over time as inventory depletes, Sunrun can also expect incremental, organic declines in industrywide solar panel costs due to ongoing technological improvements, consistent with the 14% compound annual decrease from 2010-2016.13 Building inventory upfront, beyond Sunrun’s typical 30- to 90-day stock, enables the company to delay subsequent purchases until the cost of the tariff is likely to be partially offset by lower material and assembly costs.7
Figure 3: Residential solar is underpenetrated in economically viable US states4
In the face of a potentially shrinking addressable market, Sunrun is concentrating its efforts on claiming a larger share, for example through a recently announced cross-selling and marketing partnership with telecommunications conglomerate Comcast.3 Management’s intention over the next several years is to capitalize on current under-penetration of residential solar, with under two percent of viable homes outfitted with rooftop panels.4 The company also intends to challenge policy hurdles legally, a strategy proven in the early 2000s, when steel tariffs were overturned under two years after being enacted.15,16
Beyond the actions already contemplated by management, Sunrun should position itself to benefit from market dislocation resulting from protectionist policies. Sacrificing gross margin in the short term would facilitate taking market share from competitors, and rebalancing production toward domestic manufacturers from overseas would reduce exposure to policy risk. Over time, Sunrun should pursue opportunistic acquisitions of competitors in distress.
Figure 4: Sunrun, a leader in the fragmented residential solar industry, maintains under 15% market share9
The landscape of solar installers is highly fragmented, and small-scale businesses with weaker balance sheets, less access to cash, and a higher cost of capital may be particularly challenged in the case of significant tariffs. As less resilient competitors retreat, Sunrun has a unique opportunity to acquire more customers through competitive pricing. Management should simultaneously focus on developing US manufacturing partnerships in response to heightened costs of imported panels and the likelihood of continued governmental accommodation of domestic manufacturers; vertically integrating with a manufacturer could also counteract unfavorable trade policy.
The prevalence of small, local installers that could become uncompetitive due to isolationist headwinds creates potential for accretive consolidation. The top three players in residential solar (Sunrun, Solar City, and Vivint Solar) account for approximately one-third of the industry, whereas the “long tail” of the market extends into hundreds of independent solar installers with narrow geographic expertise.7 Sunrun should aggressively expand its geographic footprint by acquiring attractively priced businesses as they come to market.
As the policy debate evolves, it is incumbent upon management to actively evaluate and adapt its approach. Confronted with adverse trade policy, how should Sunrun balance attention on its existing business with opportunistically taking share from distressed competitors? To what extent should it modify internal processes and cut costs? (800 words)
- United States International Trade Commission. Crystalline Silicon Photovoltaic Cells (Whether or Not Partially or Fully Assembled into Other Products). https://www.usitc.gov/press_room/news_release/2017/er0922ll832.htm. Published September 22, 2017.
- Mooney C, Mufson S. Solar Industry Roiled by Trade Ruling That Some Fear Could Lead to Tariffs. The Washington Post. https://www.washingtonpost.com/news/energy-environment/wp/2017/09/22/solar-industry-roiled-by-trade-ruling-that-some-fear-could-lead-to-tariffs/?utm_term=.d051be369bd0. Published September 22, 2017.
- Sunrun and Comcast Enter Into Agreement to Offer Residential Solar Program. https://www.sec.gov/Archives/edgar/data/1469367/000162828017008843/exhibit991.htm. Published August 24, 2017.
- Perea A. Q1 2017 Update: The State of Distributed Solar. In: Washington, DC: National Conference of State Legislatures; 2017. http://www.ncsl.org/Portals/1/Documents/energy/solar_workshop_Austin _Pereaa_present_6_2017_31424.pdf.
- Sioshansi FP. Innovation and Disruption at the Grid’s Edge: How Distributed Energy Resources Are Disrupting the Utility Business Model. London, UK: Academic Press; 2017.
- Creutzig F, Agoston, Peter; Goldschmidt JC, Luderer G, Nemet G, Pietzcker RC. The Underestimated Potential of Solar Energy to Mitigate Climate Change. Nat Energy. 2017;2. doi:10.1038/nenergy.2017.140.
- Karp, Sophie; Pourreza, Shahriar; Hennelly, Eugene; Feng, Shaowei; Ciciarelli R. Sunrun Inc. Guggenheim Secur Res. July 2017.
- Spector J. Sunrun Aims to Prove Solar Installers Can Grow and Make a Profit at the Same Time. Greentech Media. https://www.greentechmedia.com/articles/read/sunrun-aims-to-prove-solar-installers-can-grow-and-make-a-profit-at-the-sam#gs.QF5yzGg. Published November 13, 2017.
- Sunrun. Investor Overview Presentation – September 2017. http://investors.sunrun.com/static-files/4b4ca882-be69-4ecf-97ae-c1e064f296ab. Published 2017.
- Sunrun. 2016 Form 10-K. San Francisco, CA
- Sunrun. 2015 Form 10-K. San Francisco, CA
- Sunrun. Form S-1. San Francisco, CA; 2015.
- Fu R, Feldman D, Margolis R, Woodhouse M, Ardani K. US Solar Photovoltaic System Cost Benchmark: Q1 2017. Golden, CO; 2017. https://www.nrel.gov/docs/fy17osti/68925.pdf.
- Karp, Sophie; Pourreza, Shahriar; Hennelly, Eugene; Feng, Shaowei; Ciciarelli R. Unpacking Suniva’s Section 201 Complaint: LCOE and Industry Impact. Guggenheim Secur Res. May 2017.
- Tran M. Bush Lifts Steel Tariffs to Avert Trade War. The Guardian. https://www.theguardian.com/world/2003/dec/04/usa.wto1. Published December 4, 2003.
- United States – Definitive Safeguard Measures on Imports of Certain Steel Products. Geneva, Switzerland; 2003. https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds252_e.htm.