Solar energy adoption has seen a massive uptick in USA, with the installed capacity doubling last year to 14626 MW1.
1Source: GTM Research
Solar dominated new electricity generating capacity (39%) in USA1.
1Source: GTM Research
This growth has been predominantly supported by declining cost of solar energy2.
2Source: EnergySage Solar Marketplace
However, in this booming market an unexpected threat has come from isolationistic trade policies for the second largest solar company in USA, SunPower. Two American solar manufacturers have petitioned the International trade commission by invoking Section 201 of Federal Trade Law (under which the President of USA has broad authority to impose tariffs for protecting a domestic industry3) by claiming that the flood of subsidized imports of Photovoltaic cells from china has forced many US manufacturers of solar cells into bankruptcy.
The trade commission has recommended (to the President) tariffs of upto 35% on solar equipment containing crystalline silicon photovoltaic (CSPV) cells purchased from abroad. With such a tariff solar energy will become more expensive and its adoption in USA will reduce4.
4Source: GTM research
As a player in this industry, the shrinkage of market will affect SunPower’s future cash flows and stock price. SunPower is a California based pioneer, manufacturer and installer of high technology solar panels. However, its manufacturing plants are located in Philippines, Malaysia, Mexico, & France. Sun power’s gross margin has been reducing year on year5. Tariffs would increase their cost of revenue and significantly impinge on their profitability.
5Source: SunPower Annual report 2016
Furthermore, this tariff is applicable only to CSPV cells and hence doesn’t affect SunPower’s main competitor, First Solar, which uses a different technology (cadmium telluride). This would effectively create a monopoly like industry structure.
Currently, the management of SunPower is opposing the Tariffs with assistance from Solar Energy Industries Association (SEIA) and recommending to the ITC and the President that Tariffs would be harmful for the industry at large. Their arguments are on the following lines:
- Loss of jobs: Manufacturing jobs, which is what the Tariff aims to protect, are a smaller part of the overall labor in the industry6. Shrinkage of Solar energy market due to Tariffs would impact the other 75% of the skilled jobs that the industry has created, which were projected to grow at a fast rate7.
6Source: The Solar Foundation Report
7Source: Bureau of Labor Statistics
- Product Differentiation & R&D innovation: SunPower is an innovator in Solar cell research and makes Integrated Back Contact cells which have highest efficiency (25%). They do not compete in the low cost low efficiency market as the petitioners do, that is flooded by Chinese products. Hence, they have asked to exclude the superior IBC technology they use, which is a result of American innovation and research spend, such that they are treated on equal footing with competitor First Solar. They argue that not doing so would significantly impact American competitiveness in the race for solar technology superiority7.
- Economics 101: Tariffs would also impact ancillary industries like steel, glass and aluminum which had received a shot in the arm due to solar adoption. According to SunPower the case for Tariffs in a healthy industry cannot be made. They point out that in 2002 similar stiff tariffs was imposed on imported steel, to protect the US steel industry, which led to the loss of up to 200,000 domestic jobs and an estimated $4 billion in wages within a year and were subsequently withdrawn8.
SunPower has currently built up a sizeable inventory of solar panels as a hedge, to assure their ongoing contracts of uninterrupted supply for next 6 months9.
As a plan B, if the tariffs come to effect, they could request for an extension or grace period before Tariffs are applied, to prepare for its impact on business. Subsequently they may have to choose their target markets more stringently considering their comparative costs would rise significantly. They will need to absorb the tariffs inorder to maintain prices in market, which could be compensated for by reduced Marketing, R&D spend or further operational efficiency.
In the medium term, they might need to look at setting up manufacturing facilities in USA and explore bringing in high levels of automation to offset increased labor costs. Furthermore, they would need to explore if overseas manufacturing equipment can be shifted to USA. SunPower could also explore buying any of the bankrupt American manufacturers. This of course depends on whether SunPower’s technology can be manufactured in traditional solar cell manufacturing plants.
Expansion into global markets would help hedge against such trade policy surprises.
While sudden tariffs seem unfair on incumbent players who have built a technological advantage over long years, job protectionism is subject to political opinion. But what about the carbon footprint of importing panels from abroad?
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1 Mike Munsell, “US Solar market grows 95%in 2016, smashes record”, feb 2017 [ https://www.greentechmedia.com/articles/read/us-solar-market-grows-95-in-2016-smashes-records#gs.iK8H1Q0 ], accessed Nov 2017.
2 Sara Matasci, “How Much does the average solar panel installation cost in the US?” energysage.com, September 16,2017,[http://news.energysage.com/how-much-does-the-average-solar-panel-installation-cost-in-the-u-s/ ] , accessed November 2017.
3 United States International Trade commission [https://www.usitc.gov/press_room/us_safeguard.html ]
3 Ana Swanson, “To Protect U.S. Solar Manufacturing, Trade Body Recommends Limits on Imports”, New York Times,Oct 31 2017,[https://www.nytimes.com/2017/10/31/business/solar-industry-import-tariffs.html] , accessed Nov 2017.
4 MJ Shiao, Cory honeyman, Jade jones, “U.S. Solar Outlook Under Section 201: Supply and Demand Impacts of Tariffs at $0.10/W Increments” , Greentechmedia.com,Oct2017, [https://www.greentechmedia.com/research/report/us-solar-outlook-under-section-201-supply-and-demand-impacts-of-tariffs#gs.NJysLQA], accessed Nov2017.
5 Sunpower, 2016 Annual Report, pg 53.
6 Avery Palmer, “Solar Accounts for 1in 50 jobs in USA”, thesolarfoundation.org, Feb2017, [https://www.thesolarfoundation.org/solar-accounts-1-50-new-u-s-jobs-2016/ ], accessed Nov 2017.
7 Tom Werner, “Sunpower CEO Tom Werner’s Oct 3 ITC testimony”, Sunpower.com (blog), Oct 2017 [https://us.sunpower.com/blog/2017/10/03/sunpower-ceo-testifies-us-international-trade-commission/],accessed Nov 2017.
8 Tom Werner, “Opportunity for white house to make the right call”, Sunpower.com (blog) , Nov 2017 [ https://us.sunpower.com/blog/2017/10/31/opportunity-white-house-make-right-call-solar/ ], accessed Nov 2017.
9 Interview with Sunpower EVP & GM, Martin DeBono, Nov 2017.