Dark days ahead — SolarCity vs Protectionism

On September 22nd, 2017, the U.S. International Trade Commission (ITC) recommended a 35% tariff on imported Chinese solar panels to the president. [1] The final decision on this tariff now rests in Mr. Trump’s hands. [2]

The effects of this tariff would be felt across the economy – more 40 major US corporations including L’Oreal, Starbucks, eBay and IKEA have submitted a letter of complaint to the ITC stating that it will materially impact their ability to source clean energy [3] – but nowhere more so than at solar developer behemoth, SolarCity.

SolarCity has been a market leader. From 2013 through 2016, more than one out of every three rooftop solar systems was installed by SolarCity. [4] Acquired by Tesla in November 2016 for $2.6B, SolarCity grew into its number one position by investing in growth at the cost of profitability.

Electricity is a commodity, and SolarCity’s business model relies on their ability to offer power at a lower price than consumers are paying to their utility company. [5] To meet these prices, SolarCity sources panels from China. A 35% bump in panel prices would increase its cost of goods sold by around 15%, [6] and their aggressive sales tactics have left them with no room to take a hit on margin. If the tariff goes through, SolarCity will have no choice but to raise prices and suffer the consequences for their top line. The resulting decrease in demand is estimated at up to 48%. [7]

The first thing SolarCity management should be doing is looking to source from alternative suppliers. Panels from Australia, Singapore, and Canada may be exempt from the tariff. SolarCity needs to source around half a gigawatt of panels. [8] In 2017, total demand for panels will be 11 GW. Meanwhile, the U.S, Australia, Singapore, and Canada combined can produce only 4.3 GW. [9]

We are looking at a bottleneck in tariff-free production capacity. The marginal panel price will be set by imported panels, and any domestic prices will be bid up to that level. Waiting to see if the tariff will come through, therefore, is a bad option. SolarCity’s best option in sourcing is to secure a domestic production contract today to hedge against the risk of higher prices in 2018.

A better option for SolarCity would be to have their own panel manufacturing operation in America. Three years ago, SolarCity announced plans to a new 1 GW plant in Buffalo NY by 2016. [10] Gigafactory 2, as it’s being called, has moved ahead with $750M of support from New York State but is not expected to produce at capacity until 2019. [11] Had the Gigafactory 2 been online, SolarCity would benefit hugely from the tariff. As it stands, this project will provide them with effective relief in the next two to three years. This will almost certainly be in time to benefit parent company, Tesla, but how will SolarCity fare in the meantime?

SolarCity’s prospects are bleak. The U.S. residential solar market has already seen a downturn this year for the first time in recent history, and most experts expect the tariff to go through given Mr. Trump’s rhetoric on trade. Tesla management has laid off over 1,000 SolarCity employees this year. [12] This could be either as a to poor performance this year or a forward-looking strategy to hunker down for a long winter.

As an outsider, it looks like SolarCity’s options are limited. They could (1) downsize and wait out the tariff until their Buffalo plant comes online, (2) make a public fuss about the tariff and hope it doesn’t go through, or (3) seek alternative revenue streams by diversifying their business away from residential solar to selling other smart home products, such as Tesla’s powerwalls and cars.

In the event that the tariff is implemented in January 2018, SolarCity’s success or failure will likely hinge around the capacity of the Buffalo plant. Can SolarCity survive the new economic landscape until the Gigafactory 2 is operational? Or will this tariff bury the company that once dominated the residential solar market? And more broadly, do losses to SolarCity and others outweigh the benefits of a tariff in encouraging investment in U.S. cleantech manufacturing?


  1. Erin Ailworth, “U.S. Trade Panel Backs Solar Tariffs,” Wall Street Journal, October 31, 2017, accessed Nov 2017, https://www.wsj.com/articles/u-s-trade-panel-backs-solar-tariffs-1509476295
  2. United States International Trade Commission press release, accessed Nov 2017, https://www.usitc.gov/press_room/news_release/201_factsheet_finalasposted.pdf
  3. Joshua Hill, “Major US Business call on ITC to Reconsider Solar Tariff,” Cleantechnica, October 26, 2017, accessed Nov 2017, https://cleantechnica.com/2017/10/26/major-us-businesses-call-itc-reconsider-solar-tariff/
  4. S Solar Market Insight Report – 2016, GTM Research, accessed Nov 2017, https://www.greentechmedia.com/research/subscription/u-s-solar-market-insight#gs.vyc_dzw
  5. Dana Hull, “Tesla Seals $2 Billion SolarCity Deal,” Bloomberg Media, November 18, 2016, accessed Nov 2017, https://www.bloomberg.com/news/articles/2016-11-17/tesla-seals-2-billion-solarcity-deal-set-to-test-musk-s-vision
  6. SolarCity Q3 2016 Shareholder Letter, accessed Nov 2017, https://www.last10k.com/sec-filings/scty/0001564590-17-003084.htm#
  7. Shayle Khan, “The Potential Impact of the Solar Tariffs in 12 Charts,” Greentech Media, October 17, 2017, accessed Nov 2017, https://www.greentechmedia.com/articles/read/the-potential-impact-of-solar-tariffs-in-12-charts#gs.UOYz_XA
  8. SolarCity Q3 2016 Shareholder Letter
  9. Khan
  10. SolarCity press release, October 2, 2015, accessed Nov 2017, http://www.solarcity.com/newsroom/press/solarcity-unveils-world%E2%80%99s-most-efficient-rooftop-solar-panel-be-made-america
  11. Austin Carr, “Can Elon Musk Get SolarCity’s Gigafactory Back On Track?”, FastCompany, June 8, 2017, accessed Nov 2017, https://www.fastcompany.com/40422079/can-elon-musk-get-solarcitys-gigafactory-back-on-track
  12. Lora Kolodny, “Tesla cites performance reviews as it fires SolarCity employees, though workers say reviews never took place,” CNBC, October 25, 2017, accessed Nov 2017, https://www.cnbc.com/2017/10/25/tesla-firings-spread-across-solarcity-employees-blindsided.html


Steel Tariffs: Making America Competitive Again?


Helvetia: a Swiss insurer on time with digitalization

Student comments on Dark days ahead — SolarCity vs Protectionism

  1. Great read, thank you for the well written analysis of the situation. This is quite distressing indeed for SolarCity, and the US consumers of solar energy panels in general. It seems like the logical solution for SolarCity is, as you mentioned, would be to either source panels from low cost countries that are exempt from the tariff or take over the manufacturing process themselves. Given that SolarCity is planning to team up with Panasonic to produce the next generation of their panels in Buffalo by 2019 (Gigafactory 2, as you mentioned), it seems unlikely that they’ll go through the process of setting up manufacturing in an interim location in Singapore or Australia. Their more likely options may be to either 1) take on the lower margins (potentially negative margins) in the interim, or 2) stop selling until Gigafactory 2 is up and running. I can definitely see SolarCity sunsetting their current model and creating a backlog for their new panels, citing Gigafactory 2 as the main bottleneck (similar to what’s happening with the Model 3). To answer your question about survivability: since Tesla seems to be free flowing with cash at the moment, and since Elon is extremely bullish about the next gen solar roof, I am pretty confident SolarCity can survive through 2019. It may have to suffer a large slowdown at the revenue level through 2018 and most of 2019, but it is fortuitous that the timing coincides with their next gen product launch anyway. I think of it as running out of iPhone 7’s and having a year gap before being able to buy an iPhone X. Since this is such a long-term purchase, I would think of the lost consumers turning into pent-up demand for the new solar roof.

    PS, “tiny hands” – ha!

    1. John, Phil, thank you for your insight in such an interesting topic!

      While an interim additional location might seem unlikely, given the upcoming capacity in Buffalo, I think there is still merit for developing this supply chain. On the one hand, this will provide a better diversified and more robust supply chain. Moreover, while the Gigafactory2 will supply relevant capacity, future demand growth might still require for additional sources. On the other hand, international production sites can benefit from lower production costs.

  2. It appears the prospect of a “bottleneck of tariff free production”, as you so eloquently put it, still rests in President Trump’s hands. Interesting about the timing of the tariff as it may hurt SolarCity in the short term but help them in the long term since they appear best positioned having gotten the wheels turning on their own factory.

    To address your first two questions, I agree with the previous comment. Having a parent company that investors just love to throw cash at should help SolarCity weather the storm. If they slow down operation they could encourage orders for their new solar roofs instead.

  3. Hey John, I’m really glad you chose to write on this topic, one I’ve been following closely and that has drastic implications for renewable energy adoption in the US. I think another really important facet of this issue is that the company that brought forward the initial complain to the ITC, Suniva, did so at the urging of SQN Capital Management, the primary creditor for the near-bankrupt company. The suit was brought as a point of leverage on the other investor in Suniva, a Chinese company, to get them to buy out the $55M stake that SQN had acccumulated. Suniva even stated “And if that happened, the company’s assets would be liquidated — leaving no one left to pursue the trade complaint.” Unfortunately, the situation has spiraled and now this hypothetical protectionist threat could have a massive impact on the US solar industry. (https://www.greentechmedia.com/articles/read/suniva-trade-case-now-approaching-farce-was-bankrolled-by-creditor#gs.35mCvIw)

    To the point of a tariff encouraging innovation in cleantech – I see the overarching goal of curbing climate change to be nationalistically agnostic. Why does innovation need to be sourced from the US instead of China if the ultimate goal of the industry is to increase sustainable energy as so many industry leaders state?

  4. Thanks for sharing John. I think you and the comments above posed some interesting options for SolarCity pending the tax tariffs such as looking for alternative suppliers, building Gigafactory 2, or creating a backlog of orders as Phil mentioned. Beyond rising costs, I think the strength of existing competitors to SolarCity in the US market will also influence how much SolarCity will be able to survive until Gigafactory 2 is operational. As Tim mentioned, Suniva, a company that filed for bankruptcy, prompted the tariff conversation. What’s unclear to me is how well-positioned companies like Suniva are to retake the US solar market. For example, do they have enough capacity in their US-based manufacturing to meet demands at reasonable prices? Or alternatively, will consumer demand change because the price of rooftop solar systems rise, which would influence the company’s economics and longevity? According to an article I recently read, this proposal could “double the price of solar, destroy two-thirds of demand…and unnecessarily force 88,000 Americans to lose their jobs in 2018” [1]. Given this view, this policy seems to be a very expensive way to prop up a few, less efficient American solar panel manufacturers at the cost of declining adoption for clean energy and a significant loss of jobs. I agree and echo Tim in his point of view that the ultimate goal of increasing sustainable energy should be nationalistically agnostic.

    1 Korosec, Kirsten. “Why Rooftop Solar Might Get A Lot More Expensive in the US.” September 22, 2017. Fortune. http://fortune.com/2017/09/22/solar-costs-tariffs/

  5. Thanks John, I agree that SolarCity is faced with little options in the current situation they find themselves. But to me, given everything you stated in your article, the choice that needs to be made here is clear: They should select Option 1 — downsize and wait out the tariff until the Buffalo plant comes online.
    As Jenny said, my fear of trying to wait out the tariff is that you create an opportunity for some new entrants to enter the industry and who in turn begin to fulfill the remaining demand. This will likely reduce the chance of SolarCity being able to successfully create a substantial backlog that that will could as the foundation of the company going forward. However, if they are able to survive until the new plant comes online, they will not only be able to meet the demand from their customers, but they will likely have extra capacity to supply others in the industry since production will eventually reach 1GW by 2019 and current demand for their panels is only .5 GW.

    1. Really like the article John. However my question to you and Solomon is that although downsizing seems like our only option to reduce cost and protect the margins, how would this downsizing effect our current capacity. Will we still be able to meet the current demand with lower resources and if not how can we be sure that we can regain the lost market share once giga factory comes online. Furthermore, what about the cost of rehiring or training laid off employees once we decide to ramp up our capacity. I agree with Tim’s perspective on why does something as global as “clean energy” have to be restricted to a nationalist policy. Furthermore, how can we guarantee that till the time Giga factory 2 comes online, no other competitor in world will be able to develop a more efficient way of producing solar panels reducing the cost even lower than what we aspire through the factory. And if there is such a competitor in the market (outside of US) , should the US customers still be forced to pay higher prices for solar panels produced in their country. And how would that effect the overall rate of penetration of solar panels.

  6. Hi John, This is an extremely interesting article – I was especially interested in the price sensitivity of demand expected in the market for residential solar based on the 35% increase. I would love to know more about how the cost of the panels from the Buffalo plant and how they would compare to the current Chinese panels. I am also curious to know how SolarCity feels about this protectionist move given that they will be the beneficiaries in such a short time frame. This could give them some room to make a margin selling their panels to other U.S. installers or charging higher prices to end consumers. Playing some devil’s advocate here, but isn’t SolarCity also benefiting from subsidies from the Federal and State governments (on top of the $750mm tax break for the factory from the state of NY)? It could be argued that the Federal and State programs that reimburse homeowners who install solar panels are protecting the industry from more competitive alternative energy sources.

Leave a comment