Solar Panel Import Taxes: The Death of Tesla and the U.S. Solar Industry?
Looming import tariffs could make rooftop solar too expensive for most Americans to afford. The decision to close America's borders to the importation of cheap solar panels lies in the hands of President Trump. Could isolationism kill the U.S. rooftop solar industry?
On April 17, 2017, Suniva, a solar panel manufacturer based in Georgia, filed for bankruptcy. Just nine days later, the company filed a Section 201 trade case petition, citing the importation of cheap solar panels from China as the reason for its failure. SolarWorld, another U.S.-based panel manufacturer, joined the petition, arguing that the flood of imported solar panels significantly harmed the domestic market.  The companies requested a 74 cents/watt floor price for imported solar panels, which is approximately 61% more than the average price of panels at the end of 2016 and more than twice as much as the forecasted price in 2017 (Figure 1).  The petition was sent to the U.S. International Trade Commission (ITC), which unanimously agreed that significant damage was caused by the importation of foreign solar panels. The ITC issued three recommended solutions, including a 35% import tariff. On November 14, 2017, the case was handed over to President Trump, who has 60 days to make a decision. 
Source: GTM Research 
The Impact of Closing Our Borders
While Suniva and SolarWorld claim that their proposed import tariff will protect the domestic manufacturing industry, this isolationist move will hurt the U.S. solar installation industry. These installation companies pitch to homeowners using fragile return on investment calculations, which rely heavily on declining panel prices to show short payback periods for customers. This trade case would result in a sharp increase in equipment prices, which would make systems unaffordable for the majority of homeowners across the country.
The leading solar installer, with almost 26% of the U.S. residential solar market in 2016, is SolarCity, which was acquired by Tesla in November 2016.  The acquisition was deemed by several analysts as a bailout, given SolarCity’s high cash burn rate.  At the time, SolarCity’s core product was the residential solar lease. With a solar lease, the homeowner allows SolarCity to install panels on his/her roof at no cost to the homeowner. Subsequently, the homeowner pays a flat monthly rate to SolarCity in exchange for electricity over a 20-year term. Under this financing model, SolarCity was burning large amounts of cash to pay upfront for their customers’ solar equipment. This model was unsustainable, provoking SolarCity to start offering a loan product, through which customers owned their system and paid a third-party financier for the loan over time. Loans have gained popularity due to the falling prices of hardware, which makes it more economic for homeowners to own their systems. However, with the proposed import tariffs, Tesla will have to revert to its cash intensive lease product.
Preparing for a Cloudy Future
Since the acquisition of SolarCity, Tesla has made significant changes to the solar business model. Luckily, some of these have set the company up for success relative to other companies in the face of the proposed import tariff. In August 2017, Tesla started production of solar cells from its Gigafactory in New York. They also announced a doubling of their target capacity from this factory, from 1 GW to 2 GW per year, although the factory won’t even reach its 1 GW capacity until 2019.  Tesla’s domestic solar panel production will allow the company to avoid import taxes established through this trade petition.
While this is a significant competitive advantage for Tesla, the ramp up of the factory has been slow. Accelerating this ramp must be a focus for the company in the short term to quickly grab market share from installers that lack domestic manufacturing capacity. In the long term, Tesla should make investments to drive greater capacity increases at their Gigafactory beyond 2 GW. Furthermore, Tesla has announced that a significant portion of the factory’s initial capacity will be dedicated to the production of a new “solar roof” product, which replaces the shingles of a roof with glass solar tiles (see Figure 2). Although this is attractive technology, it costs more than double the cost of regular panels on a per watt basis.  Like Tesla’s first electric vehicles, this is a product for the wealthiest Americans, not for the mass market. If import tariffs are imposed, Tesla should shift focus back to their less expensive, traditional solar panel product for greater market penetration.
Source: Tesla Quarterly Earnings Presentation 
Last year, SolarCity/Tesla announced new services for utility-scale projects.  Utility-scale systems cost significantly less than residential-scale systems on a per watt basis, which means utility projects are more exposed to increases in panel prices and are much less attractive under increased tariffs. As such, Tesla should stop investing in utility projects in preparation for the impending increase in isolationism.
Important questions remain: can Elon Musk do anything to convince Trump to consider installation jobs AND manufacturing jobs? Does Tesla stand to benefit more from increasing its market share or will they ultimately lose out as the solar market shrinks?
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- Kirsten Korosec, “Why Rooftop Solar Might Get A Lot More Expensive In the U.S.” Fortune, September 22, 2017, http://fortune.com, accessed November 13, 2017.
- Allison Mond, “Module Procurement Trends in the U.S. Residential Market,” (January 2017), GTM Research.
- Robert Walton, “60-day clock starts for Trump to decide on solar panel tariffs,” Utility Dive, November 14, 2017, https://www.utilitydive.com, accessed November 14, 2017.
- GTM Research, “U.S. PV Leaderboard: Q1 2017,” May 17, 2017.
- Dana Hull and Chris Martin, “Tesla Seals $2 Billion SolarCity Deal,” Bloomberg, November 17, 2016, https://www.bloomberg.com, accessed November 10, 2017.
- Fred Lambert, “Tesla starts solar cell production at Gigafactory 2 in Buffalo, raises annual capacity goal to 2 GW,” Electrek, August 31, 2017, https://electrek.co, accessed November 12, 2017.
- Max Aram, “What We Still Don’t Know about Tesla’s Solar Roof,” Greentech Media, May 20, 2017, https://www.greentechmedia.com, accessed November 13, 2017.
- Tesla Motors, Inc. February 22, 2017 Q4’16 Update Letter, http://ir.tesla.com/events.cfm, accessed November 14, 2017.
- “SolarCity Launches Utility and Grid Services,” SolarCity press release (San Mateo, CA, May 5, 2016).
Student comments on Solar Panel Import Taxes: The Death of Tesla and the U.S. Solar Industry?
Well researched essay Katie! Really exciting to see how Trump will decide on this matter (maybe you should send the essay to Pennsylvania Ave).
It is fascinating to see how an industry that was “hot” only a few years back now struggles with staying relevant both in terms of relevance and domestic production. The problem you described seems to be a global issue as there were also many German solar panels producers that had to file for bankruptcy, mostly blaming Chinese imports for their faith. However, from my perspective, the German government is partly to blame for that as they promised significant subventions for households to install solar panels in order to reduce the overall dependency on coal. As a consequence, price dumping from government-backed Chinese suppliers became common and domestic manufacturer could no longer sustain their R&D focused business model.
I wonder if Tesla can turn the ship around for Solarworld, given the typical Tesla-approach of promising society-changing paradigm shits but struggling in the implementation phase of these ideas. As investors have become increasingly critical on Tesla’s future outlooks following a wave of complaints on the quality of the Tesla Model 3, I am a little worried that Musk and his management team will not have the time and focus to turn around Solarworld. The ultimate success on the solar industry also hinges on the overall government point of view of renewables, as increased focus on “cheap” coal could make investments in solar technology less attractive.
Very interesting article Katie! In the idea of building an argumentation against imposing tariff on solar panels import, would it make sense to estimate the number of solar electricity providers (and the people they employ) that would be forced to file for bankruptcy if such tariffs would be implemented. It has already been a tumultuous year for the residential solar industry and three of the largest installers (NRG Home Solar, Sungevity, and Direct Energy) have gone bankrupt or exited the residential space. Imposing a tariff would further strain this industry and might drive players such as SunPower or Vivint Solar out of business. If his goal is to maximize US’s overall employment rate, I think Trump should consider the cascading effect on taking such a decision.
My sense is that solar is structurally unprofitable in its current form, and what we are seeing play out is not necessarily uncompetitive manufacturing relative to China but uncompetitive subsidy practices in the US as opposed to foreign governments. China and Germany seem to be the primary culprits- the governments are effectively lending to these businesses in the hopes that over time efficiencies will make the process profitable. In the US, it is the shareholders who are doing most of the subsidizing, by investing in a business like Solar City despite the extremely high cash burn. Tesla shareholders are now indirectly subsidizing this via the acquisition. I hope that the markets have finally found a way to effectively match the subsidy system of China / Germany and allow a capable US manufacturer to figure out how to make money doing this on a residential scale.
Another advantage Tesla has, aside from its capital structure, is its channel into US “green luxury”- wealthy consumers willing to pay more to be perceived as working towards improving the environment by buying electric cars and solar power. This is a potentially interesting way to form a test market for the residential solar industry in the US. Finally, as you mention, Tesla is in the best position amongst any US manufacturer to be able to cobble together the manufacturing capacity to do solar on a countrywide basis- hopefully this further improves the cost equation by introducing economies of scale.
Zack raises some very interesting points regarding the current subsidies for solar companies in the U.S. and other countries. While they are directly impacting manufacturing, they have a downstream effect on installation prices. While I’m sure Elon Musk would like to argue that manufacturing is the more important part of the solar panel market, I agree with you, Katie, and believe that cheap upfront installation prices drive homeowners to “go solar.” Without panels that are affordable to the average consumer, are we really making the impact on clean energy that Musk and others are clamoring for?
These import taxes seem like a stopgap measure to allow U.S. solar panel manufacturers to continue to operate while the government refuses to invest in clean energy on the same scale as other governments such as China and Germany. Instead, perhaps we should allow Chinese solar manufacturers to pressure U.S. manufacturers to develop new techniques, focus on automation, or utilize other methods to drive down solar panel costs to compete. Instead, we artificially inflate prices, drive installers out of business, and continue to subsidize other forms of energy first. If this tariff does go through, President Trump should consider subsidizing installers, otherwise we will likely see solar installations slow to a near-halt until we can start producing at scales that can compete with the current prices offered by China. However, I would hate to have to wait until 2019 to see the Gigawatt factory save the U.S. solar economy.
Great article Katie. This highlights how something that would have been seen as an unambiguous ‘good’, the sharp reduction in production costs of solar panels, a few years ago has actually created a few ‘losers’ along the way. As you highlight, those ‘losers’ are unafraid to use their political sway to improve their circumstances, even if it harms the industry as a whole across the supply chain.
Further, it’s interesting how the rhetoric around the solar industry has followed political winds in shifting focus from the environment and climate change, to domestic jobs. Hopefully, I hope that the importance of the propagation of clean energy and the positive externality that solar panels provide are also being considered in the creation of new trade policy.
The case of US solar industry provides an interesting example to examine the merit of protectionist measures. Proponents of the import tariff argues that such measures are necessary to allow US domestic solar panel manufacturers to compete against the cheap solar panels imported from China, especially as Chinese manufacturers benefit from structural cost advantages due to heavy subsidy from the local government. It may also be argued that US requires a strong domestic solar industry given the strategic importance of solar energy as the most promising renewable energy source currently. However, one need to recognize that such protectionist measures also reduce competition and hence incentive for US solar panel manufacturers to continuously innovate and drive cost down. US consumers, as a result, will lose out at least in the short term by losing access to cheaper solar panels and potentially in the long term if the US solar panel manufacturers continue to fall behind their Chinese counterparts given the less intense market environment. US, as a result, will also experience slower adoption of solar energy in households. In addition, even players within the US solar industry may suffer. The article illustrates how the solar panel installation companies will face diminished demand due to higher price of solar panels while solar panel manufacturers gain greater profits.
One has to ask, whose interest such protectionist measures are really advocating for? Is it the end consumer? The solar industry? Or the strategic priority of the country? The answer remains elusive to me.
I will this to all industries to answer your question – what should countries do when a foreign producer can render domestic firms non-competitive?
To take a contrarian opinion – I think a key consideration is will losing R&D US jobs lead to a drastic loss in talent and capability domestically. One can argue that solar technology is still in a nascent phase and R&D will uncover efficiency and new technology. If left exposed to competition, Sunivia and Solarworld will go out of business and be unable to contribute to the overall progress of the technology in the USA.
If one is to believe that trends of automation will eventually lead to a convergence in production prices, USA needs domestic firms to stay in business. So I think there is a big difference between installation and manufacturing jobs and Musk might want to think that through.
As for Tesla, I think they will win on the merits of their scale and technology – regardless of the policies.