2017 was an up-and-down year for the solar industry, but it was much better than most investors and analysts expected from a demand standpoint, with as much as 100 GW of solar power systems installed globally. But manufacturers and developers are still having a hard time making money, and outside of a few companies, there isn't much profit to be had.
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There's also the cloud of potential U.S. solar tariffs hanging over the industry, something nearly every company is fighting against. Given all of the uncertainty, what should investors be looking at in 2018? Here are a few key things.
Tariffs, tariffs, tariffs
The first policy that will impact nearly every company is potential solar tariffs as a result of Suniva and SolarWorld's Section 201 trade case. President Donald Trump has to make a ruling on tariffs by Jan. 13, and he could decide anything from not implementing any tariffs to introducing extremely punitive tariffs that could crush the industry.
SunPower (NASDAQ: SPWR), Sunrun (NASDAQ: RUN), and Vivint Solar (NYSE: VSLR) probably have the most to lose of the publicly traded companies because high tariffs could make their developments less economical. The company with the most to gain is First Solar (NASDAQ: FSLR), which isn't included in the trade case at the moment. It has already booked billions of dollars in sales this year from customers who fear tariffs will undermine their project economics.
It's impossible to know what these tariffs will look like, but stay tuned for a big announcement in January that will impact solar companies dramatically.
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What is China doing with solar?
Current estimates are that China could install over 50 GW of solar in 2017, by far the most any country has ever installed. Is that a fluke or a new trend?
The answer to that question could tell us a lot about where solar stocks will go in 2018, and the only real indicator we have is China's feed-in tariff cut of 12% to 15%, which was a smaller cut than analysts expected. That may not be a great indicator because coming into 2017, it was expected that China's solar installations would drop because of falling feed-in tariffs, but instead, new energy policies like Top Runner, which promotes high-efficiency installations, drove an installation boom.
China has clearly made a transition toward renewable energy and away from fossil fuels like coal, but it's not yet clear if it sees 50 GW of solar being an aberration or a new normal. Based on installation levels in the first few months of the year, we should get a good idea of whether China is going to drive more growth or set its targeted installations much lower than 50 GW. Whatever it decides could throw the whole industry into over- or undersupply extremely quickly.
Do private solar manufacturers act any differenly?
One surprising trend in the solar industry in 2017 was Chinese solar manufacturers going private. Trina Solar, Canadian Solar (NASDAQ: CSIQ), and JA Solar (NASDAQ: JASO) have either been taken private or have an offer to be taken private in management-led buyouts. The implication is that management thinks there's more value to be extracted from these manufacturers than the market sees. What we don't know is how they expect to extract that value.
It's possible that being private will give manufacturers an incentive to stop expanding operations and focus on expanding margins and profitability. If that's the case, solar panel prices could stabilize, which would help most solar manufacturers in 2018.
But if going private means these companies will continue to grow with the backing of Chinese state-run banks, which funded their initial expansions a decade ago, we could continue to see an oversupplied solar industry in 2018.
How private solar manufacturers act will go a long way toward telling us whether solar manufacturing margins will improve in 2018 or remain in the mid-teens, which makes it very difficult for companies to make money.
Cautiously optimistic in 2018
The solar industry is difficult to predict year to year, but as solar energy becomes more competitive with fossil fuels around the world, solar companies are winning contracts based on it being the low-cost energy option. That should drive long-term growth, and while there may be ups and downs in 2018, this is an industry with a very bright future.
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