A trade war is brewing in the solar photovoltaic industry, and we can hear the echoes of battle getting louder every moment. Given that it’s an election year, the din of the Chinese-American Solar War threatens to transcend the narrow politics of the energy industry to get the attention of all Americans. So before the Solar War becomes politicized, it’s essential that solar advocates get really clear on what they want for the U.S. solar industry and our energy system over the long term, and whether penalizing trade with China moves us closer to or further away from that vision.
The trade issues came to a head when SolarWorld Industries, joined by six so-far anonymous solar companies, asked the U.S. Commerce Department to set tariffs on Chinese-made solar equipment, alleging the goods are being dumped on the U.S. market at unfairly low prices enabled by Chinese government subsidies. Then, in response, a larger coalition of U.S. solar companies came forward opposing the request, saying tariffs would mean higher prices and would threaten jobs.
The argument is complex and both sides have valid points and represent real constituents with a stake in the game. It’s important to keep in mind that energy is a global business with global supply chains and global customers. The solar PV industry, still in its infancy compared to its entrenched competitors, must be especially careful it doesn’t create unintended and irreversible consequences through short-term protectionist actions. The global market for PV is nowhere near mature and is highly if not totally dependent on the price of electricity delivered. At this stage in the industry’s life cycle, anything that results in a price increase to customers, especially in critical markets like the U.S., could represent a major and possibly insurmountable barrier for the entire industry.
On Jan. 30, the Brattle Group released a study projecting “the aggregate demand for photovoltaic systems is expected to grow from 1,678 [megawatts] in 2011 to 4,894 MW by 2014”—barring any tariff on Chinese PV products. But “a 50 percent tariff will raise industry-wide prices and delay solar industry growth, with total MW demand falling to as low as 3,350 MW in 2014. A 100 percent tariff will delay this growth even more with demand falling to as low as 3,159 MW in 2014.” Note that both scenarios are significantly less than the 250 percent tariffs sought by some PV cell and panel suppliers.
Any reduction in demand for PV systems would come at a critical time for the industry, just as it is starting to see dramatic growth in demand, especially in the U.S, which is poised to become one of the largest PV markets in the world by 2013. While the economic impact of reduced demand would be difficult enough to manage; a sudden slowdown in the trend of adoption in any of the three critical sectors (utility scale, commercial, or residential) would harm both economics and the overall perception of risk for customers and financiers, ultimately risking stagnation in the industry.
Unfortunately, the Brattle Group didn’t consider the potential impact that higher electricity prices for PV generation would have on the industry’s credibility and public policy support, but I’m pretty confident it won’t help. Moreover, in the politics of today, where job growth and economic development drive the political agenda, the Brattle group projects that a 100 percent tariff on imported PV panels and modules from China would result in the net loss to consumers of $698 million to $2.62 billion, eliminating up to 50,000 U.S. jobs over the next three years. By Brattle’s projections, even a 50 percent tariff would cause between $621 million and $2.287 billion in net consumer losses. These numbers go in the wrong direction for the PV industry, threatening to give more ammunition to those who lobby for business as usual in the energy system.
Finally, the reduction in U.S. demand for PV resulting from tariffs will hurt U.S. businesses as much if not significantly more than the tariffs would impact the Chinese. Both DOE’s Sunshot Initiative and RMI’s internal analyses indicates that nearly two-thirds (roughly 63 percent) of the cost of residential solar PV installation came from items outside of solar modules (“balance of system costs”), such as inverters, permitting, taxes, wiring, etc. What’s more, the approximately 37 percent of solar PV costs from modules currently includes roughly half non-Chinese modules as well as distribution and sales revenues, which often go to U.S. employees working directly for or under contract with foreign module manufacturers. The numbers are similar for both utility- and commercial-scale systems. Therefore, less than a fifth of the cost of today’s solar PV installation goes to Chinese companies for module sales.
To be sure, the Chinese government’s strategic investment in its solar PV industry creates a powerful dynamic in the global value chain and is particularly challenging to non-Chinese crystalline silicone PV cell and panel manufacturers. However, for the rest of the global industry, including manufacturers developing non-crystalline technologies, the question is whether China represents a threat or, in fact, an opportunity. Remember, China is not only investing in its production capabilities and competitiveness; it is also simultaneously investing heavily in creating demand, which may prove to be good for the rest of the global industry.
I choose to believe that growing Chinese demand for PV will accelerate global demand and drive increased innovation throughout the value chain. Increased global demand will drive the development and adoption of more advanced and efficient cells, panels, componentry, and system designs—and very importantly lead to increased acceptance and adoption by utilities and other major power purchasers around the world. Growth and scale will lead to standardization and will open PV development to global financial markets, reducing financing costs and complexity. All of this will ultimately help the industry achieve the scale it needs to compete head to head with coal, natural gas, and nuclear power to generate the world’s electricity.