China dominates the solar energy industry. Can the U.S. catch up?
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The latest infrastructure deal between Congress and the Biden administration does not give the president everything his party wanted on the clean energy front. It leaves out incentives for more investment in solar energy — Democrats have said they’re not giving up on that.
But it will take a lot to make the U.S. a meaningful competitor in the production of solar equipment. China is the dominant player; about 80% of the world’s solar manufacturing supply chain runs through China. There are very few American solar manufacturers left. It didn’t used to be that way.
“If you have a solar panel on your roof and have installed [it] in the last five to 10 years in the U.S., more than likely, it was made by a Chinese manufacturer in China,” said Jordan Schneider with Rhodium Group, which analyzes China’s economic development along with its global energy and policy issues.
Before 2000, China’s solar production was limited to its space program and military, according to Chen Gang, senior research fellow at the East Asian Institute at the National University of Singapore.
“It had its first solar panel to power its first satellite in 1970s but for commercial production it was quite late,” he said. In 2000, China was producing close to 0% of the world’s solar equipment. By 2012, it was producing 60%, and today it is the world’s dominant player.
An open door for China
Mark Widmar, CEO of U.S. solar manufacturing company First Solar, said this transformation began when solar manufacturers in Europe and other wealthy economies started relocating their production facilities to China in the 2000s.
“That opened up the door to China because now China had the opportunity to learn, capture insights, perspectives, technology, things they didn’t have without it,” he said.
Technology transfer “was still possible and was occurring on a massive scale,” at this time, Gang said.
Chinese entrepreneurs started making their own solar products, destined for places like Europe, where governments were subsidizing the installation of solar power. They benefited from the same strategies that made China so successful at manufacturing in general, said Rhodium Group’s Schneider.
“You had a really tightly-knit supply chains where suppliers would be in the same town, incredible competition leading to lower prices as well as help from the Chinese government,” he said.
And then came the Great Recession from 2007 to 2009. Demand for solar equipment cratered and the bottom dropped out of the global energy market. Globally the solar industry was struggling.
“Hibernation mode” during Great Recession
“These Chinese firms were able to ramp down and go into hibernation mode more efficiently than the Western firms were,” Schneider said.
Around the same time, the Chinese government stepped in. “Governments at all levels identified this industry as something of strategic importance, and they started to give a lot of support,” said Chen Gang, senior research fellow at the East Asian Institute at the National University of Singapore.
Building up the solar manufacturing industry – at many points along the supply chain – became a national priority. The Chinese government funded research labs at solar companies and promoted upstream production of polysilicon, one of the key raw materials for solar panels. Also, according to Chen Gang, “the government gives a lot of subsidies to the energy, because this industry needs a lot of energy, and also cheap land, and bank loans. They all help Chinese industry to gain competitiveness.” Much of the support came from local governments, about which he says little is known.
By 2013, China was promoting demand for solar inside China.
“Solar farms had very strong incentives to build … and demand for the solar panels and solar modules grew significantly,” said Dennis Ip, analyst at Daiwa Capital Markets in Hong Kong. “The supply chain blew up aggressively in 2016,” with installed capacity doubling that year, making it the world’s largest producer of solar power.
Some government support is alleged to have been more covert. In 2014, a grand jury indicted five hackers working for China’s military with hacking the solar technology of U.S. companies and then sharing it with Chinese companies. In 2020, prosecutors charged another group of hackers with working with China’s Ministry of State Security to steal industrial intellectual property, including around solar.
Widmer of First Solar said the government support, in all its forms, helped Chinese companies elbow out the competition.
“They subsidize industries, highly motivate them to create overcapacity, which then creates pricing power. They export that product into international markets with predatory pricing behavior and squash all competition,” he said.
Tariffs on Chinese solar products
Both the United States and Europe accused China of unfair dumping and imposed tariffs on certain Chinese solar products starting in 2012. But China responded by placing tariffs on U.S. producers of polysilicon, which both protected its own polysilicon producers and significantly damaged U.S. production. China’s dominance of the supply chain only grew.
John Smirnow, general counsel with the Solar Energy Industries Association, said that setting aside debates over dumping, there’s a lesson to be learned from China’s approach.
“You still can’t deny that the Chinese state and federal governments made significant long-term investments in these industries,” he said.
The emphasis is on “long term.” In contrast to the sustained commitment made by China, the U.S. had an on-again, off-again approach to its support for solar. Tax credits were allowed to expire and then re-enacted again and again, said Michael Davidson, an assistant professor at the University of California, San Diego.
“That did not result in a very strong market signal and that uncertainty could lead pause to any us manufacturer who was hoping to come up in the us space,” Davidson said.
China is now winding down its subsidies, its solar industry is mature, and its overcapacity has created problems even for Chinese firms.
“Production has been facing huge overcapacity,” Gang said. “There’s even overcompetition among Chinese domestic solar panel makers, so the situation is very messy.”
The U.S. has a long way to catch up.
“If you’re in the U.S. or Europe and you’re trying to raise capital for solar … it’s tough. It’s uninvestable in many ways because it’s not a level playing field,” said First Solar’s Widmar.
This isn’t something that will turn around quickly, said Daiwa’s Ip.
“To build a totally new supply chain at cheap cost within five years is very difficult, so I think China’s solar sector will still dominate over the next three to five years.”
The U.S. solar industry, meanwhile, is asking the U.S. government to invest in research and development, offer long-term investment tax credits and promote more demand — basically, to take a page from China’s book.
“You need a suite of federal investments that are focused on three elements,” SEIA’s Smirnow said. “One, you need a demand signal that will come in the form of long-term extension of the investment tax credit. That’s our top priority. In addition to that, you need support from government to incentivize private-sector capital to invest in manufacturing facilities and equipment.” Third, Smirnow said, the U.S. needs to fill the gaps in the supply chain, the production of materials and components like solar glass.
“That will take time,” he said.
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