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Weighing Both Sides of the China-U.S. Solar Panel Manufacturers Trade Dispute

In recent years, the price for solar PV panels has plummeted, falling 30% in 2011 alone. The drop in prices can be attributed in part to cheap, imported panels produced by Chinese manufacturers who benefit from billions of dollars of cheap credit from the Chinese government. But while solar installers benefited from inexpensive panels, manufacturers suffered. The flood of cheap panels into U.S. markets drove a significant number of U.S. manufacturers into bankruptcy, contributing to job loss and jeopardizing the ability of the U.S. to compete in renewable technologies.

In a dramatic move, several U.S. firms, most of which remain anonymous, filed a suit in October of last year with the U.S. Department of Commerce and the U.S. International Trade Commission, “alleging the unfair importation of crystalline silicon photovoltaic cells and modules from China.”  SolarWorld USA is leading the group of firms that have formed the Coalition for American Solar Manufacturing, demanding President Obama impose tariffs and duties on Chinese panel and silicon cell makers to offset their losses. According to the Coalition, China can undercut all other producers, put them out of business, and end up with a monopoly on the solar sector by heavily subsidizing panel production. Gordon Brinser, president of SolarWorld, alleges that this is their whole intention; to “gut it and own it.

SolarWorld claims that its installations, like this 600+kW facility in Yosemite National Park, will slow or cease in the face of unfair Chinese competition. Image via www.solarworld-usa.com

China has denied any allegations of wrongdoing, essentially calling the U.S. a bad sport in a losing market. Though reports accusing China of pledging $30 to $40 billion dollars in cheap credit to its companies drove allegations against the industry, evidence suggests that not only have Chinese solar companies hardly touched the financing, but that the interest rates have been quite reasonable as well. Some reports say companies have tapped as little as 3 percent of the billions of dollars made available to them, and data from actual loans indicate that interest rates fall between 3 to 9 percent depending on maturities and currencies used – hardly cut-rate lending.  While Chinese companies have access to other sources of financing, there still exists little evidence that points to the “all-encompassing range of illegal subsidies from the Chinese government, including massive cash grants” alleged in the complaint by U.S. solar companies.

And it gets more complicated. After the group of U.S. companies filed the suit, China countered with a claim that the U.S. has been illegally dumping polysilicon feedstock in Chinese markets, putting some of their companies out of business. Chinese authorities have the exact same complaints against American companies – that U.S. manufacturers are selling products below productions costs in a malicious attempt to hurt Chinese business. Fair competition, or illegal trade? It’s a complicated question involving “money, business, and patriotism,” and most importantly, jobs. Some argue that although manufacturers in the U.S. are losing out, the U.S. might actually benefit in terms of job growth from cheap panels since a majority of the estimated 100,000 U.S. solar jobs occur “downstream” or after the panels are manufactured.

In terms of the case itself, the U.S. International Trade Commission (ITC) announced on December 2nd that it agreed unanimously that Chinese solar panels were harming U.S. solar panel manufacturers.   The ITC is slated to make its final determination in July for the anti-dumping question, and in May to determine countervailing duties. Further findings in these areas could result in retroactive duties on imported solar panels. Some Chinese companies are responding to the situation by hedging their bets, with some planning to move their assembly operations outside of China to avoid future tariffs. And just last night during his State of the Union address, President Obama announced the creation of a “Trade Enforcement Unit” intended to root out unfair trade practices, not just in solar manufacturing but in intellectual property and other areas as well. While avoiding mention of the case directly, the statement seems to indicate his willingness to see it proceed.

If the case does continue, it could easily spark an international trade war. Recent events already indicate movement in that direction. Wind turbine manufacturers in the U.S. have joined in with a trade complaint regarding subsidized turbine imports, specifically from China and Vietnam. And on December 15th, China enacted a tariff on large-engine cars made in the U.S., an apparent response to the complaints over solar manufacturing. While this tariff affects only a sliver of U.S. exports, the trend is unsettling.

Reality states that both sides have an enormous amount to lose from a trade war, and it is unlikely the situation will devolve to such a state. Relying more heavily on WTO rulings to govern the relationship in this politically strained situation is one way both sides could diffuse the tension. Unfortunately, that means that U.S. manufacturers will continue to face harsh competition, fair or not, from imported panels. Manufacturers of advanced solar technologies can take comfort in the fact that Chinese manufacturers have mostly targeted the lower end of the solar panel market, producing basic crystalline silicon modules. Higher-value manufacturing – and jobs – has yet to compete directly with Chinese panels on the same scale as more basic models. Unfortunately, consumers have demonstrated that many will still choose the lowest priced panel instead of paying more for a potentially more efficient system.

But the loss of one side of the solar industry is a win for the other – installations, especially when aided by incentives like SRECs, will continue to benefit from inexpensive panels, gradually increasing the share of renewables in the energy mix. If the solar industry has collectively agreed on anything, it is the need for a coherent U.S. energy policy to guide investment and steady markets. Current trends indicate that installations are increasing as installation and panel costs become cheaper, creating jobs and solidifying solar energy’s foothold in the U.S. energy mix. The appeal of solar energy is reaching more consumers than ever before, but using the industry as a test case for larger questions of trade policy could erode this progress and threaten the future of solar energy in the U.S.

About Sol Systems
Sol Systems is a solar energy finance and development firm that was built on the principle that solar energy should be an economically viable energy solution. With thousands of customers and hundreds of partners throughout the United States, Sol Systems is the largest and oldest SREC aggregator. We provide homeowners, businesses, solar installers, and developers with sophisticated financing solutions that help make solar energy more affordable. Sol Systems also helps energy suppliers and utilitiesmanage and meet their solar RPS requirements efficiently by providing them with access to diverse portfolios of SRECs. For more information, please visit http://www.solsystemscompany.com.

A Case for American Energy

America has traditionally been seen as lagging behind in the renewable energy race.  European and Asian markets have consistently outstripped the US when it comes to alternative energy.  Western Europe has had stricter regulation towards efficiency standards and renewable resources than the US for years, and China is proving to be a solar powerhouse, seeing huge growth in the manufacturing of solar modules.

Nevertheless, American companies have begun to step up their game when it comes to solar modules. Electronic giant GE recently announced that they
would be throwing their hat into the solar ring by opening a new solar manufacturing facility in Aurora, Colorado.  This new plant will be used to design and build new cadmium telluride thin-film solar panels for primarily large-scale commercial use.  GE expects that the panels should meet or exceed the capabilities of comparable Chinese models, and sales are expected to begin in 2013.

Additionally, US solar manufactures have recently banded together to prevent Chinese solar panels from flooding the American market.  The coalition, comprised of seven American solar manufacturers, is working to impose stiff duties on Chinese modules, which they claim will undercut prices and destroy American jobs.  Led by the US arm of Solarworld AG, a German solar manufacturer, these companies are sending a stiff message to overseas corporations.  The Chinese, have advised the US government not to “politicize” what they consider to be economic issues. With the US posed to become the largest consumer of solar in the next few years, disputes and expansion in the solar industry will become more and more common.

As always, Sol Systems is excited about the future of the solar industry, and looks forward to seeing how industry will respond to these new updates.

An Outlook On Solar in 2011

Competition is stiff in the solar manufacturing industry, with companies like Evergreen announcing their departure from the United States to China in order to reduce costs. Enormous global module supply has come online in the last two years to help fuel the rapid build-out in Europe, China and elsewhere, resulting in dramatic declines in solar module pricing. Some, like Gleacher and Company, are modeling module prices at around $1.30/watt right now. Others are actually predicting wholesale module costs at $1.10 in the next few weeks.

The result is a strange dichotomy of a manufacturing industry undergoing rapid growth and simultaneously undergoing a stressful reallocation of resources and a fairly pessimistic outlook on Wall Street. The WilderHill Clean Energy Index, which includes solar and other alternative-energy stocks, fell 5.3 percent last year, compared with a 12.8 percent rise in the Standard & Poor’s 500 index. Companies like SunPower, Yingli, JA Solar, Trina, Canadian Solar, MEMC, Suntech and others all produced significant negative returns, some upward of negative 20 percent.

This fall in module prices, and the corresponding difficulties for module manufacturers, will likely continue through 2011 as the world’s top solar market, Germany, further cuts its solar subsidies and a growing supply of photovoltaic modules outstrips demand, putting pressure on prices and producers’ profits. As others have noted, a weak euro will compound the problem for Chinese and U.S. manufacturers. Last year, Germany, Spain, France, Italy and Czech Republic all cut back their solar subsidies. Further cuts are expected in Germany and France in the first half of 2011 and in Italy in the second half. Those three markets account for around 70 percent of the global market, according to Bank of America Merrill Lynch. Next year may be the first year in which more solar is built in the United States than in Germany.

For the solar installer and developer community this is presumably welcome news (ignoring the risks, of course, that similar reductions in incentives may take place here). As solar module costs decline, so are total system costs since modules compose a significant portion of the overall costs of a solar system.

However, cost reductions do not uniformly impact the solar community. Because of economies of scale, module costs account for a much larger portion of commercial-sized solar system’s costs than residential. The impact is still more powerful with regard to utility sized projects. As a result, falling module costs disproportionately benefit larger systems, as illustrated the figure below (care of SEIA).

Not only are commercial and utility costs already significantly lower than residential costs, they are also falling more rapidly. Indeed, utility projects are falling in price at three times the rate that residential projects are. This is an interesting window into the solar industry in the United States, which is that solar systems will undoubtedly get BIGGER.

To compound this trend, as states drastically reduce or altogether cut their rebate and grant programs for residential and small commercial systems, the economics that once favored smaller projects are starting to disappear. States like New Jersey, California, Maryland, Pennsylvania, Ohio and many others have all gutted their tax-funded rebate or grant programs. American Recovery and Reinvestment monies that flowed through the states in much of 2009 and 2010 are nearing their ends. Although module costs are falling significantly, they are not falling (nor could they) by two to three dollars a watt , which was often the size of grant and rebate monies. The result is a further shift upward in size. In Massachusetts, for example, given the emphasis on a solar renewable energy credit (SREC) market, many developers are starting to focus exclusively on commercial and utility scale projects.

For residential focused installers and developers, this may be an opportunity or a challenge. Presumably, those firms that can secure large economies of scale in purchasing power will better weather these changes than those that cannot. Additionally, because size matters, the industry may see consolidation. Hopefully, it will also see aggregation or collaborative models, where residential and small commercial installers work together to secure better financing opportunities and engineer more sophisticated acquisition models. This, of course, is a primary focus of financing firms like Sol Systems. Additionally, power purchase agreements and lease agreements may gain prominence if effective costs rise for residential customers in the absence of rebates.

For commercial and utility developers, a move upward in size means a necessary move towards more complex financing instruments. It becomes a bit more difficult to make a pure equity play on a multimegawatt project – a blended debt/tax equity/first loss equity product is typically required to reduce risks and bring down the costs of capital. To see this approach succeed, the capital markets will have to open further to solar projects. A lack of access to debt markets and tax equity was a big part of what has slowed the growth in wind and large-scale solar in the last few years. So this may be a challenge. On the other hand, Chinese banks continue to push into the US market to debt finance multi-megawatt portfolios, so it may not only be Chinese modules the US industry is using, it may also be Chinese money.

In sum, as the industry grows, there will be a continued movement towards larger projects. To succeed, players will have to become more sophisticated. This will favor players in the residential space who are able to collaboratively or individually leverage economies of scale and acquisition models and players in the commercial and utility space who are able to better secure complex financing instruments.