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Fast, cheap, good, and local?

2012 March 11

Attendance was strong at Nat Bullard’s talk “US-China Clean Energy Relations: He Said, Xi Said” held at the Sierra Club in downtown San Francisco on February 29, 2012. Over 40 people filled the room, with another 30 people tuning in from around the world via webinar. Donning a “That’s what Xi said” t-shirt, Nat set the tone for a relaxed, yet well-informed discussion on the recent solar module trade case. First using data and charts from Bloomberg New Energy Finance to explain the current market conditions for the solar PV market, Nat then provided key thoughts on the trade case brought to the US government by the Coalition for American Solar Manufacturing (CASM). I’ll highlight the main five takeaways from the talk and discussion here:

  1. Oversupply: Although global demand for solar modules has grown rapidly, with 27 gigawatts installed in 2011 (>10 times more than in 2007), supply has grown even faster with 43 gigawatts of manufacturing capacity in 2011. The main results of this oversupply have been that prices have been falling in every part of the supply chain and that margins have been particularly squeezed for cell and module manufacturers. Wafer, cell, and module companies had healthy earnings margins ranging from 5% to 30% in the first quarter of 2011 but those fell into negative territory of -5 to -30% by the third quarter of 2011. Almost all manufacturers (European, Chinese, and American) are facing very tough financial situations currently, with First Solar (a thin film module supplier) being the main exception.
  2. Meat for a trade case: China only had 25% of global PV module manufacturing capacity in 2006. In 2011, they had 60%. This loss of market share has hurt mostly German and Japanese module suppliers who fell from 23% to 5% and 26% to 6% in market share, respectively. The U.S.’s market share has stayed roughly constant at a modest 2% throughout these five years of incredible growth. Yet, as the U.S. demand for modules has increased in the past few years, imports of Chinese cell and modules have inevitably increased as well, from $233 million of product in 2008 to $2.4 billion of product in 2011. As Nat described it, this statistic alone is “meat for a trade case”.
  3. Decisions on duties: The main points of the Coalition’s case are that the Chinese module suppliers are dumping their product below cost into the U.S. market; the reason they can dump is because of massive Chinese government support; as a result, U.S. manufacturers have been hurt. Nat first pointed out that the types of government support cited (massive cash grants, significantly discounted raw material inputs, heavily discounted or free land, power and water, multi-billion-dollar preferential loans and directed credit, extensive tax exemptions, incentives and rebates, export assistance credits, and export insurance at preferential rates) almost all exist in the U.S. as well. Regardless, quantifying this level of support in order to build a case for imposing countervailing duties (CVD) is not easy as China is not always a “document-rich” environment. Additionally, China’s status as a market or non-market economy will play a role in the decision on CVD and Congress may play a role in that decision by introducing legislation that characterizes China as a market economy. The audience spent time considering what broader implications that decision might have beyond this trade case. Finally, Nat pointed out that once a decision on CVD and anti-dumping duties is made by Congress, China as the respondent has the opportunity to appeal the case to the WTO, which would lengthen the process by at least a year, if not many years. Everyone agreed the market would be decidedly different then, making the case somewhat of an anachronism in such a fast-paced market. Nevertheless, the decision still bears significant political weight for the Obama administration and U.S.-China relations on clean energy, and many market players (in both manufacturing and installation) see significant implications for business in the case that tariffs are imposed.
  4. Consumers don’t matter here: The Coalition for Affordable Solar Energy (CASE) has come out strongly against CASM’s case, arguing that cheap modules are leading to a rapidly expanding market for installation in the U.S., which is creating much more value and many more jobs than the manufacturing part of the value chain. Any tariff that would be imposed would hurt the U.S. market as a whole, CASE argues. Yet, the simple fact is that benefits of low-cost solar energy downstream to the consumer bear no legal significance in the decision of this case. The case only regards the Chinese government’s support of the industry and the alleged dumping of product by Chinese suppliers.
  5. Fast, cheap, good, and local: Nat ended with the old adage “You can have it fast, cheap, and good, but you can’t have all three.” He expanded this to “fast, cheap, good, and local” in the case of clean energy. If you think of local/organic food movements, they are good and local, but not necessarily cheap and fast. Even with the beer we were drinking at the event, it was noted that Tsingtao was provided at cost at $1 per beer, while the local Racer 5 and Sierra Nevada brand options were $2 a beer. The local option cost more; which one is “good” is in the eye of the beholder in this case J. If the U.S. wants cheap solar energy fast, then parts of that value chain will not be local. If the U.S. is willing to sacrifice the cheap factor, perhaps some of the local value could be saved. Even this is unlikely, however. Nat noted that imposing tariffs on Chinese module products will not save the U.S. solar module manufacturers. Idle capacity in other parts of the world will pick up the slack, and the end result could be that Germany, Korean, and Taiwanese module manufacturers fill the gap created by imports on Chinese modules.

Thank you to Nat for his great insights and thank you to all those who attended for the fruitful discussion!

For more context on this and past trade cases, feel free to read my piece “Clean energy wars: manufacturing jobs (Sith) vs. installation jobs (Jedi)”.

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