The US International Trade Commission voted unanimously on Friday in a preliminary ruling on the antidumping petition filed by SolarWorld and five other companies calling for countervailing duties against Chinese solar companies. It’s officially ‘game on’ now as the US ITC will now proceed with a full investigation. But is it ‘game over’ for SolarWorld and those companies failing to lower their prices, open new solar electric markets, and compete to win? For sure, it now appears that a trade war between the US and China over renewable energy including photovoltaics in 2012 is very real and it could not be timed any worse for the industry suffering from oversupply and dwindling finance.
SolarWorld is a global company with operations in the US and a flamboyant and controversial and some would say ‘protectionist' leader, Mr. Frank Asbeck. Mr. Asbeck has ridden in many limos over the years, and if he wanted to impress he might use the one in Figure 1 as he did in LA for SPI.
If the SolarWorld antidumping limo pulls up, do we get in or keep walking? Is the $1/Wp Chinese module selling price the realization of the industry’s push to achieve lower prices in a ever present push to reach grid parity? Or, is the $1/Wp selling price evidence of unfair trade? American Sam Walton, an early investor in McMaster, the predecessor company to First Solar, is an icon of business throughout the world. Walmart’s credos, lower prices, increase quality and open new markets. This is what we all want from clean energy and solar electricity in particular. So, while it may not be exciting, deciding to keep walking or to get in the SolarWorld antidumping limo may be as simple as asking do we want to achieve grid-parity sooner rather than later.
Some complain that in China ‘capital is free’. There is a lot of evidence that capital incentives are widely used in China, and that capital in China is relatively cheap. The ITC lawyers will likely consider these capital incentives for unduly cheap factories, etc., but as part of their investigation, however, it’s the cash cost of c-Si (crystalline silicon) modules the ITC may care more about. While we all like cheap goods, we don’t want them if they are hurting competitive US companies, so it is critical not to dismiss the complaint outright.
The legal question of dumping is for ITC lawyers to determine as they evaluate the merits of a possible case against China. The economics of PV systems costs are for the analysts and the industry supply chain experts to consider. Here is what we know. PV systems prices are down 50% in three years (see Figure 2), and an additional system price reduction of 50% will achieve grid-parity, the holy grail of renewable energy advocates, in major markets throughout the industrial world.
Lower solar system prices: module costs
The schematic in Figure 2 tells it all. Solar companies must pursue a cycle of cost reduction based on sound practices akin to those driving semiconductor companies enslaved by ‘Moores Law’. When companies fail to keep up they can go out of business fast (i.e., Solyndra). At the heart of the complaint against the Chinese is the belief that the Chinese are not playing fair. That just because they have achieved scale and scope, have major market shares here and abroad, and that the price for Chinese modules are not commensurate with their costs (i.e., selling modules below their cost).
Cost matters: are the Chinese cheating? No
It does not seem like the Chinese are cheating by our analysis below, but they are doing a better job lowering costs than even we estimated. Thus, there may be substance to claims that the Chinese are dumping, but the politics seem to us the primary driver rather than valid arguments based on the merits. Here is what we know.
In our latest PV Report (Figure 4), a quarterly report provided to the top companies in the PV supply chain, we conducted a Cost Simulation Analysis beginning with a 1Q 2011 basis. We used Trina Solar to conduct our estimates. Trina’s cost per watt as per their filings stood at $1.16/W in 1Q11. Their price was $1.72/W permitting a 32% margin. Of the company’s cost, $0.43/Wp was silicon and the rest, the non-silicon costs, was $0.73Wp. So, if the question is about selling for $1/Wp when costs are higher than that, the 1Q 2011 numbers suggest the Chinese are selling below costs. However, 1Q 2011 isn’t the subject of the claim. We now have a framework to look at the relevant data.
Trina’s Actual 3Q11 cost stood at $0.98/W based on polysilicon cost $40/Kg and a module efficiency of 15.30%. On the surface of it, the SolarWorld petition has no merit, so what are the industry conditions or the political considerations that drove the company to bear witness against the Chinese and the ITC to take it up officially?
First, this year has been a financial disaster for all but a few solar companies as prices collapsed and volumes dried up for most companies. During 2011, c-Si technology demand is approximately 11 to 13GW compared to ‘economically viable supply’ of approximately 26GW. This oversupply has resulted in steep price declines (Figure 5), and the situation looks to continue in 2012 as well.
Second, as the year has unfolded, most US and European solar companies saw their rankings for operational performance drop significantly and their banks and financiers pull back credit and capital. A year-to-year financial comparison of ten solar companies ranked by AEI for returns and margins tells a story of falling rankings for all but one American company, First Solar. The same ranking story illustrates better performance for almost all of the Chinese. Again, American and European firms are falling back fast while Chinese firms have been moving up (Figure 6). This makes for impassioned politics, but it does not make an antidumping case in itself. It does, however, increase the number of stakeholders harmed by the success of the Chinese. Politically, this adds fuel to the fire.
Of the summary list in Figure 7, the top module producers are mostly in China. The two companies on the list with a presence in the US are First Solar and SolarWorld. SunPower is another, but it didn’t make the list. First Solar makes its products overseas and some in the US. SolarWorld makes materials here and the majority of its modules in Germany. Other companies in the US with plans to scale up but are not on the list number about 20. GE, Abound, and several others appear to have sufficient backing to grow manufacturing in the US. Many of the rest are capital starved and those like Solyndra may be effectively priced out of the market when c-Si module prices are $1/Wp. Not all of these companies are pushing the trade complaint. SolarWorld and five others are.
What’s at stake?
The growth of clean solar energy installations around the world are at stake should a clean energy trade-war erupt between the US and China. The California example proves a point – when systems prices fall volumes go up.
Solar systems last 20 years or more when developed properly using high quality modules. The output, electricity, combined with income from subsidy and or not paying the utility for it when they charge more, green credits, etc. produces a return. When that return is more than other returns, the excess return is positive. That drives capital into investing in solar energy. The solar market around the world is driven by positive excess returns. It’s a good thing, too. It is the very driver voters want no matter what your political party or philosophy. Higher module prices are likely to lower the excess return putting solar energy at risk of losing years of economic potential as a result.
Excess returns in the US
A victory by the US in a antidumping trade case against China, should a case be made, may be much worse for the US solar industry overall considering the global leadership enjoyed by US chemical and capital equipment firms. However, a US victory in a case driven by the facts, and not driven by foreign influence (i.e., Mr. Asbeck) and/or wrong-headed politics, may balance the playing field and renew innovation in the industry. Innovation has and will always be paramount. R&D spending in PV at the module step is about 3.4% of revenue if we use $1/Wp. So, as a vital part of the national interest to deploy clean energy more cheaply than sources of electricity generated using fossil fuels, research and development spending for the industry seems too low. Making the case that this is relevant to a “go, no-go” decision for the US ITC is at the moment unknown to us. That said, it is interesting, and it should not go unnoticed, that upstream R&D spending essentially doubled. Therefore, it can be said that the Chinese have responded to the need to lower costs. Has their response netted results that defend their $1/Wp selling price we see in the market today?
It seems certain, however, that a victory in any trade case brought rightly or wrongly against China would increase system prices, and as a result, solar energy installations would likely fall commensurate with lower returns brought on by higher prices. For most Americans, and I can only guess, for most Chinese, the question of right or wrong matters. So, if the ITC probe leads to a well founded basis for an antidumping suit against the Chinese, and the ITC prevails in its case, then the solar industry will be required to adapt. Unfortunately, it will also mean potentially years of backsliding. If a suit isn’t brought, or it is brought but lost, the solar industry will find that scale and scope matter and that the current technology seems to have a sufficient (i.e., good enough) trajectory to achieve grid parity.
The implications may mean that initiatives like “Sun Shot” will prove difficult to maintain funding as the existing technologies blossom to create the new clean energy landscape. The DOE’s recent focus on reducing ‘soft costs’ and other balance of systems costs and the fact that the module is now only about a third of systems costs is changing the cost reduction focus away from module technologies. That said, the DOE isn’t throwing in the towel on new module technology breakthroughs. DOE bets could revolutionize the solar module industry and rewrite model technology economics.
In the final analysis, it is interesting to consider that US Lawmakers may be forgetting is this – the US is a global powerhouse in the manufacturing and supply of chemicals and advanced materials for everything from semiconductors to solar PV modules, products made in China with good old American quality goods coming from dozens of states across the Union. Just which American companies are being harmed and why? What will be the jobs lost here at home if the PV market tanks on the ultimate outcome of the suit? We may learn that the foreign interests and personalities behind initiating the complaint are interests with potentially flawed cost structures, poor investments and may care more about “protectionism” and nothing about “fairness”. They may be sore at getting whopped by the Chinese and acting out to save themselves by crying “foul”. If that turns out to be the case, then you can be sure that we will see the SolarWorld limo run out of gas, and those who thought it was a good idea to get on board pile out in a hurry, and the likely bankruptcies of those companies that cannot beat the Chinese at their own game – all this provided the game is fair. That is what the ITC will now consider as they prepare to get in the SolarWorld limo, or pass it up.
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