TODAY’S STUDY: Should U.S. Solar Be More Like China Solar?
The New Solar System; China’s Evolving Solar Industry And Its Implications for Competitive Solar Power In the United States and the World
Jeffrey Ball, Dan Reicher, Xiaojing Sun, Caitlin Pollock, March 2017 (Stanford Law School)
Solar power is undergoing a revolution. Over the past decade, an energy source as old as the planet and theoretically all but limitless has plummeted in cost and begun in some places to be harnessed in large volume. This dynamic is disrupting the modern energy system and, as energy disruptions always do, rattling the geopolitical order. In the process, the industry that produces the equipment to convert sunlight into electricity is simultaneously reeling, consolidating, and surging. These twin transformations—one of the global energy system, one of the global solar industry— carry profound implications for national economies and for the planet. At the center of both transformations sits China.
The New Solar System illuminates key and littleunderstood changes that are remaking the solar enterprise—in China and thus in the world. Based on this analysis, it recommends changes in U.S. solar policy—particularly timely with a new U.S. administration and Congress—that would put solar power on a more economically sensible path toward environmentally significant growth.
A Global Solar Strategy: Harnessing Comparative Advantage to Cut Solar's Cost
Solar power has grown massively in recent years and yet it still represents only about 1% of global electricity generation. Mainstream observers now predict that solar photovoltaic could provide 16% of global electricity by mid-century, and credible sources predict even higher levels.
Whether solar power grows this significantly, and whether in the process it makes much environmental difference, will depend in large part on whether governments approach it with a new level of economic efficiency. Many of the solar policies that countries have adopted thus far have been inefficient. They have achieved, to varying degrees, their stated goals of boosting domestic solar manufacturing or deployment in the near term, but often they have done so in ways that are unable to be sustained—for political or economic reasons or both.
The result, in much of the world, has been wild swings in solar policy, ranging from unnecessarily generous support to unreasonable neglect. That has contributed to a boom-bust pattern in the solar industry that has benefited no one: not investors, solar-technology entrepreneurs, ratepayers, taxpayers, or citizens around the world who could benefit from an energy system decarbonized sooner rather than later. Enabling solar power to scale to a level that can help curb fossil-fuel emissions requires governments to find smarter means of policy and financial support. One key predicate for making smarter policy is taking into account a country’s relative comparative advantage in the rapidly globalizing solar industry: what it does well and what it does not.
The New Solar System does not seek to enable any country to beat another in the global solar industry. It seeks instead to help all countries find their most effective places. By better understanding and playing to their comparative strengths in the solar business, countries would achieve two key objectives. They would reduce the cost for the world of scaling up solar power. And they would be better positioned to fashion policies that maximized the long-term benefit to their own economies from solar’s global growth.
It is important to be clear: This notion of comparative advantage is no rose-colored vision of borderless global harmony. It is the increasing reality of the cutthroat international solar market today. It does not ignore very real tensions between China and the United States, including an ongoing dispute in which each country has imposed solar tariffs on the other, doubts about the protection of intellectual property in China, and concerns by both the U.S. and Chinese governments about national security. Rather, it puts those concerns into perspective, which is something that investors, corporations, and governments try to do every day.
The Chinese solar industry is likely to remain, for the foreseeable future, the major driver of the global solar industry. But this does not mean that China as a country will remain as dominant in the solar industry as it is now. This distinction—China as the leader of the global solar industry but with declining dominance—is crucial in clarifying the roles that other countries could sustainably play in the global solar industry of the future.
This emphasis on economic efficiency in the globalizing solar industry is particularly relevant during the administration of U.S. President Donald Trump, who has talked approvingly of tariffs against China and who has questioned the desirability of U.S. support for renewable energy and of U.S. action to curb carbon emissions.
The New Solar System is based on some two years of work by Stanford University’s Steyer-Taylor Center for Energy Policy and Finance, an initiative of Stanford Law School and Stanford Graduate School of Business. The research was funded by a research grant from the U.S. Department of Energy’s (DOE’s) Solar Energy Technologies Office. Stanford’s Steyer-Taylor Center proposed the research and initiated the grant application to the DOE. The grant provided the center with full independence and authority to frame the inquiry, conduct the research, draw conclusions, and write this report.
Busting Myths About China's Solar Sector…The Maturation of China's Solar Enterprise…Financial Status…Research and Development…Manufacturing…Deployment…
Recommendations for U.S. Policy
The best way for any country—including the United States—to derive lasting economic gain from the growing solar industry is to help maximize the industry’s efficient global growth. This framework suggests three overarching priorities for U.S. policymakers:
• Seek above all else to reduce solar power’s costs. Solar power, despite significant cost cuts over the past decade, remains too expensive to scale to the level that would make a meaningful environmental difference, particularly when its intermittency is taken into account. In 2016, the DOE announced the solar industry had achieved 70% of costcut targets that the DOE had set five years before—and so it unveiled moreaggressive unsubsidized-cost targets for 2030: $0.03 per kilowatt-hour for utilityscale solar, $0.04 per kilowatt-hour for commercial rooftop solar, and $0.05 per kilowatt-hour for residential solar. Reducing the cost of solar energy to this extent would require maximizing international R&D cooperation, manufacturing in the most-cost-effective locations, and improving solar-project permitting and deployment. And it would require significant advances in two enablers—energy storage and transmission—that will be crucial to overcoming solar’s intermittency and its varying availability across regions including North America.
• Embrace the reality of a globalizing solar industry. U.S. policy bearing on solar should reorient fundamentally so that it seeks to leverage, not defeat, China. More than ever before, the solar industries in China and the United States are intertwined: Shareholders across the globe invest in both of them, capital moves between them, many of the same companies are active in both of them, and market dynamics in one influence fortunes in the other. Key players in both countries increasingly believe that they will profit more if each country focuses on exploiting its comparative advantages in the globalizing solar industry than if it orients policy around trying to beat the other. That conclusion marks a major shift from the thinking that prevailed just five years ago, when the solar sector was more a patchwork of small and distinct national industries than the interconnected, international force it is becoming today.
• Focus U.S. federal support for solar primarily on R&D and deployment and only secondarily on manufacturing. Certain types of solar manufacturing in the United States seem increasingly feasible. But U.S. policymakers should regard manufacturing as a subordinate, not a primary, policy goal. Solar manufacturing is unlikely to produce large numbers of U.S. jobs, because it is an increasingly automated process. The majority of solar jobs are in areas other than manufacturing: in sales, installation, operation and maintenance, and R&D.
The United States remains a leader in many aspects of solar R&D. This leadership has been backed by significant U.S.-government funding, and it will be important to solar’s global growth. The United States should:
• Significantly increase U.S. spending on R&D for solar and for solar-enabling technologies such as storage and transmission, in both the public and private sectors, to help propel solar’s global growth and to ensure that the United States remains a leader in it.
• Broaden international solar-R&D efforts to include China so that China’s increasing solar innovation informs efforts elsewhere. For the United States, cooperating with China on solar R&D poses real and important challenges, including concerns about the protection of intellectual property and about national security. But not cooperating with China on solar R&D also presents significant risks, including reduced relevance in the silicon-based solar technologies that command the majority of today’s market.
• Reform a federal policy that requires that those who accept federal R&D funding, including for solar R&D, promise to manufacture "substantially" in the United States any technologies that they develop through that R&D. According to a wide range of U.S. solar executives, scientists, and even government officials involved in implementing it, this provision is outdated and counterproductive. In its effort to maximize U.S. solar-manufacturing jobs, it risks weakening U.S. solar R&D, an activity with potentially greater long-term economic value to the United States than solar manufacturing.
U.S. solar manufacturing is rising significantly but from an extremely small base. As noted above, the United States in 2016 accounted for 0.1% of global wafer manufacturing capacity, 1% of global cell manufacturing capacity, and 1% of module manufacturing capacity. Several new or expanded U.S. solar-cell and -module factories are under construction or expected to be built over the next two years. Yet predictions are that, at least in the near term, U.S. solar manufacturing will remain small in the global context. The key opportunity for the United States is to identify those sorts of solar manufacturing that are likely to be economic absent significant government subsidy. The New Solar System concludes that U.S. solar manufacturing is likely to prove economically viable for three categories of solar products:
• products for U.S. consumption that are expensive to import;
• export-oriented goods that the United States can competitively produce at large scale because of cheap U.S. natural gas;
• and export-oriented goods developed with U.S. R&D talent that the United States is well-positioned to manufacture in relatively small quantities in initial factories but that may shift to cheaper manufacturing locations overseas as they scale up.
Around the world, solar manufacturing, like manufacturing in many other sectors, has centered on particular geographic clusters that leverage well-developed supply chains, established transportation infrastructure, abundant low-cost energy, and often partnerships with local R&D institutions such as universities or government affiliated labs. The United States has focused on developing two solar-manufacturing clusters: California’s Bay Area and New York’s upstate region near Buffalo. One way to grow the upstate New York solar cluster, in particular, would be to expand an existing solar-R&D effort there to include companies beyond U.S.-based firms.
An important element of China’s buildup of its solar-manufacturing enterprise has been the financing that Chinese lenders have provided to China-based solar firms for their international expansion. The U.S. Export-Import Bank is the subject of ongoing political disagreement but has played, and could continue to play, an important role in exports by U.S.-based solar firms.
Certain areas of the United States—particularly the Southwest, Mountain West, and California— have some of the best solar resources on the planet. Largely in those regions, U.S. solar deployment is surging. In 2015, the United States was the third-largest deployer of solar modules in the world, behind China and Japan. It installed 7,200 megawatts of solar capacity in 2015, up 16% from 2014. Cumulatively, the United States installed 25,600 megawatts of solar capacity as of 2015, placing it fourth globally, behind China, Germany, and Japan. And in 2016, new U.S. solar deployment increased hugely to 14,600 megawatts, essentially twice the figure for 2015. Yet despite this growth, the United States still ranks 25th globally in the percentage of its electricity—just under 1%—that it generates from solar.
In scaling up solar power for itself and for the world, the United States could do much more. It should focus on two broad categories.
The first is U.S. domestic energy policy. U.S. solar deployment would benefit from:
• establishing a significant U.S. price on carbon, the single most important policy step the country could take in incentivizing private enterprise to develop and deploy technologies, such as solar, that curb climate change;
• continuing the Clean Power Plan, a federal rule finalized in 2015 that would cut greenhouse-gas emissions from U.S. power plants; though the plan is the subject of current legal challenge, and analysts differ as to how significantly it would drive solar deployment, it would help propel the shift from higher-carbon to lower-carbon electricity sources, and so, if it survives in the courts, the federal government and the states should implement it;
• achieving an equitable outcome to intensifying disputes over "net energy metering," a state-level policies that require utilities to pay consumers for electricity—generally solar power—that the consumers generate and feed into the power grid;
• supporting state renewable-portfolio standards (RPSs), which have been key drivers of solar deployment in the United States and remain important because solar power is, in most places, more expensive than conventional power;
• extending to solar energy—in the wake of a 2015 Congressional decision to phase down the federal investment tax credit (ITC) for solar—certain tax benefits enjoyed by fossil-fueled energy projects, including the master limited partnership (MLP);
• learning lessons from successes and failures of federal loans and loan guarantees provided by the DOE’s Loan Programs Office (LPO);
• and ensuring that U.S. federal agencies adhere to the requirements of a 2015 law that requires them to collaborate much more than before in the way they conduct environmental reviews and permitting of a host of large-scale developments, including renewable-energy projects.
The second area ripe for U.S. federal action is to facilitate engagement by U.S. investors and financial institutions in the Chinese solar market.
Several leading U.S. solar-technology firms have sold large stakes or their entire businesses to Chinese investors. U.S. investment banks have been active in helping China-based solar firms tap the public markets for capital for manufacturing, both through initial public offerings and through follow-on offerings. And China-based solar manufacturers are beginning to invest significant sums in developing solar projects in the United States. So far, however, neither U.S. lenders nor U.S. solar developers have been active in China’s burgeoning solar-deployment market.
Now is the time for that to change. U.S. solar companies, investors, and policymakers have pioneered innovative methods of solardeployment financing. In what may prove to be one of its most significant findings, The New Solar System points up rising interest among highranking government officials in China in deploying in China certain U.S.-developed financial structures. Those structures could facilitate both debt and equity financing in China by institutions beyond banks, whose capital tends to be expensive and which have dominated the Chinese market so far. The hope in China is that more-innovative financing methods would reduce the cost of capital, helping expand solar deployment in the largest solar market in the world.
Increasing U.S. financiers’ involvement in China’s solar market inevitably will raise complex issues, including questions about China’s electricitymarket regulations—regulations that currently make it difficult for foreign investors to participate. But the prize is substantial: China plans by 2030 to spend ¥41 trillion ($5.95 trillion) on low-carbon technologies, including solar.
The U.S. government could act as a powerful facilitator of increased involvement by U.S. investors and solar developers in the Chinese solar-deployment market. Doing so could help unleash private capital to combat carbon emissions—as study after study has concluded that private capital will be far more important than direct government spending in cleaning up the global energy system. Amid continuing animosity between Beijing and Washington on many fronts, including on the issue of solar tariffs, the possibility of increased involvement by U.S. investors in China’s solar-deployment market is a significant opportunity.
China and the United States find themselves at an unprecedented moment in the growth of solar power. How they proceed will do much determine whether solar energy emerges as a mainstream energy source and, in the process, as an engine of significant economic growth and carbon reductions. There are many reasons to be skeptical that the world’s two largest energy consumers and carbon emitters will find the will to work more closely together to scale up solar power to meaningfully address the climate challenge. Yet The New Solar System concludes that each of them has an even more-compelling reason to do so: economic self-interest.