Has China Won the U.S. Solar War?

Until we are able to develop a strong market for renewables in the U.S., China will continue to reap the benefits.
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On the eve of Chinese President Hu Jintao's state visit to Washington, Evergreen Solar announced that it is closing its Massachusetts factory and moving its manufacturing to China. While President Obama is travelling to Schenectady later this week to a GE plant to talk about the importance of clean energy to the US economy, has the future already passed us by? Conventional wisdom tells a familiar story: China has become the world's largest producer of solar modules because it uses cheap labor, someone else's technology, and "billions" in subsidies to take advantage of other countries' clean energy support programs. Hence, U.S. (and German) taxpayers are supporting Chinese manufacturing and jobs instead of creating domestic industries. The policy prescriptions that follow from this diagnosis are obvious: require domestic content if U.S. taxpayer money is being used for support, restrict imports in other ways, or increase subsidies to U.S. manufacturers.

As satisfying as these prescriptions may feel, the disease we are treating is more nuanced than the Chinese caricature presented above. If we are to understand how to compete against China and to create jobs in the U.S., the renewable energy area is a cautionary tale. It is true that Chinese manufacturers have used cost advantages to try to capture shares in renewable energy markets where policy incentives have helped promote adoption. Moreover, as manufacturing of standard solar modules, for example, is far less complex than electronics manufacturing (much of which moved offshore from the U.S. long ago), we can hardly be surprised that U.S. manufacturers of standard modules have hardly been enthusiastically expanding capacity in the U.S. And it is also true Chinese manufacturers use technology based on breakthroughs developed in the U.S., often in our own National Laboratories and universities.

But the answer isn't to restrict or penalize Chinese manufacturers. If we hope to compete against China, develop new products and create new jobs, we need to understand that we need to change our own game.

The renewable energy examples provide several keys to what we need to do:

First, the bigger advantage that Chinese players enjoy is less manufacturing than access to a wide range of financing. A large part of the reduction in solar prices have stemmed from a significant expansion of polysilicon production in China. These types of large construction projects with uncertain off-takes would be difficult to get financed in the U.S.; Chinese banks fund them readily. Once the polysilicon has been converted into a solar module, Chinese banks offer financing to project developers at attractive rates and maturity; U.S. banks aren't as competitive. The point of this observation is not to encourage the US to merely mimic Chinese lending, but to highlight the role financing plays in renewables. We simply do not have a financing system in the U.S. that is up to the task. Proposed bank capital reserve requirements will only reduce the amount of lending banks will be able to dedicate to smaller, below investment grade borrowers. The new Congress needs to decide whether to take up proposals for establishing needed entities to support renewable energy and energy efficiency projects.

Second, we must also recognize the geographic interconnection between innovation, jobs and markets. China has supported renewable energy not only because there are near-term markets to exploit. Chinese leaders understand that scale matters in capital intensive industries such as energy in achieving global competitiveness, and that the Chinese domestic market will eventually be the biggest. Hence, while the short-term game is the export game, the long-term game is the domestic market and an even larger share of the export market. Once a domestic market develops, manufacturers will get the immediate feedback from consumers that will lead to more innovation in all parts of the value chain. With improved innovation, Chinese manufacturers will be able to offer global consumers greater value at lower costs.

In the U.S., we struggle to develop a domestic market. The U.S. solar industry has been growing, although more thanks to state initiatives than to the federal government. Federal policy still emphasizes innovation over deployment. Sadly, this approach creates dozens of companies developing new technologies vainly hoping they can survive the "Valley of Death" until they can reduce costs enough to gain enough scale, while Chinese companies use scale of "good enough" technologies to lower costs faster. It is far easier for companies to get U.S. government financing for innovative technology than for building technology that already works. We aren't likely going to "out Chinese the Chinese" is commodity solar module costs, but were we to develop a large domestic market, we might be surprised by innovative, non-commodity products (imagine, as an example, a "smart roof" which had a system of solar, energy efficiency monitoring and wiring) that might be developed, with lots of jobs created in train. Even Chinese solar manufacturers are looking to open facilities here as U.S. markets expand.

If the smart roof is too far-fetched, consider this: China is now the world's largest automobile market, although only a small percentage of the population have cars. It is not a foregone conclusion that the internal combustion engine will be the propulsion system of the future in China, just because it is in the US. Since new battery technologies are also getting cheaper through scale, Chinese planners may decide that the investment in gasoline and refining infrastructure is more costly than building a future around electric vehicles. Where we struggle in imagining converting a small percentage of our auto fleet to electrics, we could find that the dominant share of cars sold in China could quickly become electric. Given the subsequent benefits Chinese manufacturers would obtain in scale and innovation, it would make the worries we have about solar panels and windmills pale in comparison.

Until we are able to develop a strong market for renewables in the U.S., China will continue to reap the benefits. Mr. El-Hillow, the CEO of the company moving to China, Evergreen Solar, said "Chinese state-owned banks and municipal governments were offering unbeatable assistance to Chinese solar panel companies." China's real advantage lies in the ability of solar panel companies to form partnerships with local governments and then obtain loans at very low interest rates from state-owned banks. The US should provide its renewable energy firms with similar advantages by creating the Energy Independence Trust (EIT) to provide the same kind of long-term, low-cost loans for clean energy projects that are being offered by the Chinese government. If the US is serious about competing globally in the renewable energy sector, this is a necessary step that we must take.

The challenges facing the US renewable energy industry highlight the broader problem the U.S. faces in its economic relationship with China and other Asian economic powerhouses. Long driven by domestic demand, we have been more than willing to innovate in the US and manufacture offshore. U.S. exports have come from selling products developed for the domestic market. The effect of these steps has been to abdicate market share in export markets to low-cost giants like China and to hollow out domestic manufacturing. The game worked as long as we had strong domestic demand; we didn't need to worry about developing and manufacturing products for global markets. Now that domestic demand is weaker, we need to recognize that our own macro equation has been turned inside out and as the examples of solar and other alternative energy technologies illustrate, new products, new markets, and aggressive financing are leaving us on the outside looking in.

Unless we change our game -- develop local markets with an eye to global markets -- there will be more announcements like Evergreen Solar's.

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