By Jeff Ferry, CPA Research Director
Later this month, President Trump faces one of the biggest trade decisions of his presidency.
By Jan. 26th, the president must decide whether to levy duties on solar cell and module imports, and what level those duties should be. The International Trade Commission (ITC) found in September that the industry has suffered injury from imports from China and elsewhere, and unanimously recommended that duties should be levied. The two complainants, struggling solar manufacturing companies Suniva and SolarWorld, have each said the recommended duties are not high enough to save the manufacturing industry, while the solar installers’ trade association, the SEIA, has loudly protested that duties could have a negative impact on industry growth.
For us it’s clear that the huge volume of imports (some 90% or more of the US market, on our estimate—we are not aware of any official figures on import share) was only possible because Chinese national, provincial, and local governments have supported and continue to support the growth of the solar cell and module industry. Today China controls some 70% of global solar cell production. The US industry would likely cease to exist within a few years if no duties are levied. The president should impose not just duties, but quotas too, to prevent the Chinese industry from absorbing losses to wipe out the US industry.
But we believe there is a larger opportunity. The federal government should aim to rebuild the US industry, including its supply chain. In the long term, this would benefit the industry and American consumers. Below we outline the main points of our solution.
Solar energy is essential to our future. Virtually all experts agree that renewable energy must fulfill a larger portion of US energy needs, for security, environmental, and cost reasons. Solar is likely to produce the largest share of renewable energy because solar energy costs are on a downward curve. Solar energy is cleaner, and will ultimately be cheaper, than fossil fuels or wind energy. As a semiconductor technology, innovation is likely to drive costs steadily down, potentially spawning other industries and applications well beyond the (huge) electric power opportunity. Solar has the potential to employ many thousands of Americans.
On the national security side, the US needs to have the resources to supply a large part of its own energy needs. It would be a shocking situation if after nearly half a century of wrestling with the consequences of being dependent on the Mideast for our fossil fuel needs, we went on to surrender our capacity in solar power to China, which is plainly more of an economic rival to the US than any of the oil-producing nations in the Mideast.
The problem with relying on narrow antidumping case remedies, even a Section 201 case like this one, is that it addresses wrongs committed by importers in a narrow, legalistic way, rather than larger US objectives. The confidentiality requirements in an ITC case make it difficult for the wider public to fully understand the industry situation and the ramifications. In the ITC’s 400-page report and summary of its conclusions, virtually every significant number regarding the performance and health of the US solar industry is redacted out. The reader is simply not aware that the industry is currently in a deep slump. We try here to shed more light on solar, an industry shrouded ironically in darkness.
Most of the technology for photovoltaic solar power was invented in the US. Early versions of solar panels were developed for our NASA space program, to generate electric power for space capsules. But in the early 2000s, the Chinese government decided to target a dominant worldwide position in the solar manufacturing industry. The Chinese built large solar cell manufacturing facilities, to exploit the huge scale economies in semiconductor production to drive the unit price down dramatically. According to various press reports, solar panel prices plunged by 80% between 2008 and 2013, and have fallen another 50% since then. The effects of surging Chinese production were quickly felt in the US market, as can be seen in Figure 1. In almost every year since 2005, our imports of solar cells and modules rose by double-digit percentages, peaking at $8.3 billion in 2016. It was these price declines that doomed Solyndra to bankruptcy in 2011, despite $200 million in venture capital and a $535 million loan guarantee from the federal government. The problem was the US government did not comprehend the determination of the Chinese government to dominate the industry. The US government aimed for a “level playing field” while its competitor was targeting worldwide domination and backing its plan with the resources of a multi-trillion dollar command economy.
Figure 1: US Solar imports peaked in 2016 at $8.3 billion
Suniva and SolarWorld deserve to win the ITC action, and the president should grant them duties for four years at the level they have requested, 50% tariffs on top of the import prices. But the US government should go further. It should focus on the end goal, not just remedies for past wrongs. The end goal is solar energy independence for the US. That means a market in which 75% of US consumption is delivered by US production. Only this way can we become self-sufficient in solar power and enjoy the fruits of a high-value, high-growth tech industry on our own shores.
Can we really move from 90% dependence on solar imports to 75% domestic production? The goal is easier to achieve than it may seem. In addition to Suniva and SolarWorld, there are two other US solar cell producers, First Solar and Stion, using a variant of the technology, so-called thin-film cells, which is more expensive but higher-yielding. And there is also Elon Musk’s Tesla, whose interest in solar cell production is large, but with an uncertain future. Industry experts say it takes twelve to 18 months to build a greenfield solar cell production site and bring it up to full production. A tariff of some 50%, combined with quotas to ensure that imports continue to flow but at annually declining US market shares, would enable all these companies to commit to the market, attract capital, and build larger production facilities. New companies (or some of the 20-odd companies that have quit the industry) would probably invest too. The most important feature of such a plan would be its long-term commitment. It would take at least five years, perhaps as much as ten, to get up to a 75% US market share. That long-term commitment is vital to give all industry players the confidence to invest in the future.
Make the Chinese Pay
Since the 1990s, the Chinese government has been ruthless and uncompromising in taxing its own population to finance its growth to worldwide leadership in a growing list of critical industries. (I use the word “tax” in the sense of extracting cash from the public; in fact the Chinese use a wide range of tactics such as fixing wages at low levels, forced savings at fixed low interest rates, and import taxes, to extract resources from its own population to invest in industry.) With solar power, the US has the opportunity to take some of this money from China for our own benefit. If we assume that in 2018, we import the same $4.4 billion of solar components that we imported last year, a 50% import duty would raise $2.2 billion. This is a huge amount of money. The federal government should return this money to the industry, and our understanding of Section 201 of the 1974 Trade Act is that the president is empowered to provide relief to the industry as he sees fit. I would suggest that 25% of the funds go to the manufacturing industry to help them recover from their losses from unfair competition, and the remaining 75% be used to stimulate demand for solar systems. In this way, solar demand would continue to grow, despite the higher domestic prices for solar components. All this money should be disbursed by the government with conditions attached. The government should focus on ensuring the survival of a minimum of four significant US producers in the market, and with importers supplying a significant share too, that would ensure a competitive market.
The estimated $1.65 billion of annual duties that will be returned to the industry should be used to drive up consumption of solar systems in all three main markets: utilities, commercial applications, and residential. There are currently two stimulus schemes in operation nationally and in many states. One is the federal investment tax credit which provides for credit to companies that invest in solar. The other is net metering agreements (NMAs), allowing residential solar power users to sell their excess power back to the utility at retail rates. With over a billion dollars of annual funding to lubricate the system, the federal government can stimulate demand in such a way that all the players feel advantaged.
The funds should be administered by an independent commission composed ideally of experienced businesspeople with no interest in the solar industry. Congress, and regulatory agencies staffed by civil service and/or political appointees have proved inadequate to manage federal funds in a disinterested fashion. Today solar accounts for only 6% of renewable production, and 0.9% of total US energy production. A commission of independent businesspeople given a target of say 15% of US energy supply in ten years would be more likely to succeed and more impervious to the power of Washington lobbyists than any existing agency.
What About Jobs?
It is in the jobs discussion that the US complainants have paid the steepest price for focusing narrowly on the ITC trade case rather than the broader issue of US self-sufficiency in this vital energy source. As a consequence, Suniva and SolarWorld risk losing the public relations battle. The solar installers’ trade association, the SEIA, has waged a well-funded, largely successful campaign to convince the American public that as many as 80,000 jobs are “at risk” should a duty be levied on the industry. After research, we believe this number is such an exaggeration that it is fair to call it a fiction.
The SEIA and its sister organization the Solar Foundation publish a document they call a National Solar Jobs Census, which claims that the solar industry employs 260,000 Americans—or 260,077 they claim with spurious precision. The largest portion of that figure is made up of 137,133 employees working in “installation.” However, the federal government’s Bureau of Labor Statistics (BLS) also publishes data on the industry. According to BLS data, in 2016 there were just 11,300 solar installers in the US.
We contacted the SEIA and Solar Foundation to ask them to explain how they can justify a number 12 times larger than that of the BLS, one of the world’s most respected sources of independent economic data. Solar Foundation Communications Manager Avery Palmer said they stand by their 137,133 number and said the Foundation counts other employees of solar installation companies, not just installers. Their figure, he said, “also includes management, accountants, designers, and other back office staff.” But our discussions with industry executives (as well as common business sense) confirms that non-installation staff typically make up from one third to two thirds of a solar installation company’s workforce. No company could survive with eleven support staff for each installer. For example, according to its 2016 annual report, Vivint Solar, a marketing-intensive publicly listed solar installer employs 1,140 installers out of a total headcount of 3,001. Vivint has significant market share: it did 2,600 residential installs a month, for a total of 222 megawatts installed in the boom year of 2016. Accordingly, a reasonable estimate for the size of the US installer industry might be some 22,000 people.
Other employment figures in the Solar Foundation “Census” appear similarly inflated. We might hazard a guess that the entire US solar industry employs some 30,000 people. What about the SEIA’s other claim, that duties raising the price of solar panels could threaten “one third” of those jobs? The problem with this claim is that today, in early 2018, the solar industry is already in a short-term recession. According to recent estimates, installations in 2017 fell by some 15% from 14 gigawatts (GW) in 2016 to 12 GW in 2017. The fall was the result of unsustainably high demand in 2015 and 2016 as customers rushed to take advantage of low prices and beat feared tax credit reductions. Our industry sources speak of a year-on-year decline of some 30% in the residential market. Vivint Solar’s filings show its megawatts installed in Q3 2017 were 20% below the year-earlier level.
The Solar Foundation was aware of the slowing market in their 2016 Census. So how did the slump affect their own numbers? Not at all! They forecast a 12% increase in the number of installers despite the slumping market! The Solar Foundation, funded by installers and foundations that lobby for renewable energy, appears to be unable to separate economic analysis from industry boosterism. Yet, there’s no doubt that a rise in prices of solar cells and modules due to the imposition of duties would have some modest negative effect on demand in 2018 and beyond. That’s why Chinese money should be used to stimulate US demand for US products.
We discussed our proposal with Frank Kneller, CEO of solar installers Sungevity, headquartered in Temecula, California and number four in the residential solar market with 648 employees. Kneller told us some of the large players who rushed into the residential solar business are finding it hard to make a profit. “It’s not a technology business, it’s a residential construction and home improvement business,” he said. He would welcome government action to drive up demand for solar power. “The solar industry doesn’t do much consumer education, and there’s a lot of misinformation out there,” he said. “Education from an unbiased third party would be useful.” He added that as the industry matures, it can offer employment for thousands of people, in manufacturing as well as installation.
“It’s important to create jobs here in America. As solar gradually replaces coal as a source of power, we can provide jobs for those folks. These are people who are used to working with their hands. Installing solar panels on a roof in the blazing sun or frigid cold is tiring work, but you won’t get black lung from it. If we manage it right, this can be a great industry and put a lot of Americans to work.”