Background: On December 20, 2011, Jigar Shah, President, Coalition of Affordable Solar Energy (CASE) and founder of SunEdison, publicly asked Gordon Brinser, President of SolarWorld Industries Americas and the Coalition for American Solar Manufacturing (CASM) to withdraw its petition to the U.S. ITC/DOC against Chinese solar imports for dumping solar panels in the U.S. below cost and receiving unfair subsidies which threaten the U.S. solar manufacturing industry.
Focusing exclusively on price brings neither legitimacy nor clarity.
The U.S. solar industry -- be it at a trading desk or on a rooftop -- is looking for a sensible national energy policy, particularly in the downstream portion where most of the jobs reside and get created. Without that, the parochial interests of the downstream seem to overwhelm any reasonable economic discussion with a focus on nothing but price.
The sole focus on low solar panel prices -- irrespective of how they have come about and the consequences stemming from that -- misses the point.
The broad contours of the issue as it pertains to the solar PV industry are:
-The substitution of market mechanisms with state-sponsored capitalism on China's part
-A policy framework that leads to asymmetric and below-cost pricing, which destroys innovation and competition
-The adherence to agreed-upon and acceptable principles that enable free and fair trade/competition.
The crux of the issue is the rules of engagement on solar PV trade/policy given sovereign intervention from China. When practiced in extreme form, as seen with the solar PV industry, this has led to structural imbalances within an industry with ramifications that stretch far beyond the issue of cheap prices. Individual industries and companies can compete against each other, but cannot compete against a sovereign nation that has currency, capital, taxation, and policy levers at its disposal.
We believe the China dynamic is key to the solar PV industry outlook for 2012 and beyond. If Chinese downstream solar installations are encouraged by policy in a meaningful way then this will be a major positive for the industry/companies, as it will correct the supply-side imbalance. On the other hand, if supply-side support for local solar PV companies continues unabated, and if the U.S. policy response (and possibly that of other countries) involves the imposition of import tariffs or local content requirements, the drag on industry will continue with negative implications for stocks. We expect the industry/companies will eventually adjust to this altered dynamic as they have with the annual reduction of subsidies, but without the benefit of a market mechanism for price discovery.
Currently, the challenges facing the solar PV industry are not necessarily related to cost and technology, as both these metrics are charting a commendable progress path (even without the consequences of capacity-driven excesses from China). The prospect of building a strategic industry, and even more significantly, one that impacts energy, and from a resource that free and plentiful, faces far larger and more complex challenges in terms of sensible/sustainable policy framework and financing.
Rules of engagement are extremely important on matters relating to trade. Defining them is very complex, and abiding by them, even more so, as countries evolve. Defending these rules when they are flagrantly violated requires unmistakable evidence. It's no wonder that the decade-old Doha round of world trade talks stalled as the much-wider societal interests at stake polarized the world in terms of developed versus developing countries, industrial countries versus agricultural countries, and trade/capital movements versus market access/labor movement. A global power shift is clearly underway, and given that globalization has winners and losers, the process of defining, abiding by and enforcing rules of engagement is no easy task.
A supply-side flood (with its attendant positives as well as negatives) is what China has delivered so far in solar PV without touching the demand element that it can unleash in its own backyard, even as it imports a rising percentage of primary energy. We expect China to either rationalize its state-sponsored supply-side excesses or create domestic demand to address some of the structural imbalances that pervade the industry. The point is that a trade/industry policy cannot be sustained with free market capitalism at one end of the trade relationship while a competing sovereign nation on the other side retains a degree of totalitarian control that allows it to engage in economic warfare.
On the other hand, the demand element is largely what the U.S. has, and unfortunately it still does not have a national energy policy that can sensibly match that with competitively fair supply. A valid defense from the U.S on an issue that has a vital bearing at many levels of its society is not a protectionist trade war, but rather a message that free trade does not mean trade that is free of rules. This may prompt China to rethink its approach and look for a way that is a win-win for everyone.
Today, it is solar panels; tomorrow it will be about downstream installations, and beyond that, it can be anything else. If unchecked, extreme trade will be an end unto itself. It is nothing but the economic manifestation of the doctrine of unrestricted warfare (a concept advocated by PLA Colonels Qiao Liang and Wang Xiangsui in a book by the same name).
Hari Chandra Polavarapu is the Managing Director of Solar/Cleantech Research at AURIGA USA LLC.