The U.S. 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 U.S. ITC will soon 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 the prospect of trade war between the U.S. and China over renewable energy including photovoltaics in 2012 is very real -- and it could not be timed any worse for an industry suffering from oversupply and dwindling finance.
The Antidumping SolarWorld Limo: Should We Get In?
Solar Energy Industries Association; SPI 2010
SolarWorld is a global company with operations in the U.S. 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 really wanted to impress, he might use the one shown above, as he did in L.A. 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 an ever-present push to reach grid parity? Or is the $1/Wp selling price evidence of unfair trade? American Sam Walton, an early investor in McMaster, the predecessor company to First Solar, is an icon of business throughout the world. Walmart’s credo was and is lower prices, increase quality and open new markets. This is what we all want from clean energy and solar electricity in particular. So, while it may not be exciting, deciding to keep walking or to get in the SolarWorld antidumping limo may be as simple as asking: do we want to achieve grid parity sooner rather than later?
Some complain that in China, capital is free. There is a lot of evidence that capital incentives are widely used in China, and that capital in China is relatively cheap. The ITC lawyers will likely consider these capital incentives for unduly cheap factories, etc., as part of their investigation. However, it’s the cash cost of c-Si (crystalline silicon) modules that the ITC may care more about. While we all like cheap goods, we don’t want them if they are hurting competitive U.S. companies, so it is critical not to dismiss the complaint outright.
The legal question of dumping is for ITC lawyers to determine as they evaluate the merits of a possible case against China. The economics of PV system costs are for the analysts and the industry supply chain to consider. Here is what we know. PV system prices are down 50 percent in three years, and an additional system price reduction of 50 percent will achieve grid parity, the holy grail of renewable energy advocates in major markets throughout the industrial world.
Historical System Prices ($/Wp)
Lower Solar System Prices: Module Costs
The schematic shown below tells it all. Solar companies must pursue a cycle of cost reduction based on sound practices akin to that driving the semiconductor companies enslaved by Moore's law. When companies fail to keep up, they can go out of business quickly (e.g., Solyndra). At the heart of the complaint against China is the belief that the Chinese are not playing fair -- that just because they have achieved scale and scope and have major market shares here and abroad, the price reductions achieved are not commensurate with their costs.
The Prime Directive: Cost and Price Reduction
Source: AEI Consulting
Cost Matters: Are the Chinese Cheating? No.
It does not seem like the Chinese are cheating, according to our analysis. However, they are doing a better job lowering costs than even we estimated. There may be substance to claims that the Chinese are dumping, but the politics seem to us to be the primary driver, rather than valid arguments based on the merits.
Here is what we know.
In our latest PV report, 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 its filings, stood at $1.16 per watt in 1Q11. The firm's price was $1.72 per watt, permitting a 32 percent margin. Of the company’s cost, $0.43 per watt was silicon, and the rest, the non-silicon costs, were $0.73 per watt. So, if the question is about selling for $1 per watt 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. Still, we now have a framework to look at the relevant data.
The Cost Details: The Basis 1Q 2011 and the 2013 Roadmap
Source: AEI Consulting
Trina’s Actual 3Q11 cost stood at $0.98 per watt based on polysilicon costs of $40 per kilogram and a module efficiency of 15.3 percent. On the surface, 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 compelled 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 in the industry. During 2011, c-Si technology demand is approximately 11 to 13 gigawatts against an ‘economic supply’ of approximately 26 gigawatts. This oversupply has resulted in steep price declines. The situation looks to continue in 2012, as well.
The c-Si PV Supply Chain in 2011: Oversupplied
Second, as the year has unfolded, most U.S. and European solar companies saw their rankings for operational performance drop significantly and had their banks and financiers pull back credit and capital. A year-to-year financial comparison of 10 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 firms. Again, American and European firms are falling back fast, while Chinese firms have been moving up. This makes for impassioned politics, but it does not make an antidumping case in and of itself. It does, however, increase the number of stakeholders harmed by the success of the Chinese. Politically, it adds fuel to the fire.
Slipping in the Rankings: European and U.S. Producers
Source: AEI Consulting, company reports
'ROA' and 'Net Margin' represent the averages for the past four quarters ending 3Q10 and 3Q11, respectively, for the 3Q10 and 3Q11 reports
According to the summary list shown below, the top module producers are mostly in China. The two companies on the list with a presence in the U.S. are First Solar and SolarWorld. SunPower is another, but it didn’t make the list. First Solar makes some of its products overseas and some in the U.S. SolarWorld makes materials in the U.S. and the majority of its modules in Germany. Other companies in the U.S. with plans to scale up but which are not included on the list number about 20. GE, Abound, and several others appear to have sufficient backing to grow manufacturing in the U.S. Many of the rest are capital-starved, and those, like Solyndra, were effectively priced out of the market when c-Si module prices fell to $1 per watt. Not all of these companies are pushing the trade complaint. SolarWorld and five [unnamed] others are.
What’s at Stake?
The growth of clean solar energy installations around the world will be imperiled should a clean energy trade war emerge between the U.S. and China. The California example makes a salient point: when system prices fall, volumes go up.
Solar systems can last for 20 years or more when developed properly using high-quality modules. The output, electricity, combined with income from subsidies and/or not paying the utility for the electricity when they charge more than what it costs from your system, 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 U.S.
A U.S. victory in an antidumping trade case against China -- should such a case be made -- may be much worse for the U.S. solar industry overall, considering the global leadership enjoyed by U.S. chemical and capital equipment firms. However, a U.S. victory in a case driven by the facts, and not driven by foreign influence (i.e., Mr. Asbeck) and/or wrongheaded 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 percent of revenue if we use the metric of $1 per watt. 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 U.S. ITC is at the moment unknown to us. That said, it is interesting, and it should not go unnoticed, that upstream R&D spending has 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 per watt selling price that we see in the market today?
R&D Spending on PV Cell/Module: Unchanged
Source: AEI Consulting, company reports
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, then the solar industry will be required to adapt, and it will -- but it will mean potentially years of backsliding. If a suit isn’t brought, or if 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 SunShot 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 the system costs are 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 what U.S. lawmakers might be forgetting is this -- namely, that the U.S. 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 in dozens of states across the Union. Just which American companies are being harmed and why? How many jobs will be lost here at home if the PV market tanks as a result of 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 and poor investments, and that they may care more about protectionism than they do about fairness. They may be sore at getting whooped 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 will pile out in a hurry. We will also likely see the 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 to let it pass them by.
Joseph Berwind is Managing Partner at Alternative Energy Investing, LLC and Managing Partner at AEI Consulting.
Here is Greentech Media's recent coverage of the trade issue:
- We covered the initial CASM announcement here and here.
- We published a primer on the mechanics of the way these cases are handled by the ITA here.
- Statements from a variety of Chinese PV panel manufacturers were compiled here.
- Here is President Obama voicing his administration's leanings on this matter.
- We published a statement by CPIA, the Chinese Photovoltaic Industry Association, in which they make a claim that American firms are guilty of dumping polysilicon on China's shores. CPIA is alleged to be led by LDK and GCL Poly. Another claim is being made about unfair American subsidies, as well.
- CASE tried to encourage a spirit of de-escalation amongst CASM and CPIA here.
- We covered the ITC decision here: Solar Panel Dumping Claim: ITC’s First Decision Is Today