Friday, February 4, 2011

Is Chinese Clean Energy Competition Good or Bad for the U.S.?

Evergreen Solar, the third-largest producer of solar panels in the U.S., will be closing its main plant in Massachusetts, laying off 800 employees, and moving its operation to central China.  Lower wages usually explain why businesses make such moves, but for solar panel manufacturing labor makes up a minor share of total operating costs.  Evergreen’s advantage from relocation lies in obtaining a large loan at a low borrowing rate from a state-owned bank with the help of its local Chinese partners.  As the result of this and other kinds of subsidies, Chinese manufacturers can sell solar panels in the U.S. at a $1.60 per watt, well below Evergreen’s $2 a watt U.S. manufacturing costs.  Chinese solar panel factories account for a little over half the world’s production and control almost a quarter of the U.S. market.  In both solar and wind energy, China has followed a proven strategy of inviting in foreign companies, learning their technologies, and subsidizing the growth of domestic spinoffs.    With an expanding domestic market for clean energy, government requirements for domestic content, and subsidized loans and site costs, Chinese solar manufacturers have quickly achieved scale economies and reduced production costs, allowing them to outcompete their rivals on the global stage.    China also invests heavily in science and engineering education with the hope of becoming its own innovator in green technologies.  On top of this, China depresses the value of its currency in international markets, effectively subsidizing its exports, although an accelerating Chinese inflation rate is eroding the benefits of an undervalued currency by boosting export prices.  Government-aided growth of China’s clean energy sector have many wondering about U.S. future prospects in this field.  
An expanding domestic clean energy sector could be an especially powerful engine of U.S. employment growth by staunching the current drain on domestic economic activity from imported petroleum.  When you buy a gallon of gasoline, almost 90 cents on the dollar goes to oil sheiks and petroleum dictators around the world with little of that finding its way back to the U.S.  If China takes over the U.S. clean energy market, one drain would in effect be substituted for another.

A further look at the market for solar energy suggests, however, that worries about Chinese competition may be overstated.  Solar cell modules in the U.S. currently accounts for about half the cost of an installed solar system (a bit less for residential and a bit more for commercial and utility systems).  Module prices presently run about $2 a watt, but are dropping rapidly in part because of Chinese competition.  The magic benchmark of $1 a watt where solar begins to outcompete conventional energy seems well within reach.  If this benchmark were achieved today, solar module costs would drop to about a third of the total for solar installations.  This means that as much as two-thirds of this cost would go to domestic businesses that manufacture supporting equipment for solar and undertake system design, installation, and maintenance.  In a worst case scenario where the Chinese fully capture U.S. solar panel sales, the domestic content of the solar industry would still be substantial, and replacing fossil fuels with solar would still provide a significant boost to the U.S. economy.  The Chinese could be doing us a favor by driving solar panel costs down to the point where solar outcompetes fossil fuels.  The U.S. Department of Energy originally projected solar module costs to not drop to near a dollar a watt until 2020, but this target will now be realized much sooner than expected due in part to competition from low cost Chinese manufacturing.  
Complete Chinese dominance of the solar module market seems unlikely given the U.S. capacity for technological innovation.  Arizona’s First Solar, the world leader in thin film solar technology, claims that it has already cracked the $1 a watt cost barrier, suggesting that it will be close on Chinese solar heals in the global marketplace.  Thin film panels are made from less costly cadmium tellurium instead of silicon.  The primary customers for thin film are utilities because of lower solar conversion rates and larger space requirements, not rooftop installations.  Some analysts predict that thin film costs per watt will fall to 65-75 cents by 2012.  
Without further action, the future of clean energy looks bright in the U.S. even with stiff competition from abroad.  Nonetheless, placing a price on carbon emissions either through cap and trade or a carbon tax would move the coming clean energy revolution along even more quickly.  Doing so would take away an unfair subsidy that fossil fuel producers now get for their zero cost use of the global atmosphere to dispose of waste carbon and other pollutants.  Removing this subsidy would increase the cost of fossil fuels, accelerating the shift to clean energy.  A price on carbon has the added virtue of providing a revenue source for doing many good things such as reducing the federal debt, decreasing economic inequities, accelerating clean energy development, and expanding energy efficient public transit.  
With the Republican ascendancy in the recent election, the chances for cap and trade or a carbon tax seem remote.  Nonetheless, recent talk of major tax reform to reduce the federal debt could open up an opportunity in the future for placing a price on carbon.  A carbon price could easily generate enough revenue to cut the national debt in half over the next forty years with funds left over for other purposes.  Despite poor prospects in the immediate future, the eventual adoption of a price on carbon remains a distinct possibility.  In the meantime, the near-term political prospects for a clean energy standard seem to have brightened as a reasonable “second best” approach.
In his recent State of the Union, President Obama called for a requirement that utilities generate 80 percent of their energy from clean sources by 2035.  His definition of clean energy includes nuclear power, clean coal, natural gas, as well as solar, wind, and other renewable sources.  Given the high cost of nuclear and clean coal, they will probably play a minor role in future electricity generation, but may bring political support from a few Republicans.  Natural gas emits about half the carbon as coal per unit energy, but remains a big source of carbon pollution.  Environmentalists question its inclusion as a clean energy source, but political realities make it tough to leave out.  Even with natural gas in the mix, the role of solar and wind in meeting the clean energy 2035 target would likely be substantial and could accelerate the decline in cost per watt for these sources through market expansion.  Combined with increased CAFE mileage requirements for motor vehicles and tightened efficiency standards for appliances, a clean energy standard constitutes a reasonable strategy for moving us along to a wind and solar based energy economy.  
Increased competition from China may turn out to be a blessing in the legislative arena by placing pressure on lawmakers to do something that will benefit the U.S. clean energy sector.  China’s clean energy advances also give it a large and growing economic interest in cutting its own carbon emissions, which is especially important since it is the world’s largest emitter.  In the larger scheme of things, Chinese competition may well be a good thing for both the U.S. economy and the global environment.  


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