Getting Our Act Together On Solar – Elements of a Winning Strategy
The watchword in today’s global energy markets is change.1, 2 This change in part includes the advance of solar and other renewable energy technologies – advances that can boost economic growth, improve energy security, and help address global warming.3, 4 However, reaping these benefits, and particularly the jobs that go with these global industries, requires a strategic approach to clean technology innovation. This blog discusses how the United States might use an innovation-centered strategy to compete in the increasingly tough global solar power industry.
The U.S. and China are leading players on the clean technology stage. Sometimes they collaborate with each other on research and on deals, and other times they worry about each other as competitors.5, 6 China reaffirmed and strengthened its support for renewable energy with the release in 2011 of its 12th Five Year Plan, which includes targets for substantial wind and solar power deployment through 2015.7, 8 The U.S., although it does not yet have a comprehensive national clean energy policy, supports renewable energy development through short-term programs and many state policies.9 In terms of total investment in clean energy, the two countries have been running neck-and-neck for the global top spot in recent years; in 2011 the U.S. regained the lead for the first time since 2008.10 Meanwhile, industry analysts have named China the most attractive country for overall renewable energy investment, just ahead of the U.S.11
Of course, China and the U.S. are watching each other closely on this front. If this spurs the U.S. to reexamine its own strategy, that would be a positive development. The truth is that the U.S. can remain a leader in renewable energy, but only if it acts strategically.
Solar – a Rapidly Evolving Competition
Solar power is crucial to meeting growing energy demand while limiting the impact of fossil fuels on the climate system. To limit greenhouse gas concentrations to 450 ppm CO2-eq,12 the International Energy Agency (IEA) projects that by 2050 solar power should contribute 11% (4,500 TWh) of global electricity generated as part of a portfolio of technologies, up from less than 1% (20 TWh) in 2009.13 Even though existing national policy pledges fall far short of the 450 ppm scenario, the IEA estimates that they will drive global solar photovoltaic (PV) power generation growth by an average of 15% a year through 2035.14 In 2011 the global market for solar power reached around 27.7 GW of newly connected installations annually, a 67% increase from the capacity connected in 2010.15 Globally, cumulative installations reached 67 GW and have grown dramatically in the last few years.
There has been a tremendous transition in the solar PV industry globally since 2008, when a global oversupply developed, partially driven by a massive solar PV manufacturing build-out in China. For this and other reasons, module prices began a slide that continues today – falling from US$3.80/W in 2008 to $2.40/W in 2010,16 and falling at least another 59% over 2011.17 As some solar panel manufacturers begin to sell panels below cost to clear backlogged inventory, the lowest prices may be unsustainable, though alternatively producers may find ways to keep squeezing costs and reduce prices further.
Need for Innovation
These changes in supply have dramatically impacted trade flows. In 2000 the U.S. held 30% of the global export market in cells and modules, and while U.S. exports have grown dramatically in absolute terms, they have been dwarfed by the rise of exports from China.18 However, the U.S. remains an innovation leader with interests in a wider range of solar technologies than China and maintains a trade surplus when the whole solar value-chain is considered.19
The U.S. and China are currently investigating each other for unfair trade practices in the solar industry, but even if the claims are found to have merit, given the global marketplace a unilateral tariff on imports may not deliver the best outcome. A tariff might afford some protection for U.S. manufacturers in the U.S. market, but not in overseas markets where they have to compete with Chinese companies head-to-head. India, China, and the EU are each projected to install more capacity than the United States, highlighting the importance of considering both the export and domestic market opportunities.20 Continued improvements in price, quality, and efficiency are the reliable, long-term way to maintain global competitiveness – all achievable through innovation.
For U.S. manufacturers to remain players in the global solar market – estimated to be 3,000 GW of cumulative capacity by 2050 in the IEA’s 450 ppm CO2-eq scenario – the U.S. government needs to focus on working with U.S. manufacturers to boost innovation, particularly in the higher-risk technologies that could be significantly cheaper than the current silicon PV technology widely used today.
As Professor Edward Steinfeld of the Massachusetts Institute of Technology points out, we need to understand all phases of energy technology innovation in order to be competitive. He notes that in addition to being good at research, we need to actively pursue the later stages of innovation, “demonstrating, scaling, and improving,” or we risk losing the knowhow to deploy what we invent.21 In what follows, we look at a strategy for solar industry innovation that does more than invest in research and development. In this short space we are not aiming to be exhaustive, but rather to suggest the kind of thinking and elements needed for a successful strategy.
The U.S. Department of Energy (DOE) estimates that utility-scale grid parity in the United States will require large-scale solar installations to cost $1/W,22 which is much lower than the most recent average of $3.75/W.23 (Modules only make up a portion of the total cost of an installation.) DOE’s analysis shows that solar PV will be competitive very soon in Europe because European countries have a higher cost of electricity – but U.S. electricity prices are significantly lower, making reaching a competitive position harder for solar. In response, the DOE Sun Shot Initiative is focusing resources on overcoming the specific challenges that lie between $3.75/W and $1/W, like cheaper ways to manufacture solar cells, easier and more efficient connections to the grid, and new technologies that could turn sunlight into electricity more efficiently. While this is in part focused on delivering competitive solar to the U.S. domestic market, it will also keep U.S. companies in a highly competitive position internationally.
The Sun Shot Initiative is an important program – but touches only part of the support that U.S. entrepreneurs need in order to be successful. The U.S. government doesn’t have to provide all of this support – it can coordinate with state and regional partners24 and the private sector to make sure support is in place. However, each piece is important to the competitiveness strategy and cannot be safely ignored.
Creating markets for low-carbon power. Until solar PV technology is competitive with fossil fuel options, mandates or incentives are necessary to support demand. Using public funding to support the market is economically efficient when the social benefits of lower pollution, economic development, and climate change mitigation are included. These supports should decline in a predictable way over time to contain costs for consumers or taxpayers, as does Germany’s feed-in tariff, or premium pricing, for solar power sold to the grid. The Renewable Portfolio Standards (RPSs) in many U.S. states and discussed in the U.S. Congress25 could, if carefully designed with solar PV in mind, also reward those companies that provide clean solar energy at the lowest cost.
Financing companies and projects. While there are no ongoing fuel costs, solar PV systems have high capital costs. So keeping the cost of financing projects to a minimum, whether for small residential systems or large utility-scale systems, is helpful in making the whole project competitive with fossil fuel options. For example, some businesses lease panels to homeowners so that homeowners don’t have to finance the systems themselves. By bundling many projects together, the businesses can lower the overall financing cost, making the per-system price that much closer to the cost of electricity from the grid.
However, access to financing goes beyond buying and installing panels. Companies with new technologies, like those that might make $1/W systems possible, require financing for growth and scaling-up that can stomach risk. In the United States there is a somewhat unique venture capital community that can provide financing to riskier, smaller companies. However, the economic crisis and policy gridlock have dampened the community’s interest in clean technology, with a 44% drop in investments between 2010 and 2011.26 Venture capital can be very good at helping a company demonstrate a technology, but is often too small to scale to commercialization. Federal programs like DOE’s Advanced Research Projects Agency – Energy (ARPA-E) grants can be powerful tools to support companies, draw in private sector finance, and move ideas from demonstration to commercialization.27 “Green banks” are another tool to consider: countries such as China, the UK, and Brazil have these, as does the State of Connecticut. Funded through a pre-existing surcharge on electricity bills, the state through its green bank hopes to more effectively leverage limited public resources to create a ‘self-sustaining flow of low-cost capital for innovative clean energy deployment projects’.28
Creating new knowledge. The U.S. National Laboratory system is a tremendous asset and crucial, alongside academic and industry partners, to doing the research that comes before commercial products. But this pre-commercial research is badly underfunded. At just over $4 billion in total federal spending on energy research, development, and demonstration (RD&D), the United States invested less than half of what China spent on energy RD&D in 2008.29 The FY12 budget proposed by President Obama rose to $4.8 billion but was still significantly lower than the $12 billion per year recommended by the President's Council of Advisors on Science and Technology to meet America’s energy challenges.30 While renewable energy RD&D funding has been under particular attack by some31 in the budget negotiations, energy RD&D in general is a very low priority on Capitol Hill. In 2009, U.S. federal energy R&D investment, excluding demonstration, was only 10% of what was spent on health R&D.32
Providing clear regulation. New technologies and business models often run into old processes and regulations. Solar projects in some developing countries have run into trouble when the premium is available but rules about how to physically connect to the grid haven’t been updated or provided at all.33 The solar project can’t earn income from the premium if it is not connected to the grid. U.S. entrepreneurs face a similar challenge with the wide diversity of municipal codes governing solar panel placement. Entrepreneurs can rise to the challenge of stringent regulatory requirements, but vague regulation or confused permitting processes raise the risk and thus the cost of new technologies. This sort of problem shows through very clearly in expanding transmission for renewable energy in the United States.34 Obtaining agreement from all states that a transmission line may cross can take years and requires a separate process for each state. This makes the risk too high and the timeline too long for many investors. It is therefore critical to make the national and local regulatory landscape clear and predictable.
Investing in innovation is one of the few strategies to increase competitiveness that can succeed on a limited budget and in tough economic times.35 It is crucial to meeting the energy challenges we face today – particularly reducing greenhouse gas pollution. It is needed to help domestic entrepreneurs be globally competitive and to position the U.S. to make the most of joint R&D with China as well as opportunities in the growing global marketplace. In order to reap the most from the transition to low-carbon power and from massive energy infrastructure expansion in emerging economies like India and China, the United States must increase public investment in innovation and develop a stable and clear regulatory environment wherever possible.
Letha Tawney is a Senior Associate in the World Resources Institute’s Climate and Energy Program. She leads the Two Degrees of Innovation platform, which works to enable innovations along the entire value chain for low carbon energy, in design, in manufacturing processes, in siting and operations, and in grid integration.
1. “Global Clean Power: A $2.3 Trillion Opportunity.” Pew Charitable Trusts. 2010. http://www.pewtrusts.org/uploadedFiles/wwwpewtrustsorg/Reports/Global_warming/G20-Report-LowRes.pdf.↑
2. “Renewable Energy Country Attractiveness Indices,” Issue 31, November 2011, Ernst & Young. http://www.ey.com/Publication/vwLUAssets/Renewable_energy_country_attractiveness_indices_-_Issue_31/$FILE/EY_RECAI_issue_31.pdf↑
3. “Global Clean Power: A $2.3 Trillion Opportunity.” Pew Charitable Trusts. 2010. http://www.pewtrusts.org/news_room_detail.aspx?id=62379↑
4. “Contribution of Renewables to Energy Security.” IEA. 2007. http://www.iea.org/papers/2007/so_contribution.pdf↑
5. “The U.S. and China at the Summit: Climate & Energy Developments in China and U.S.-China Collaboration.” ChinaFAQs. January 14, 2011. http://www.chinafaqs.org/library/chinafaqs-us-and-china-summit-climate-energy-developments-china-and-us-china-collaboration↑
6. “U.S.-China Collaboration on Energy & Climate.” ChinaFAQs. November 15, 2010. http://www.chinafaqs.org/library/chinafaqs-us-china-collaboration-energy-climate↑
7. “How does China’s 12th Five Year Plan address energy and the environment?” ChinaFAQs. March 7, 2011. http://www.chinafaqs.org/blog-posts/how-does-chinas-12th-five-year-plan-address-energy-and-environment↑
8. Seligsohn, Deborah. “China moving forward on 12th Five Year Plan Climate and Energy Implementation.” ChinaFAQs. August 2, 2011. http://www.chinafaqs.org/blog-posts/china-moving-forward-12th-five-year-plan-climate-and-energy-implementation-targets-taxes-↑
9. Kennedy, Kevin. “A Look Back at U.S. Climate Policy in 2011.” WRI Insights blog. December 21, 2011. http://insights.wri.org/news/2011/12/look-back-us-climate-policy-2011↑
10. “Solar surge drives record clean energy investment in 2011.” Bloomberg New Energy Finance. January 12, 2012. http://www.bnef.com/PressReleases/view/180↑
11. “Renewable Energy Country Attractiveness Indices,” Ernst & Young. 2012. http://www.ey.com/GL/en/Industries/Oil---Gas/Oil_Gas_Renewable_Energy_Attractiveness-Indices↑
12. ppm C02-eq. means “parts per million of carbon dioxide equivalent”. For a discussion of the 450 ppm threshold and its relationship to the energy sector and dangerous climate change, see: “World Energy Outlook 2011 Factsheet: What will avoiding irreversible climate change mean for the energy sector?” International Energy Agency. 2011. http://www.iea.org/weo/docs/weo2011/factsheets.pdf↑
13. World Energy Outlook 2011. International Energy Agency. 2011; Frankl et al. "Technology Roadmap: Solar photovoltaic energy, Technology Roadmaps." International Energy Agency. 2010. http://www.iea.org/papers/2010/pv_roadmap.pdf.↑
14. World Energy Outlook 2011. International Energy Agency. 2011. ↑
15. “Market Report 2011.” European Photovoltaic Industry Association. January 2012. http://www.epia.org/index.php?eID=tx_nawsecuredl&u=0&file=fileadmin/EPIA_docs/publications/epia/EPIA-market-report-2011.pdf&t=1332283646&hash=25f2a48add1659ec44dc48c3d28b8554.↑
16. Ryan Wiser et al., Tracking the Sun IV: A Historical Summary of the Installed Cost of Photovoltaics in the United States from 1998 to 2010. Lawrence Berkeley National Laboratory. September 2011. pp14. http://eetd.lbl.gov/ea/emp/reports/lbnl-5047e.pdf.↑
17. Christopher Martin and Zachary Tracer. “China Solar Makers face ‘Suicidal’ Prices on Excess Output.” Bloomberg. November 22, 2011, http://www.bloomberg.com/news/2011-11-22/chinese-solar-shipments-forecast-to-decline-in-fourth-quarter.html.↑
18. "Solar PV Manufacturing Cost Analysis: U.S. Competitiveness in a Global Industry." National Renewable Energy Lab. October 10, 2011. http://www.nrel.gov/docs/fy12osti/53938.pdf.↑
19. Lewis, Joanna. "China's Competitive Advantage in the Solar Industry: How Advantageous is it Really?" ChinaFAQs. October 3, 2011. http://www.chinafaqs.org/blog-posts/chinas-competitive-advantage-solar-industry-how-advantageous-it-really
The association of solar manufacturing firms that recently lodged a trade complaint against China with the US International Trade Commission and Commerce Department has published a report that extrapolated the 2010 relationship between solar trade and aggregate trade to 2011 aggregate trade totals to draw the conclusion that the US imported more from China than it exported in the solar value chain. See: "The United States Suffered a Dramatic Reversal in Solar Trade Balance for 2011, Resulting in Significant Trade Deficits with China and the World." Coalition for American Solar Manufacturing. March 1, 2012. http://www.americansolarmanufacturing.org/news-releases/casm-export-report-3-1-12.pdf↑
20. World Energy Outlook 2011. International Energy Agency. 2011. pp185.↑
21. Day, Charles. “IPF 2011: Energy security and energy policy.” Physics Today. November 1, 2011. http://www.physicstoday.org/daily_edition/singularities/ipf_2012_energy_security_and_energy_policy↑
22. U.S. Department of Energy. "$1/W Photovoltaic Systems: White Paper to Explore A Grand Challenge for Electricity from Solar." Advanced Research Project Agency. White Paper, $1/Watt Workshop. August 10-11, 2010. http://www1.eere.energy.gov/solar/sunshot/about.html↑
23. "2nd Quarter 2011 - Executive Summary, U.S. Solar Market Insight" Solar Energy Industries Association, GTM Research. 2011. pp11. http://www.seia.org/galleries/pdf/SMI-Q2-2011-ES.pdf↑
24. Muro, Mark. "Job Creation on a Budget: Regional Cluster Strategies." Brookings Institution. January 25, 2011. http://www.brookings.edu/opinions/2011/0125_regional_clusters_muro.aspx↑
25. "Analysis of Impacts of a Clean Energy Standard as requested by Chairman Bingaman." U.S. Energy Information Administration. November 30, 2011. http://www.eia.gov/analysis/requests/ces_bingaman/↑
26. Freed, Josh, Mae Stevens. "Nothing Ventured: The Crisis in Clean Tech Investment." Washington, D.C.: Third Way, November 2011. http://content.thirdway.org/publications/456/Third_Way_Report_-_Nothing_Ventured_The_Crisis_in_Clean_Tech_Investment.pdf.↑
27. Wald, Matthew. “Clean Energy Firms Aided by U.S. Find Investors.” New York Times. Washington, D.C. February 2, 2011. http://www.nytimes.com/2011/02/03/business/energy-environment/03energy.html?pagewanted=all.↑
28. Muro, Mark. “Banking On Green Growth In Connecticut.” The New Republic. June 28, 2011, http://www.tnr.com/blog/the-avenue/90969/banking-green-growth-in-connecticut.↑
29. Gallagher, K. S., Anadon, L. D., Kempener, R. and Wilson, C. (2011), Trends in investments in global energy research, development, and demonstration. WIREs Clim Change, 2: 373–396. http://onlinelibrary.wiley.com/doi/10.1002/wcc.112/pdf↑
30. "Report to the President on Accelerating the Pace of Change in Energy Technologies Through an Integrated Federal Energy Policy." Executive Office of the President, President’s Council of Advisors on Science and Technology. November 2010. http://www.whitehouse.gov/sites/default/files/microsites/ostp/pcast-energy-exec-sum.pdf.↑
31. Morello, Lauren, Dina Fine Maron, Lisa Friedman, and Saqib Rahim. "Republicans Gut EPA Climate Rules, Slash Deeply Into Climate Research, Aid and Technology Programs." ClimateWire. February 14, 2011.http://www.nytimes.com/cwire/2011/02/14/14climatewire-republicans-gut-epa-climate-rules-slash-deep-87716.html?pagewanted=all↑
32. "Catalyzing American Ingenuity: The Role of Government in Energy Innovation." Washington, D.C.: American Energy Innovation Council, September 2011. pp12. http://www.americanenergyinnovation.org/2011-executive-summary.↑
33. Lutz Weischer et al. "Grounding Green Power: bottom-up perspectives in smart renewable energy policies in developing countries." WRI Working Paper. World Resources Institute. May 2011. http://pdf.wri.org/working_papers/grounding_green_power.pdf↑
34. Tawney, Letha, Ruth Greenspan Bell, and Micah S. Ziegler. "High Wire Act: Electricity Transmission Infrastructure and its Impact on the Renewable Energy Market." World Resources Institute. April 2011. http://pdf.wri.org/high_wire_act.pdf.↑
35. Letha Tawney et al. "Two Degrees of Innovation - How to seize the opportunities in low-carbon power." WRI Working Paper. World Resources Institute. September 2011. http://pdf.wri.org/working_papers/two_degrees_of_innovation.pdf.↑