The Impact of China’s Production Surge on Innovation in the Global Solar Photovoltaics Industry

David M. Hart October 5, 2020
October 5, 2020
China’s subsidy-aided rise to dominance in PV manufacturing has driven prices way down, but at the cost of undermining promising alternative technological pathways. Policymakers should adopt measures to sustain greater diversity in PV and similar technologies.
The Impact of China’s Production Surge on Innovation in the Global Solar Photovoltaics Industry

Introduction

The Vital Importance of Continued Innovation in Solar PV

How Mercantilist Policies May Slow or Strand Innovation

Setting the Stage: The Solar PV World Before the Chinese Surge

The Chinese Surge to Global Leadership: The Role of Subsidies

Excessive Competition and the Demise of PV Manufacturing Outside of China

PV Innovation Since 2006

Interpreting the Impact of the Chinese Surge on Innovation

Lessons Learned and Strategies for the Future

Conclusion

Endnotes

Introduction

Before the advent of veterinary medicine, anyone buying a horse was supposed to first look at its teeth. Teeth were reputed to be a leading indicator of durability, with bad teeth signaling that the plow-pulling days of the horse on offer would be numbered. A gift horse, though, was a different matter. According to the old saying, “Never look a gift horse in the mouth.” Any plowing it did was taken to be pure gain, and to imply otherwise by peeking at its teeth might be taken as an insult by the giver.

Yet, sometimes gifts impose costs as well as bestow benefits. Imagine a gift horse received in the fall and nourished with precious fodder through the winter proving unable to plow in the spring. So while it may be impolite, a look in the mouth may be prudent when economics is more important than etiquette.

The remarkable decline in the price of solar photovoltaic (PV) modules, which stemmed from China’s subsidy-aided rise to dominance in PV manufacturing during 2010s, is a “gift” (to use a metaphor employed by Greg Nemet of the University of Wisconsin) that warrants a closer look. Between 2006 and 2013, China’s global share of production of PV cells, the industry’s core technology, surged from 14 percent to 60 percent. The global average price per watt of PV capacity dropped rapidly during these years, while the global market grew eighteen-fold. Prices have continued to fall since then, and China remains the dominant producer. Low prices have helped make PV 1 of only 6 technologies that are “on track” out of 46 that will be required for the world to stay well below two degrees of global temperature rise by 2050, according to a 2020 report by the International Energy Agency (IEA).[1]

The remarkable decline in the price of solar PV modules, which stemmed from China’s subsidy-aided rise to dominance in PV manufacturing during 2010s, is a “gift” that warrants a closer look.

Yet, for all its evident benefits, China’s “gift” imposed costs as well. Most critics of China have focused on the global distribution of manufacturing jobs created by the growth of the solar industry. An even more significant impact, though, has been overlooked: a change in the industry’s pattern of innovation. Conventional indicators of product innovation, such as patenting and the ratio of research and development (R&D) to sales, dropped precipitously in the wake of the Chinese surge. The decimation of PV manufacturing outside China drove many innovative firms out of the business, in large part because they could not match the predatory prices offered by government-subsidized Chinese competitors. China’s new PV giants have innovated in important ways, especially through process innovation that moved the industry’s dominant technology rapidly down a steep experience curve. But the prospect of shifting to better, cheaper PV products with the potential for even greater emissions reductions over the long run, has been deferred or even lost.

This report contributes to a series of ITIF reports assessing China’s impact on global innovation across a diverse set of key industries.[2] It seeks to assess the opportunity cost of the Chinese surge in PV, and explores how to weigh it against the more tangible benefits cheap PV has already brought the world and might bring it in the future. The stakes are especially high looking forward. As IEA suggests, PV looms increasingly large in scenarios that lead to a successful global transition to low-carbon energy. If this technology loses momentum due to slowed or stranded innovation, the transition would be put at even greater risk than it already is.

The report first explains why this issue matters from the climate and energy perspective. Then, building on prior ITIF research, it delves briefly into the theory of “innovation mercantilism.” The particulars of the case follow, describing the history of PV manufacturing before, during, and after the Chinese surge, with a focus on the role innovation mercantilist policies played in it. It then seeks to assess the impact of the surge on innovation, reviewing key indicators and placing this data in the context of theories of dominant design and technological lock-in. This section also includes simple counterfactual models of pathways the industry might have taken if the surge had been slightly less powerful than it was.

This report concludes by arguing policymakers should take measures that would create and sustain diversity in PV technology and, by extension, in other energy and climate technologies with similar characteristics, such as batteries, carbon capture devices, and hydrogen electrolyzers. Diversity is a sensible goal given the great importance of these technologies to the achievement of global climate goals and the non-trivial risk that dominant designs may not perform as well as their proponents expect.

Policymakers should take measures that would create and sustain diversity in PV technology and, by extension, in other energy and climate technologies with similar characteristics.

As detailed in the final major section of this report, policies that would advance this goal include:

  • Increased public R&D spending with an emphasis in the United States and other R&D-intensive countries on alternatives to today’s dominant crystalline-silicon design;
  • Market-pull policies, such as carve-outs for alternative designs within portfolio standards as well as tiered tax incentives and feed-in tariffs (FITs) that award alternatives a higher level of support;
  • Public-private co-investment in manufacturing and supply chains informed by strategic analysis of technologies and markets;
  • Stronger enforcement of international trade law and updating of U.S. anti-dumping rules; and
  • International cooperation featuring reciprocity and transparency to strengthen learning and build open markets that support innovation.

The Vital Importance of Continued Innovation in Solar PV

Electricity will be the core resource of the clean energy system of the future. It can be generated with low greenhouse gas emissions using a variety of technologies. It is a flexible energy carrier with diverse applications today, many of which are growing rapidly, such as powering information and communications technology.[3] Looking ahead, low-carbon electricity must be substituted for higher-carbon fuels in major applications such as transportation and heating to eliminate a substantial additional fraction of emissions. In IEA’s Sustainable Development Scenario (SDS), in which the goals of the Paris Agreement are achieved along with universal access to energy, global electricity supply grows by 70 percent, while use of unabated fossil fuels in vehicles and buildings shrivels.[4]

Solar PV has many qualities that make it one of the most attractive options for low-carbon electricity generation. In addition to its low and falling cost, it is modular, durable, relatively easy to site, and low in lifecycle emissions. IEA’s SDS envisions 5 terawatts (TW) of PV capacity being deployed globally by 2040, ten times the total in 2018. A 2019 review in Science led by researchers from the U.S. National Renewable Energy Laboratory (NREL) offers an even more ambitious scenario, in which 30–70 TW of PV capacity makes this technology “a central contributor to all segments of the global energy system” by 2050.[5]

Successful deployment on such a scale will require sustained innovation in the coming decades. PV innovation may be assessed with several metrics. Most energy forecasters measure it in terms of cost reduction. Varun Sivaram and Shayle Kann, for instance, have argued that the installed cost of complete PV systems, including modules and balance of system (BOS) components, will need to fall below $0.25 per watt for ambitious global goals to be achieved by 2050.[6]

Sustained PV innovation even promises to address variability, the technology’s Achilles’ heel.

Industry experts disagree about how likely this goal is to be achieved with first-generation PV technology made out of crystalline-silicon (c-Si). Advanced c-Si PV cells use more-efficient architectures and require less material than current ones, which in turn reduces the required capital cost of module manufacturing. NREL’s 2019 roadmap for continued innovation anticipates that the cost of c-Si modules will decline to $0.24 per watt between 2030 and 2040. As has typically been the case over the last decade, module prices have dropped much more quickly than expected since that roadmap was prepared, reaching an average of $0.36 per watt. A new roadmap under development may bring Sivaram and Kann’s 2050 target within striking distance.[7]

In his 2018 book Taming the Sun, Sivaram advances a more holistic vision of PV innovation and its vast potential. Rather than being assembled into rigid c-Si modules, PV cells will be “printed on flexible substrates en masse.” They may be made from advanced semiconductor materials such as quantum dots, organic materials, new materials such as perovskites, or hybrids of two or more of these alternatives. At a cost of just a few pennies per watt, such cells would enable massive reductions in balance of system costs, such as shipping and installation. They would open up new applications in heavy industry, hydrogen production, and direct air capture of carbon dioxide. They would bring solar power directly to cities through building integration (such as roofs and windows that generate electricity), eliminating the need to devote large land areas to solar farms, while drastically downsizing the impact on the power grid. Such innovation would be particularly beneficial for developing countries that will dominate global carbon emissions in the 21st century, which have limited available land and are urbanizing rapidly.[8]

Sustained PV innovation even promises to address variability, the technology’s Achilles’ heel, to some extent. PV systems generate at maximum power only when the sun is shining brightly; when the weather is cloudy, production declines. These variations create problems for the grid, which needs to balance supply and demand at all times. There are several solutions, including energy storage, larger grids, and demand response. An additional solution, overbuilding solar capacity so this resource can meet demand even during cloudy weather, will become more viable if cells become ultra-cheap along any technological pathway.[9]

Challenges hindering other low-carbon electricity-generation technologies, which scenarios such as the SDS rely on for deep decarbonization along with PV, may place even more weight on PV innovation moving forward. Nuclear power and fossil-fuel plants with carbon capture, utilization, and storage are costly and face significant public opposition. The growth of wind power may slow as the technology matures and the best sites are developed. Hydropower already faces similar constraints. Other renewables, such as concentrating solar and tidal power, have not yet been proven commercially viable. Investments in research, development, and demonstration (RD&D) that aim to break through barriers across a broad range of technologies should be sustained and expanded, but no prospect currently shines as brightly as solar PV.[10]

How Mercantilist Policies May Slow or Strand Innovation

If PV innovation were to stall, the likelihood of the world reaching its 2050 climate goals would be significantly diminished. Yet, few solar industry observers seriously consider this possibility. The conventional wisdom is captured by IEA’s judgment that PV is “on track.” The virtuous cycle between market growth and cost reduction that marked the past decade, according to this view, will surely continue for three more.

But past performance does not always predict future results. Indeed, past performance may obstruct future results—if it erodes the conditions that made for past success. In this case, the mercantilist policies that powered the Chinese production surge altered the trajectory of innovation, making promising alternatives to the dominant technological paradigm in PV more difficult to pursue. This hypothesis is firmly grounded in theory, and finds empirical support across other manufacturing industries. The burden of this report is to see whether it finds support in this industry.

Mercantilism, writes Laura LaHaye, was a “system of political economy that sought to enrich the country by restraining imports and encouraging exports.” It dominated European policy in the sixteenth, seventeenth, and eighteenth century, but fell into disfavor as David Ricardo’s theory of comparative advantage gained sway. Britain could trade its cloth for Portuguese wine, in Ricardo’s famous example, and both countries would be better off. Mercantilism, even when it is successful in relative terms, imposes opportunity costs in absolute terms, as imbibers of British wine well understand.[11]

Although no longer dominant within the economic and trade policy establishment, mercantilism never died, Ricardo notwithstanding. As ITIF research documents, the prospect of running trade surpluses that enrich the mercantilist state, while favoring supporters who can make easy profits in protected domestic markets, is a recurring temptation for governments. Sometimes, a defensible analytical case can be made for temporary “infant industry” protection that allows domestic producers to build up their capabilities before facing the full force of more-experienced global competitors. Frequently, though, such temporary measures become permanent—and sometimes they are actually intended to be so.[12]

Mercantilism is frequently contrasted with free trade “small-l” liberalism. Between these poles, however, there is a spectrum of other approaches. “National developmentalism,” as ITIF’s Robert Atkinson writes, sanctions support for domestic industries, but within internationally agreed rules and norms.[13] 

Mercantilism is particularly problematic in industries in which innovation is rapid. Such industries rely on continuous feedback from the market to provide both information and resources that sustain innovation. This feedback process is especially important for mass-produced products in which economies of scale drive innovation. By segmenting global markets, mercantilists impede learning through feedback. And by subsidizing domestic firms, they restrict the resources flowing to foreign competitors.[14]

Past performance may obstruct future results, if it erodes the conditions that made for past success.

Mercantilist policies can take a number of forms beyond restricting access to the home market and subsidizing exports. The mercantilist state may countenance or even assist in theft or forced transfer of intellectual property and know-how, which deters product innovation. It may repress labor, which reduces incentives for process innovation. It may manipulate its currency, which impinges on both.[15] In the case of PV, the most important policy was the simplest: government financial support for domestic firms. These subsidies led to excessive global competition, ultimately drying up profits and investment that foreign firms needed in order to pursue innovation-oriented strategies.

The notion of excessive competition may seem paradoxical. Competition ought to be a powerful driver of innovation in market economies, as firms seek profits through new products, improved processes, better business models, and the like. And it often is, particularly when wages are high and public investments in research and education create a rich pool of knowledge and talent upon which firms can draw as they compete to address evolving markets or create new ones. For example, robust competition, including the entrance of new firms pursuing technological opportunities neglected by incumbents, helped the semiconductor industry uphold Moore’s Law for more than 50 years.[16]

Yet, competition must not be so robust that it destroys profits and erodes investor confidence. Current profits and investment with the expectation of future profits provide firms in market economies with the capital they need to take risks. Innovation-oriented strategies are by definition risky and involve significant upfront costs for R&D and equipment, especially in capital-intensive industries such as PV manufacturing. They become increasingly difficult for firms to pursue when government subsidies support too many competitors in an industry.

Turning from theory to empirical analysis, the weight of the evidence suggests that “China’s innovation mercantilist policies have harmed innovation in other nations,” as Atkinson puts it. David Autor and his colleagues, for instance, have shown that the “China shock” that followed that country’s accession to the World Trade Organization in 2001 negatively impacted not only production and jobs in the United States, but also innovation as measured by patents in the manufacturing sector as a whole.[17]

It takes time for mercantilism to impact innovation. Mercantilist subsidies are opaque and may be dimly perceived or discounted by foreign competitors. Once the threat is recognized, the most technologically advanced firms may respond to subsidized, less-advanced competitors by doubling down on innovation, seeking to differentiate their products and escape competition.[18] While this response may prove successful for some, it is ultimately limited by the patience of investors, particularly for smaller, less diversified firms, which have less margin for error. If subsidies are sustained, investor confidence crumbles and innovation-oriented firms face a reckoning. That, in short, is the story of the PV manufacturing industry outside China in the 2010s.

Setting the Stage: The Solar PV World Before the Chinese Surge

The Chinese surge from the mid-2000s to the early 2010s made PV manufacturing what it is today: a large and growing sector dominated by commodity production, and composed of many firms competing on price and scale. This outcome was not inevitable. To imagine alternative pasts, we must recover the sense of possibility that existed before the surge, particularly with respect to second- and third-generation product technologies.

PV technologies are the result of decades of public and private investment in the United States, Japan, Germany, and elsewhere. The first PV device, made of silicon, was invented by scientists at Bell Labs in New Jersey in 1954. The U.S. government supported its development and deployment with policies that provided both technology push and market pull over the next quarter-century. Initial applications focused on satellites and spacecraft, wherein cost was no object to government sponsors. The oil crises of the 1970s sparked an effort to develop affordable terrestrial applications, using the tools of non-defense procurement, regulatory reform, and tax incentives along with federal RD&D spending.[19]

The Reagan administration pulled back many of these policies in the United States as oil prices dropped in the 1980s, but other countries picked up the baton. Japan made PV a top RD&D priority in the 1980s, and followed up with the “New Sunshine” policy to encourage deployment in the 1990s. When Japan cut back its program in the 2000s, Germany ramped its up. It moved into the lead in RD&D spending and invented the FIT, which induced homeowners to install PV systems by guaranteeing a high rate of return on their investments. Between 2000 and 2006, Germany’s installed PV capacity grew more than 38-fold, surpassing Japan’s.[20]

The United States returned to the PV playing field in earnest around the turn of the century as well. The electricity crisis in California in 2000–2001 sparked that state to adopt a renewable portfolio standard (RPS) in 2002 that mandated utilities to support solar power. Other states—to date, a total of 29—have done the same. With oil prices rising and the Middle East dominating foreign policy attention, the federal government added to the momentum beginning in 2005 by expanding the solar investment tax credit and enabling utilities and third-party “tax equity” investors to claim it. The average annual growth rate for PV installation shot up from less than 10 percent in the late 1990s to about 60 percent during the 2000s.[21]

As the global market grew, manufacturers pursued a variety of strategies. U.S.-based pioneer SunPower focused on improving the efficiency and lowering the cost of first-generation c-Si systems, which dominated the global market in the mid-2000s with a share well over 90 percent. This strategy would ultimately be pursued with great success by Chinese producers, which were just beginning to make their mark at this time.[22]

Many other competitors diversified or shifted entirely to second-generation thin film technologies (TFTs). TFTs, which can be made from a variety of materials, are less efficient in practice than c-Si; that is, they convert a smaller portion of the solar energy falling on them into electricity. On the other hand, they can be produced in a more flexible form and thus potentially used in a wider variety of configurations than the dominant design. Most important, they were projected to be much cheaper to make in the long run.

Just because entrepreneurs and investors see opportunities to displace the incumbent technology, and even put their talent and money to work to do so, does not mean they are right.

The world’s largest PV producer, Japan’s Sharp, invested heavily in amorphous silicon (a-Si), a TFT that had been used since 1980 in pocket calculators. The leading German manufacturer, Q-Cells, diversified into a variety of TFTs, including cadmium telluride (CdTe) and copper indium gallium selenide (CIGS). In the United States, a wave of venture capital flowed into TFT start-ups. AVA, HelioVolt, MiaSolé, Nanosolar, and SoloPower were among the nascent firms that raised rounds of $100 million or more in 2007 and 2008. The more established CdTe producer First Solar (founded in 1990) brought in $1 billion with its 2006 initial public offering. As TFTs’ global market share began to tick up—breaching 10 percent in 2007—some analysts predicted it would grow to 25 or 30 percent within five years.[23]

A third generation of PV technology, which initially used organic materials, promised to overtake the first two by combining high efficiency with low cost. One third-generation U.S.-based firm, Konarka, reportedly raised more than $150 million in private capital and received $20 million in government grants during the 2000s. Although its cells were not very efficient, the company nonetheless claimed in 2008 that it would have 1 gigawatt (GW) in annual production capacity 2010, more than the installed PV capacity in North America at the time.[24]

Of course, just because entrepreneurs and investors see opportunities to displace the incumbent technology, and even put their talent and money to work to do so, does not mean they are right. Misperceptions and hype drive investment waves. Old technologies often fight back and sometimes maintain their dominance. SunPower founder and industry legend Richard Swanson cautioned his colleagues in 2009 that “the competition from crystalline silicon will remain formidable.” Some market players mistook an extraordinary price spike in silicon in 2007–2008, which temporarily favored TFTs, as a signal of something more permanent.[25]

In hindsight, however, it is clear that the competition among companies and technologies played out in a much different context than industry participants such as Swanson expected at the time. China put its thumb on the scale and determined the outcome. Alternative pathways that might have led to different destinations over the ensuing decade were cut off.

The Chinese Surge to Global Leadership: The Role of Subsidies

China’s PV manufacturing industry was miniscule before 2005. It breached 100 megawatts (MW) of cell production in that year, jumping to 7 percent of global supply from less than 2 percent in 2003. Production grew by an order of magnitude in the next two years, another order of magnitude in the following three, and doubled again in 2011, capping roughly 200x growth in a six-year span. China’s share of the global market had surpassed 60 percent by 2011, and it has remained above that level since then. (See figure 1.)[26]

Figure 1: Global market share of PV cell production by country, 2006–2013[27]

As Nemet and others have shown, the industry’s initial climb to global credibility owed more to Australia, Germany, and the United States than the Chinese central government. Chinese students who had trained at the laboratory of PV pioneer Martin Green at the University of New South Wales in Sydney, and elsewhere in the West, returned home to start up or lead many of the most successful firms, such as Canadian Solar, JA, Suntech, and Yingli. U.S. investors provided many of these entrepreneurs with money, plowing some $7 billion into Chinese PV firms between December 2005 and the end of 2007 alone, a forgotten adjunct to the “cleantech” VC boom of the same period. Chinese manufacturers used some of their money to import specialized turnkey production lines from Germany that were far superior to domestic equipment at that time. And German consumers, motivated by the FIT, drove massive demand for low-cost Chinese products.[28]

Although the Chinese central government gave little direct support to PV manufacturers before 2009, “provincial and local governments were quick to get behind the new solar firms in their jurisdictions,” as Kelly Sims Gallagher of Tufts University put it. These governments offered subsidized land and electricity, direct and indirect financial support, and tax relief to the emerging industry. Local state-owned banks in Wuxi, for instance, granted Suntech $3.7 billion in low-interest loans between 2005 and 2012 at the behest of the municipal government. The firm received another $1.4 billion in tax rebates and other export promotion subsidies. Success quickly bred imitation, as entrepreneurs from industries as diverse as clothing, auto repair, and firefighting equipment, based in places with no obvious locational advantages, poured into PV manufacturing with support from subnational governments.[29]

The central government did assist the industry indirectly during this early phase of the surge. China’s currency was substantially undervalued relative to the dollar during this period, thereby boosting all exports to the United States. The misalignment reached an estimated 40 percent at its peak in 2009 before subsiding to the single digits by 2012, according to William Cline of the Peterson Institute. A series of national planning documents signaled to lower levels of government that the central government considered renewable energy broadly to be a strategic industry and encouraged inflows of foreign equipment and investment to it. Beijing also supported the creation of a domestic silicon industry, albeit initially to provide inputs for semiconductors rather than PV. This support proved to be fortuitous when silicon prices spiked in late 2007, which was also the first year the solar industry used more silicon worldwide than the chip industry. (See figure 2.)[30]

Figure 2: Polysilicon price (right axis) and share of PV in polysilicon demand (left axis)[31]

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This spike, which lifted silicon prices by about 900 percent in the space of a few months, sent shockwaves through global PV manufacturing. It encouraged investment in TFTs, which did not use the material; prompted some c-Si firms to lock in supplies at fixed prices; and induced massive investments in silicon production. This last impact, along with the global recession that began in 2008, caused prices to recede as quickly as they rose as new production came on line.[32]

The free fall in silicon prices, which went further and faster than industry analysts anticipated, left c-Si manufacturers that had locked in fixed prices, including some in China as well as elsewhere in the world, exposed. The blow was even more devastating for firms making TFTs, which were concentrated in the United States, where they had gained a 65 percent market share by 2007. While firms were harmed by the silicon price volatility in every producing country, the heavy concentration of Chinese manufacturers in c-Si meant that China suffered relatively less when the price settled at a very low level.[33]

This outcome was not the result of a deliberate central government strategy. While there is some evidence that large state-owned silicon manufacturers subsidized the PV industry through unduly low input prices, many Chinese entrants into silicon production were privately owned, including some PV manufacturers that became vertically integrated. There were also many entrants from other parts of the world. The Chinese share of the global market for silicon inputs lagged behind its share of other segments of the PV value chain during the surge.[34]

Chinese companies also transformed the PV manufacturing equipment business with the unwitting assistance of their German competitors. Close linkages between German PV manufacturers and their domestic suppliers in the mid-2000s had allowed the latter to build dedicated machinery as the market grew, rather than repurposing semiconductor equipment as they had in the past. German equipment makers then aggressively sought markets in China. As a German expert commission concluded in 2012, the export of PV manufacturing equipment “served as the prime source of gain in know-how for Chinese companies.” One German CEO put it more bluntly to a researcher: “The equipment manufacturers are to blame for the German PV [cell] manufacturers losing their competitive advantage.” The tables were then turned on German equipment makers as Chinese entrants into this segment were able to beat them on price without sacrificing too much quality. Lower equipment costs became a key source of competitive advantage for the Chinese PV industry, and helped drive down end-product costs as well.[35]

The Chinese central government was far more involved in the later phase of the surge. The State Council declared PV specifically (not just renewable energy in general) to be a “strategic emerging industry” in 2010. As the global banking industry cratered, China’s state-owned banks fueled the continued rapid growth of the nation’s PV manufacturing industry with lines of credit worth more than $40 billion. Rainer Quitzow of the Free University of Berlin noted that such commitments “function as de facto repayment guarantees for commercial lenders … [which] enabled the leading Chinese PV firms to continue their aggressive investment strategies as company balance sheets around the world began suffering.”[36]

Central government support for domestic demand also helped sustain the industry. China’s share of global PV installations was less than 1 percent in 2008; the early phase of the surge was devoted almost entirely to exports. By 2013, that figure was nearly 30 percent, as German demand growth stalled, while the Chinese market exploded to become the world’s largest. A large-scale demonstration project in 2009 authorized by Beijing was followed by both direct subsidies and FITs to incentivize adoption by Chinese customers.[37]

The domestic market was served almost entirely by domestic firms. Clean Energy Associates CEO Andy Klump summarized the situation this way at a 2013 industry conference: It was “possible” for foreign firms to do projects in China "as long as you partner with the right state-owned entity [SOE] or local company. But expect a much lower margin. And the payment terms are horrific.” (A 2019 report by the McKinsey Global Institute concludes that Chinese producers supplied 100 percent of the domestic market.)[38]

A team from MIT and NREL found that the price of a Chinese PV module in 2012 was about 20 percent less than one made in the United States. They attributed the difference to two groups of variables: subsidies, which accounted for one-sixth of the gap, and scale/supply chain, which accounted for the rest. But this is a distinction without a difference. Without state-directed access to capital, total control of the protected domestic market, and other policies, it would have been impossible for Chinese firms to build out the PV supply chain after 2006, and to do so on a much larger scale than non-Chinese competitors could contemplate.[39]

Unfortunately, this meaningless distinction has been repeated without caveats by numerous later authors, such as MIT’s John Deutch and Edward Steinfeld, and Fang Zhang and Kelly Sims Gallagher. Citing the MIT/NREL analysis, the latter wrote, “Even counting these subsidies, they actually did not substantially contribute to China’s advantage over foreign countries, such as the United States.” Later NREL analysis, citing the same work, is far more measured, attributing “declining U.S. market share … to Chinese government subsidies for PV manufacturing facilities and their access to low-cost debt and regional suppliers, which has since been further compounded by economies of scale.”[40]

Subsidies allowed China’s major PV manufacturers to sustain enormous losses during the latter part of the surge. Veteran industry reporter Herman K. Trabish captured the situation in the title of an April 2013 piece “Is China’s Solar Business Not-for-Profit?” The median operating margin for a group of predominantly Chinese large manufacturers tracked by NREL fell to an estimated negative 40 percent in 2011, recovered briefly, and fell again to negative 30 percent in 2012. (See figure 3, which also includes data for U.S.-headquartered SunPower and First Solar.) These data fail to capture unprofitable smaller “zombie” companies that continued to produce at the behest of lenders or governments that did not want to acknowledge that they had failed.[41]

Figure 3: PV manufacturers’ margins, 2010–2020[42]

The fact that China’s major PV manufacturers have operated for the better part of a decade without making much money (albeit with significant variations across firms and over time) suggests that subsidies continue to shape international competition in this industry. After the horrific losses of the surge period, these producers managed to do slightly better than break even in the middle of the decade, but then suffered large losses once again for several years after that.[43]

The widespread adoption of PV in China is good for the global climate and for the health of the Chinese public, particularly when it substitutes for carbon-intensive coal-fired power, which has historically dominated China's grid. China took the baton from Germany in the early 2010s to lead the international relay that built a global PV market. But non-Chinese suppliers did not benefit the way Chinese suppliers did during the German leg of the race.

As Nemet argues, entrepreneurship, creativity, and international linkages were certainly necessary factors in the Chinese PV surge. But subsidies, initially from the subnational level and later from the national level, were necessary as well. Even a sympathetic observer such as Gallagher noted that in a capital-intensive industry, “Chinese clean energy firms have enjoyed virtually unlimited amounts of capital” thanks to government policy. Similarly, Jeffrey Ball and his Stanford colleagues stated that Chinese officials acknowledge that in 2011–2012 they created “a solar manufacturing bubble [with] their easy liquidity.”[44]

Excessive Competition and the Demise of PV Manufacturing Outside of China

The PV manufacturing bubble is all the more remarkable given the rapid and sustained growth of global sales. After 2006, year-on-year growth of installed PV generation stayed above 40 percent until 2013, when it fell to 37.7 percent. For the 2006–2013 period as a whole, installation growth totaled an astounding 2,362 percent. Yet, supply kept pace with or even exceeded demand. Excess manufacturing capacity put intense downward pressure on prices. [45]

Chronic oversupply and hyper-competition implied a massive waste of capital, yet Chinese local leaders and entrepreneurs continued to jump into the game as they read the signals from Beijing. The central government finally took note in late 2013, decreeing that some three-quarters of the more than 500 companies in the domestic PV manufacturing value chain at that time would no longer be eligible for domestic projects. The policy not-so-subtly squeezed access to finance in an effort to drive low-quality producers out.[46] 

Outside China, the shake-out was even more severe. Beleaguered manufacturers turned to their home-country governments for help. A spokesperson for SolarWorld, a German-headquartered firm with operations in the United States and elsewhere, put its complaint simply: “Pervasive and all-encompassing Chinese subsidies are decimating our industry.” The United States and later the European Commission ultimately imposed sanctions aimed at countering subsidies and below-cost dumping of Chinese PV cells and modules. But these steps—riddled with loopholes, opposed by customers, and moderated for geopolitical reasons or fear of retaliation—proved to be toothless.[47]

Western governments were not willing to match Chinese subsidies or effectively correct for distorted exchange rates, either. In the United States, the federal government offered a 30 percent tax incentive to PV manufacturers under the 2009 American Reinvestment and Recovery Act. It hit a fiscal cap in 2010 after providing just $800 million in breaks, including $10 million that went to China’s Suntech and Yingli. Four solar manufacturing projects received federal loan guarantees under the Recovery Act. But two were never used, and two others went to companies that went bankrupt in 2011–2012: Abound and Solyndra. [48]

Loan guarantees for utility-scale PV projects indirectly aided the U.S.-based manufacturer First Solar, which supplied the equipment for three of the five projects that won them. These projects, which amounted to over 1 GW of production between late 2011 and early 2015, helped the firm’s bottom line. The program as a whole established the viability of large-scale solar projects, which dominated installations in the United States throughout the 2010s, ultimately benefiting Chinese suppliers more than others.[49]

The controversy over the Solyndra loan guarantee poisoned further attempts to provide additional federal support to U.S. PV manufacturers. Not long after the Tea Party revolt gave Republicans control of the House of Representatives in January 2011, its powerful Energy and Commerce Committee initiated an investigation, alleging that the company received preferential treatment. By the time Solyndra declared bankruptcy and defaulted on the loan in August of that year, the name conjured disdain among members of the majority party, which was not inclined to back this industry in any case. The only remaining federal programs after that provided a mere $20 million to $30 million per year for manufacturing R&D.[50]

U.S. states also offered incentives to locate PV manufacturing plants within their borders. But these, too, proved no match for their competition in China. In the case of Evergreen Solar, the fourth-largest solar-cell manufacturer in the United States in 2010, Massachusetts went head-to-head with Wuhan and lost. Despite loans and tax credits from the state, the company closed its Massachusetts plant in 2011 after receiving “easy access to capital” (in the words of its own executive) to move production to China. According to Usha Haley and George Haley, “Evergreen, with its partners, the Wuhan municipal and Hubei provincial governments, borrowed two-thirds of its Wuhan factory’s cost (as compared to less than 5 percent of its U.S. factory’s cost from the Massachusetts government) from two Chinese state-owned banks at very low interest rates with no principal or interest payments due until the end of the loan in 2015.”[51]

A few states sought to jump-start solar manufacturing within their borders, for instance, by offering additional incentives for in-state production in their renewable portfolio standard. These efforts did not yield significant results. Most RPS-driven purchases—like those aided by the German FIT and the U.S. federal investment tax credit for PV installations, and unlike Chinese solar installations—were agnostic as to the source of the equipment installed.

In any case, in the absence of effective trade protection, incentives offered by governments outside China to build PV manufacturing plants would simply have exacerbated the problems of excessive competition and overcapacity. Beyond seeking government help, Western producers employed a variety of strategies to try to survive the shake-out. Some continued to compete directly on price with subsidized Chinese competitors, building new facilities in Malaysia, the Philippines, and other Asian locations to cut costs. Others diversified downstream into project development. By 2014, for instance, two leading U.S.-headquartered firms, SunPower and First Solar, were deriving more than two-thirds of their revenue from downstream activities.[52]

As discussed in more detail below, these firms also sought to differentiate themselves from commodity producers through product innovation. SunPower jousted with U.S.-headquartered Solar City and Japan’s Panasonic to make the world’s most efficient c-Si module, while First Solar offered the most-efficient TFT modules. The effort to escape competition is well-established in theory, and empirical research has shown that R&D-intensive manufacturing firms are less vulnerable to trade shocks.[53]

Such strategies allowed SunPower and First Solar to survive, but they were the exceptions. A study of 238 firms that entered the PV module manufacturing industry globally from 1978 to 2015 found that 104 of them exited by 2015, with the majority departing between 2012 and 2014. (See figure 4.) Chinese firms are included in these figures, as the policy decree previously noted would imply. Suntech, for instance, which was the world’s largest producer in 2011, went bankrupt two years later. But the study showed that the probability of a Chinese firm exiting the industry was statistically significantly lower than a non-Chinese firm, even when many other variables are taken into account. In fact, the China variable predicting firm survival was larger in magnitude than most of the strategy variables upon which the authors concentrate.[54]

Figure 4: Firm entry and exit in PV module manufacturing, 1978–2015[55]

The bloodletting was much worse for ventures pursuing second- and third-generation technologies. Twenty-seven of the 34 TFT start-ups in the study exited, as the global market share of thin film products peaked in 2009 and fell back into the single digits by 2012. Along with Abound and Solyndra, darlings of the cleantech VC boom such as HelioVolt, Konarka, MiaSolé, Nanosolar, and SoloPower were acquired or went under. Nor were units of large companies spared; GE, for instance, sold its thin-film business to First Solar in 2014. Other buyers were Chinese. Hanergy, for instance, made a string of acquisitions, including MiaSolé (which sold for just $30 million in 2012 after having raised more than $500 million in venture funding and receiving over $100 million in federal tax incentives) and the thin-film unit of Q-Cells, Germany’s leading PV manufacturer.[56]

After the shake-out, the industry settled into a pattern that persists today, notwithstanding a further round of tariffs imposed by the Trump administration. According to NREL, with the exception of First Solar and South Korea-based Hanwha Q Cells, the top ten PV manufacturers (and all of the top five) in both 2015 and 2019 were based in China or Taiwan. While many Chinese manufacturers have diversified their production locations, particularly within Asia, to lower costs and avoid tariffs, Chinese factories still produce about 60 percent of the world’s PV cells and modules.[57]

PV Innovation Since 2006

The shift in the pattern of production brought with it a shift in the pattern of innovation in the PV manufacturing industry. Price pressure resulting from chronic oversupply compelled process innovation and efficiency gains in c-Si cells and modules, as managers struggled to keep costs in line with revenues. But it also squeezed profits and limited new entrants, crimping R&D spending, invention, and product innovation.

Figure 5, which maps the PV “experience curve,” may be the most famous graph in energy policy this century. The y-axis measures the price for a unit of PV electricity generation capacity; the x-axis measures cumulative installed capacity. Both axes are logarithmic, that is, each evenly spaced tick on an axis represents a ten-fold difference from one unit above, below, or to the side of it. The downward slope of the line therefore describes the percentage decline in the unit price relative to the percentage growth in cumulative capacity. The relationship is often summarized as a “learning rate”: for each doubling of cumulative capacity since the 1980s, according to Atse Louwen and Wilfried van Sark, the creators of figure 5, the price has declined by approximately 20 percent.[58]

Figure 5: PV experience curve, 1975–2018[59]