David M. Hart is a professor in the Schar School of Policy and Government at George Mason University.
Until the Inflation Reduction Act passed last year, the United States had no solar panel manufacturing policy. Now it has a flawed one. That’s probably better than not having one at all, but the time has already come to consider how to make it better. A new and improved approach should rest on three pillars: diversification, domestication and disruption.
Solar power will be a core resource of the energy system of the future. Solar panels are inexpensive, modular, durable, relatively easy to site, and clean. They already dominate global electricity generation investment, and their dominance is likely to grow. An important question facing world leaders is where this large and growing supply chain will be located. Today, China controls it.
This was not always so. As recently as 2006, Japan, Germany and the United States together held about 70% of the global market. Within five years, their combined share fell to less than 14%, while China exploded onto the scene.
The demise of international competition in solar panel manufacturing sparked a disjointed response from the United States. A series of tariffs sought to punish Chinese manufacturers who were selling below cost thanks to government subsidies. But these did little more than raise domestic costs. Even so, demand for imports remained strong, bolstered by tax credits for solar customers and state utility mandates, while the domestic supply chain deteriorated.
The disruption of global supply chains during the pandemic prompted a closer look at the risks of excessive dependence on imports from China. Economic risks are posed by Chinese solar companies’ dependence on government subsidies. China’s willingness to use its export leverage to advance its geopolitical aims creates another set of risks. And ethical risks, such as the use of forced labor, have already moved Congress to act.
A final risk of solar supply chain concentration is that the world will continue to miss out on product innovations that might accelerate cost reductions and performance improvements and thus hasten net-zero emissions. China’s emphatic entrance into this industry wiped out many companies that were pursuing advanced technologies, and its subsidies continue to deter investments in advanced technology through relentless cost pressure.
Yet, during the Biden administration’s first thirty months, its main solar manufacturing policy decision was to temporarily postpone further tariff increases. The White House framed the pause as a “bridge” to a reinvigorated domestic industry, but took only baby steps to cross that bridge until the IRA came along.
Under the IRA, manufacturers will benefit from a lucrative tax credit that will cover roughly half the cost of solar panels that are sourced entirely domestically. It also added a 10% domestic content bonus to a separate credit received by panel buyers. More support for domestic producers will come from federal grant and loan programs.
Investors have responded enthusiastically. An estimated 155 GW of new production capacity across several layers of the domestic supply chain, such as Hanwha Q Cells’ Georgia complex, were announced in the first year after the law passed. The Boston Consulting Group and Credit Suisse both posit that the United States may be exporting solar panels by 2030 thanks to the IRA.
But it’s far too soon to declare “mission accomplished.” The IRA overcomes the high barriers to entry posed by China’s massive and sophisticated supply chain through the brute force of public spending. This approach is not sustainable in the long term.
Creating a coherent strategy
True success for solar manufacturing policy depends on using the breathing space provided by subsidies and tariffs to create a global industrial ecosystem that matches or beats China’s on price and performance. U.S. and allied producers will have to overcome today’s energy, labor, and capital cost disadvantages by raising productivity through automation, integration, and innovation.
Washington could enhance the odds of achieving such success by integrating the policy tools at its disposal into a coherent strategy. This strategy would aim to diversify the supply chain geographically, bringing some but not all segments onshore, while seeking to disrupt China’s technological advantage by accelerating product innovation. International allies and partners that were neglected or harmed by the IRA, such as South Korea, would play important roles in creating and executing this strategy.
Diversification would require Congress to let the executive branch use trade policy tools to provide limited and temporary protection for those segments of the solar supply chain in which domestic manufacturers have the best chance of becoming globally competitive over the long run. In segments where U.S. producers face long-term disadvantages, policymakers would instead adopt “friendshoring” tactics to diversify imports and expand international competition with China.
Domestication of the solar supply chain segments targeted by trade policy would be enhanced by similarly-targeted tax incentives. Rather than the IRA’s expansive and blunt approach, which is not responsive to market conditions, tax incentives could be tailored to apply pressure to the companies that benefit from import protection, pushing them to innovate and cut costs.
Disruption would be pursued by policies that carve out a significant niche for advanced solar panel product technologies that promise higher efficiencies, lower costs and more flexibility. These technologies, such as perovskites, are just entering the market and have not yet proven that they can deliver on their promise at scale in the coming decade. This element of the strategy would use investments in technology demonstrations and early deployment and procurement by federal agencies. A collaborative effort to coordinate with allies and partners would strengthen the thrust considerably.
The United States should not undertake this strategy lightly. While it might ultimately cost less than implementing the IRA for the rest of the decade, it would still require significant investment, savvy management and sustained resolve. China will use its economic and diplomatic might to preserve its dominant position.
The costs and flaws of the IRA may be evident by the time the 2024 election is decided. In the meantime, the U.S. energy and climate policy community should debate the options, articulate the opportunities and lay the groundwork to diversify, domesticate and disrupt solar manufacturing for real.