Over the last month, three major American solar companies have filed for bankruptcy. Collectively these companies—Solyndra, Evergreen Solar Inc., and SpectraWatt—account for over 25 percent of American solar photovoltaic output. All three companies had received generous aid from the national and state governments.
Solyndra, once a Silicon Valley darling, received $525 million of federal loan guarantees in addition to $600 million in venture funding. President Obama visited their manufacturing headquarters last year and celebrated the company as a paragon of America’s clean energy potential. But now, Solyndra is laying off all of its 1,100 employees. Another company, Massachusetts-based Evergreen was solicited by Governor Deval L. Patrick on the campaign trail to set up a manufacturing facility in the state. Once in office, Patrick boldly granted the company $76 million dollars in aid. Now, Evergreen too has shut down all its U. factories and is $485.5 million in debt.
Why are these major American solar companies dying like flies? Two words: subsidies and China.
The unfortunate reality is that globally renewable energy (excluding biomass and hydroelectric) remains a subsidy-dependent business. Without policies to promote them, current solar and wind turbine technology can’t compete with dirtier energy sources like coal. Over the last decade, steady growth in solar demand was driven by generous European subsidies. But earlier this year, Germany and Italy (the largest solar markets) sharply reduced their costly solar feed-in-tariffs in the face of the European debt crisis. Feed-in-tariffs are policies that incentivize consumers to install renewable energy by mandating utilities to pay consumers a high fixed price for the clean energy they supply to the grid. The tariff cuts have led to excess PV supply, driving prices down over 20 percent—killing many Western companies that were already wounded by fierce competition from Chinese manufacturers.
The Chinese are also feeling the price squeeze, but have been buoyed by their persistent growth in market share. Three top Chinese solar companies—Suntech Power, Yingli Green Energy and Trina Solar—just announced that their second quarter sales this year rose 33 to 63 percent compared to last year, which is quite a contrast from the situation in the U.S. The drivers behind the growing success of the Chinese solar industry are both obvious and subtle. Lower labor costs, cheap loans from state controlled banks, low environmental regulatory costs, and cheap land from the government have obviously led to lower Chinese prices. On a more subtle level the most successful firms have benefited from having Western educated managers, efficient automation, continued commitment to quality, and in some cases economies of scale and vertical integration. Intense price competition between Chinese firms has also helped.
What does all this mean for America? What can America do to become competitive in the clean energy race? Well, in an ideal world Congress and the President would pass an aggressive carbon tax to unleash market forces to develop, fund, and scale the most competitive clean energy ideas. Unfortunately, it doesn’t look like a carbon tax will be happening anytime soon.
Regardless, important policies can and should be put in place to tackle America’s energy, climate, and competitiveness problems. Continuing the current practice of subsidizing specific companies like Solyndra in a commodity like industry, however, is not an effective, reliable or fair way to achieve these objectives. The recent cases of government-backed solar companies filing for bankruptcy show that political decision makers are not skilled venture capitalists. When the government hands out special loan back guarantees or tax breaks to individual firms like Solyndra, it is essentially unfairly and inefficiently picking winners, mindlessly risking tax payer dollars and unintentionally creating market distortions in the process.
Having learned their lesson from distorting economics, policymakers must now make broad and massive research and development investments in game, changing clean energy technologies. Rather than betting on individual companies in a commodity like industry, tax-payer dollars should go towards creating leap-frog technologies that will one day allow for clean energy to compete without subsidies and position American companies to be leaders in the field. Cutting edge black silicon solar technology (developed here at Harvard), nano-structured solar cells that mimic photosynthesis and air-borne wind turbines; these are the kind of innovations that government should be much more aggressively funding. We need to simultaneously advance a whole host of disruptive technologies.
America must come to terms with the fact that it can’t beat China in manufacturing commoditized products. Our share of the global clean energy pie will have to be won through creativity and innovation. We must accept the new norm that we’ll have to constantly out innovate the rest of the world in order to stay competitive. Whatever ideas we come up with, low-cost competitors will copy in a few years or months. We should look to Apple for inspiration, the company that stands tall in a commoditized world by relentlessly focusing on reinventing itself, creating new paradigms, pushing out new products, and improving old ones.