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]