By Sylvain Plasschaert, Honorary Professor at the University of Antwerp and at the Catholic University of Leuven
2. The Solar Energy Sector in the European Union and China
2.1. The Boom and Bust of the Solar Energy Sector
Renewable energies, tapped from nature itself, open a wide horizon for scientific progress that would bestow incommensurable economic benefits to the world as a whole. Indeed, as soon as developers of solar energy, no longer buttressed by government subsidies, would succeed in improving the technologies (for the generation, the storage, and the transmission of solar power) to the ‘grid parity’ level, the benefits would be truly revolutionary. The ‘grid parity’ level is the level at which the cost to install solar energy capacity would descend to that of electricity provided by fossil fuels (coal, petroleum or gas). Solar energy, for example, is inexhaustible, clean and – if it is efficiently captured – has low variable costs. Moreover, and vitally important, photovoltaic solar energy does not release carbon dioxide. Sunshine is also available all over the world, albeit in unequal doses. Hence, the operation of a solar energy system can be organized in a fairly decentralized manner. In due time, solar energy could be delivered in small quantities into individual households and such micro-units might become ‘prosumers’, who combine the roles of producers and consumers, in the terminology of Rifkin (2014), who anticipates their emergence in thirty years.
Looking back at around the turn of the century, solar energy came to exert a strong appeal in the business world within the span of a few years. In the US, especially in sunny California, a number of firms started to manufacture chips, cells and /or panels. In Europe a similar hype in solar energy took root in several countries, especially in Germany which had established a strong position with respect to silicon, a widely used material, and cell production. Elsewhere in Europe many firms in the energy sector, or even in plumbing, eagerly engaged in the solar sector, especially with respect to the installation of solar panels. The initially rather lavish subsidies to consumers by governments in a number of countries, propelled a booming business. Moreover, the installation of solar panels was viewed favorably by governments, on account of its labor-intensity. In Germany a law in 2000, aiming at developing renewable energies, provoked a real outburst of activities in solar energy. As a result, Germany had the world’s highest output of solar energy by mid-2011. Italy and Spain, more generously gratified with sunshine, reached about the same modest, but rapidly rising, coverage of electricity needs.
The interest in solar energy erupted quite suddenly in China also, but it occurred at a later stage. The interest arose once the Chinese government had announced that it would provide rather generous subsidies to the enterprises that would enter this new field, which were initially focused on wind energy. Furthermore, firms in China were typically heavily involved in the end phase of the production process, such as that of assembly into solar panels, and intermediary inputs, such as Germany-made silicon cells, were often imported.
In such a propitious setting, the solar industry experienced a meteoric growth over the last decade. A great number of firms initiated the production of solar panels, especially in China, or of components, such as silicon cells. In other regions, particularly in Europe and the US, more on the ‘consumer’ side, the installers of solar panels tended to purchase panels from the lower-cost producers, quite often located in China. The hype of the solar energy sector (and of its ‘cousin’, the wind sector) reminds us of the internet hype in the first years of the new century, but which soon capsized into a deep crisis.
The breakdown of the photovoltaic energy sector was as sudden and deep as its ascent had been speedy and promising. The causes of the downfall were largely similar in most of the countries already cited above. Some of the general reasons for the breakdown of the sector include:
- Over-optimism had attracted many firms to start production. Some of these firms were seasoned large firms, with a solid technological craft, but others were small firms with a weak financial backbone.
- Many firms, encouraged by government subsidies, did not hesitate to borrow heavily, especially since interest rates were notoriously low. In the prevailing bullish ambiance, they perceived a golden opportunity that should be availed of as soon as possible and on a large scale. Thereto a number of firms at once set up affiliates abroad, but their forward financial planning was often inadequate.
- The overinvestments entailed considerable overproduction, which, in itself, provoked a downward turn of the prices of their products and of their profit rates, in an already fiercely competitive market.
- Concurrently, some technological advances pulled down the production costs and heightened the rivalry.
- In sum, investing firms had inadequately factored in some characteristics of a seemingly attractive new business, but in a still immature industry, with rapidly evolving technologies. Therefore, there was the related risk that a price war may soon ensue and the likelihood that this new field would attract many new rather adventurous producers.
In addition, the development of the solar energy sector in China aggravated the situation. In China the response of the business world – typically rather by fairly small non-state companies, not large State-owned enterprises (Freeman, 2015) – to the prospects of benefiting from the government subsidies, was much more forthcoming than the government had anticipated. About 400 firms, of varying solidity, plunged into production. Outlets in China remained limited, as the electricity generated could not be loaded on the underdeveloped distribution grids. Yet, due to some economies of scale and partly to lower labor costs, and to some public subsidies, firms in China were able to supply panels at a cheaper price than their foreign rivals (serious estimates, such as at the Asian Development Bank put their price advantage at around 20 % (Xie, 2012)). Several of them, once they were in severe financial straits, emptied their stocks at discounted prices, and flooded the export market, where they found eager importers of panels in the EU and the US.
In the main countries involved, quite suddenly several of the factors just mentioned, coincided and provoked a widespread cataclysm, which caused the downfall of a significant number of firms, even among those that were in pole position. The very rapid surge of producers in China and of their exports provoked real disasters in the US and even more in the EU. Furthermore, the concomitant financial crisis that engulfed the world did not provide a favorable background to the solar industry, although the financial tsunami in itself cannot be held accountable for the catastrophe in the solar energy field, as the latter occurred not only in the Western world, but equally in China.
An example which illustrates the downfall of the sector in the United States is the American firm Solyndra, which was first acclaimed as a shining innovating firm. At the end of 2006, it requested a government guarantee for the construction of a new robotized manufacturing facility. In September 2009, the US government granted a subsidy amounting to 535 million USD. However, less than a year later Solyndra ran out of cash. The prices of its panels had dived deeply, while the company was launching a more efficient, but more expensive, technology. In August 2011 the firm was declared bankrupt and more than 1,100 employees were laid off. The strong competition by the Chinese firms Suntech and Yingly was mentioned as a contributing factor, but allegations of illegal accounting manoeuvers have also been leveled.
In Germany, a significant percentage of the firms involved went bankrupt, on account of the keen competition of Chinese imports, the overambitious expansion plans of some firms and the burden of the debts incurred. Amongst the victims were some well-known firms, such as Q Cells and Conergy.
In China, the destiny of many participants in the solar energy sector was similar. Suntech, listed on the New York Stock Exchange, which in 2011 proudly proclaimed that it was the world’s largest solar energy firm, was declared insolvent in 2013. Its creditors, notably the state-owned Development Bank of China and the Bank of China, did not renew their outstanding loans and bills to several suppliers of inputs – among them South Korean firms – remained unpaid. Suntech was finally salvaged, in a much slimmed format, by the city of Wuxi, where it is headquartered and employed 10.000 workers, and by a Hong Kong investor. Other Chinese firms, such as Trina and Yingly, which had already built up a solid position in foreign markets, also went through tough times, due largely to the drying up of consumer subsidies in importing countries, but they survived.
2.2. The Anti-Dumping Case between China and the European Union
The preceding exposé already presages the sharp anti-dumping conflict that occurred between the EU and China. This dispute soon became a hot topic in the media and unleashed accusations of varying veracity from interest groups, and even from official spokesmen. As already mentioned in the introduction to this paper, a last minute agreement settled the case, at least temporarily. A succinct narrative of this clash is provided herewith.
As in some other similar disputes, the solar energy anti-dumping (AD) measures were enacted first in the US, ahead of those in the EU. A complaint by producers in the US, led by the American subsidiary of the German firm Solar World, together with six other producers (which chose to remain anonymous), requested action against the imports from China, which had been growing rapidly. The US Department of Commerce enacted an AD duty, amounting to 31% (and an anti-subsidy levy of 73%, as well). Those levies were instantly challenged by a ‘coalition for the affordable solar energy’, which stressed that the cheaper imports from China benefited consumers in the US and that many more workers were employed in the installation of the imported solar panels than in the domestic manufacturing of solar products.
A similar complaint was lodged with the EU Commission by a Pro Sun coalition, equally spearheaded by Solar World, which grouped about 40 producers. The allegation was that manufacturers in China practiced dumped export prices and benefited from massive and unfair subsidies at various levels of governments in China. This move was immediately protested by the ‘Alliance for affordable solar energy’ (AFASE), an ad hoc coalition of about 400 importers, installers and large distributors, who advocated the free entry of solar panels into the EU. As in many other EU-China trade conflicts, the opposition of interests between producers versus importers, and users, was obvious and highly mediatized (an issue also discussed in Chapter 6).
While the Commission was investigating the complaints, and statements by EU decision-makers strengthened the expectation that tough trade defense measures were forthcoming, opposing opinions were voiced as well, even within the same country. Member states were openly divided on the issue. In Germany, for example, Chancellor Merkel, who was hosting the Chinese premier, counseled caution. The fear that China, a major outlet for EU business, might retaliate even in unconnected areas was conceivably a major consideration underpinning her position.
Despite strong political headwinds, the European Commission persisted in its AD investigation and stated that it found evidence of price dumping. This is plausible, as in a number of cases Chinese producers facing overproduction and with little scope for outlets within China itself may have directed their sales to the EU at lowered prices to empty their excessive stocks. In June 2013, the Commission introduced a preliminary, rather lenient, anti-dumping levy of 12%. It threatened to transform this into a definitive duty of 47% if, before 6 August 2013 no agreement would be forthcoming. However, a compromise (valid until the end of 2015) was reached at the end of July. In an official memo of 4 June 4 2013, the Commission held that “this (action) is not about protectionism, and not about a trade war, but about re-establishing fair market conditions”. It also added that “in the absence of measures, 25,000 jobs in the EU would be at risk … and the EU’s technological leadership would be lost” (European Commission, ‘Frequently asked questions’, 2013). Close to the expiry date, China undertook to request its exporters to raise their export prices to the level of the prices applied by Korean exporters in the solar panel spot market. In substance, this agreement embodied a (not so) “voluntary export restraint”. In the end, 90 firms in China, accounting for nearly 60% of the EU market, accepted that norm while the others were subjected to the higher definite anti-dumping levy (for more details see Naman, 2014).
This agreement has significantly relaxed the tensions and looks balanced. One may surmise that the Chinese government also had misgivings about the overproduction at home which had not been anticipated to its actual extent. This interpretation finds support in the steps that were subsequently taken in China to severely thin out the number of producers and to redirect them more to the domestic market.
There were some dissenting reactions to this outcome. The ProSun group decided to contest the Commission’s decision at the European Court of Justice. In September 2015, the ProSun coalition requested the re-opening of the anti-dumping levies. Furthermore, a few other subsequent developments related to the EU-China dispute are also worth mentioning. In May 2015, the Commission initiated an ‘anti-circumvention’ action, alleging that its anti–dumping duties were sidelined via Taiwan and Malaysia, and in June 2015 the Commission terminated the undertakings by three major enterprises in China, including Canadian Solar. Additionally, the Commission enacted an anti-dumping levy on glass used in the manufacturing process of solar panels. This file, of much lesser importance, stands apart from the solar panel case, which would have been the largest anti-dumping dispute ever, with 23 billion USD at stake.