By Richard Stubbe, BloombergNEF. This article first appeared on the Bloomberg Terminal.
First there were the U.S. tariffs on solar components from China, now the coronavirus has struck in the heart of its manufacturing base, and still the solar industry is cranking out more and more panels at lower and lower costs.
“The demand for solar has never been stronger,” said Andy Klump, chief executive officer of Clean Energy Associates, in an interview with BloombergNEF in Houston in late February. The Shanghai-based firm inspects components and the factories that make them for the buyers, typically developers of solar farms.
The virus has created some hiccups in the supply chain not only in Wuhan, but in Sichuan province to the west and in Zhejiang province on the coast, Klump said. Some factories are running at less than half their capacity.
Still, there will be changes in the industry as a result of the Covid-19 virus that emerged last year in Wuhan, in Hubei province in central China, Klump said. China will continue to dominate the supply chain of wafers, cells and modules, but bigger, more established manufacturers will diversify to avoid future bottlenecks. Smaller or mid-size factories may suffer the most.
Q: Will there be any long-term industry changes?
A: You’re not going to see the industry shift to the U.S. in any meaningful way. It wouldn’t be cost-effective, and it takes five-plus years to build up a supply chain. I could easily see more of the Asian suppliers shifting to South East Asia with their subcomponent suppliers — Vietnam, Malaysia and Thailand. We also see a little bit starting in Cambodia.
Q: Are you seeing signs of a peak in the virus?
A: It’s hard to speculate. There could be multiple phases or waves. This case is far more serious than SARS [severe acute respiratory syndrome, the 2002-04 outbreak that resulted in hundreds of deaths] ever was. The government is doing its best to get a handle on it, but it’s spread so much it’s really impossible to get your arms around it.
Q: How has it affected your company?
A: We have three members of our team that are in Hubei province now. They’re all well but they’re quarantined at home with their families. They’re still doing some remote work but they’re not in the factories doing the inspection work that they typically would.
Q: How will companies prevent future disruptions of the supply chain?
A: One of the natural outcomes is going to be a flight to quality. Folks are going to look at the larger manufacturers who have more stable supply chains, but there’s a limitation on the number of players who fall into that bucket. There’s going to be a lot more discussion about who else has a stable supply chain. They’ll have to research fully and partner with strong international suppliers who have local supply chains which are not dependent only on China. There are some up-and-coming players with stable supply chains, but you can’t have a supply chain in the U.S. and in South East Asia and in China.
Q: What are the down sides to diversification?
A: It takes more contracts with more parties. There are different ways to slice and dice the risk. Every procurement professional will tell you always dual-source depending on your volumes, but we are encouraging folks to consider not just two but three suppliers. But most finance mechanisms for single projects are dependent on one stable supplier, so that’s problematic.
Q: Are companies at risk of losing their U.S. tax credits for building solar?
A: There’s a start-of-construction provision that should let developers qualify for the credit as long as they started their projects by this April and have them delivered by 2023.
Q: In January 2018, President Trump placed tariffs on imported solar cells and modules for four years, and the administration has favored coal and other fuels over renewables. How’s the political environment now?
A: Solar is more of a bipartisan issue than it’s ever been before. Obviously the Trump administration platform is more about domestic jobs, and what we have to educate them on is that it’s not just about manufacturing jobs but about installation jobs. There are far more installation jobs, more than 200,000 compared to fewer than 2,000 in manufacturing.
Q: Does the recent decline of the world equity markets have an effect?
A: It doesn’t really cause the publicly traded companies any harm just yet. There may be a long-term systemic shock. But financing of long-term solar projects aren’t dependent on the current level of the market. There are pension funds and infrastructure funds and insurance companies and the like that are willing to finance long-term solar at a fairly reasonable cost of capital.
Q: China’s also ramping up its efforts in energy storage. How are the growth rates for solar and storage?
A: Storage is growing much faster on a percentage basis, but it’s a much smaller portion of our business. The overall growth rate of solar has been very strong, especially in the U.S. and Europe. There’s a huge demand in the U.S. because of the investment tax credit. Last year was bad for storage, but there’s a lot of planning going on for the 2020-21 pipeline.