Losing Our Future

If you want to understand the consequences of America's failure to have a coherent, national industrial policy, look at one signature industry of the future -- renewable energy. The U.S. Energy Information Administration estimates that by 2030, total global investment in wind and solar technologies could be worth as much as $3.6 trillion. Unfortunately, the U.S. is headed down a path that will render us consumers of renewable energy -- but not leading innovators or manufacturers. Though the U.S. pioneered these technologies, we already have an annual trade deficit of over $6 billion in renewable energy, while nations like China, Germany, and Japan are widening their lead. And India is about to enter the competition with massive investment.

Other countries have deliberate policies to link innovation in renewable energy to manufacturing advantage -- -commercializing the products resulting from subsidized research and development, subsidizing education of skilled workers, and using domestic green-energy requirements to help launch export champions and thereby create domestic jobs. China has more predatory policies that include massive subsidies, pricing below cost to capture market share, closed supply chains, requirements that foreign companies produce for export but not for China, and coercive technology transfer. Japan is somewhere in between, with relatively closed supply chains and direct government help for industry. The U.S., by comparison, does nothing at the national level to link clean-energy goals to industrial ones, much less pay attention to supply chains -- leaving our states and cities to play this game as best they can -- competing against entire countries and against each other.

Consider Germany. During the 1980s, while the U.S. dramatically reduced investment in research and technology development in renewable energy, Germany was forging ahead. In 1991, Germany began implementing a regulatory mechanism called a feed-in tariff, which requires utilities to purchase all the renewable power that is produced, at prices set by the government. Purchases are subsidized, but the subsidy declines over time as technology becomes more efficient. Green-energy producers thus enjoy a reliable domestic market that encourages investment in technologies and reduces the unit cost of production. German federal research and development funding, direct subsidies, tax allowances, and loans for renewable energy have been in place since the 1970s, and Germany's increasing production capacity is directly linked to industrial goals.

Germany's soft mercantilist approach favors German firms. Both national policy and the preferences of German companies to use domestic suppliers have led to the development of strong supply chains. While Germany has turned to Chinese and other foreign suppliers of some components, both the government and the industry seek to keep high-end manufacturing in Germany. Though Germany is not notably windy or sunny, these policies have put Germany among the world's leading exporters of wind and solar technology. Comparative advantage was created by public policy. German employment in renewable energy is about 273,700, and the German government estimates that it will reach 400,000 by 2020.

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Here in the U.S., there are promising initiatives under the Obama administration, but they are fragmented. The American Recovery and Reinvestment Act of 2009 (the stimulus) invests $112 billion in various green technologies, and earmarks $2 billion for renewable-energy research. There's also a $2.3 billion tax credit for domestic producers of clean-energy equipment. But President Obama's proposal to add another $15 billion annually in renewable-energy research paid for by a cap-and-trade system is not likely to be realized. The cap-and-trade system proposed in the American Clean Energy and Security Act that passed the House in 2009 will likely be weakened in the Senate version, and passage is questionable. Another essential component of the energy bill is a national requirement, called a renewable portfolio standard, that utilities purchase 20 percent of their power from renewable sources by 2020. But that too will likely be watered down by the Senate.

Because we do not have a national strategy for linking renewable energy to domestic production, the stimulus package has given 84 percent of the $1.05 billion in clean-energy grants distributed since September to foreign wind companies. A whopping $545 million went to Spanish utility company Iberdrola S.A. through its U.S. subsidiary. A $1.5 billion, 648-megawatt wind farm planned in Texas would have used turbines produced in China by A-Power Energy under a joint venture between Shenyang Power Group and U.S.?based Cielo Wind Power. The project sought $450 million in tax credits and other support from the stimulus package even though only 15 percent of the 2,800 new jobs would have been in the U.S. Only after protests from Sen. Charles Schumer, the Campaign for America's Future, and other groups, did the companies agree to build a U.S. plant that will employ up to 1,000 workers.

Even if the administration wanted to direct stimulus funds to renewable-energy manufacturers there aren't enough firms that have the capacity to build these large projects. The industrial promise of green technology is being lost. U.S. policy doesn't seem to care where jobs, suppliers, and advanced research and development are located. China isn't making that mistake.

China's goal is to become a leader in manufacturing solar and wind equipment -- 70 percent to 75 percent of jobs in wind and solar energy are in manufacturing -- so it is targeting an expansion of wind-power capacity from 5,600 megawatts in 2008 to 100,000 megawatts by 2020. In addition to rules enacted in 2006 requiring utilities to purchase more wind and solar energy, China raised tariffs on imported wind turbines and dramatically reduced import duties on components, many of which are in short supply. To develop its own supply chains, China has gradually increased domestic content requirements for wind-farm developments -- from 40 percent in 1996 to 70 percent since 2004. In the five-year plan that begins in 2011, mandated utility purchases will increase, as will subsidies for renewables.

China is already spending $221 billion of its $586 billion 2009 stimulus package on renewable energy and other clean technologies and is poised to overtake Germany and Japan to become the largest alternative-energy producer in the world. China has more than 100 solar companies that account for one-third of global solar-component production. China's largest solar-panel producer, Suntech Power Holdings, has captured 25 percent of California's solar-panel market and will soon build a plant in the United States, but strategic control remains in China. The company plans on selling its U.S.?made panels at below cost in order to build market share. Other Chinese manufacturers will soon follow. U.S. states will no doubt compete with each other in offering subsidies to land these plants.

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Instead of a national policy for capturing the good manufacturing jobs in renewable energy, we have a hodgepodge of state policies. The best include renewable portfolio standards requiring set percentages of electricity to be generated from green sources, investment in research and development often in partnership with universities, technical assistance on business-plan development, assistance in obtaining public and private start-up capital, commercialization, and education and training. The payoff for any given state may be anywhere from a few hundred to a couple thousand jobs. While we can applaud each success, this approach will not result in the U.S. becoming a leader in renewable energy.

Several states, such as Pennsylvania, Ohio, and Iowa, have figured out that reaching big employment numbers means developing supply chains, and these states have instituted programs to assist manufacturers in retooling to supply wind-turbine manufacturers. But too often the strategy is to offer subsidies while asking little or nothing in return, and too many of the jobs pay less than prevailing wages (see Philip Mattera's April 2009 Prospect article, "A Green Industrial Economy").

Often, individual states lack the scope or market power to assure success for the companies they try to help. In 2008, for example, the administration of Gov. Deval Patrick of Massachusetts bet heavily on a company called Evergreen Solar, a start-up that emerged out of research done at the Massachusetts Institute of Technology. Massachusetts gave Evergreen Solar $67 million in grants, loans, land, tax incentives, and other aid to produce silicon wafers, cells, and solar panels in the state. The company's competitive edge was its patented String Ribbon manufacturing process, which had lower silicon costs than its competitors. The company, for its part, invested $435 million in facilities and created 577 permanent and 230 contract jobs in Massachusetts. In 2009, Evergreen accepted a $1.8 million tax credit and a 12-year tax break worth an additional $3.9 million for locating another plant in Michigan.

But some competitors with even newer technologies and deeper government subsidies turned out to have lower costs, while China was offering large subsidies and cheap workers. Evergreen, to survive, has announced that it is shifting panel production to China, while keeping wafer and cell production in Massachusetts. The Wuhan government financed about two-thirds of the cost of the facility. Evergreen will write off $40 million worth of equipment at the Massachusetts plant because of the production shift to China. Evergreen CFO Michael El-Hillow says that some jobs in Massachusetts will be eliminated but suggests the losses might be offset by increasing production of wafers and cells.

Evergreen is actually making very rational moves in a highly competitive international environment. As the price of silicon has come down, labor has become a higher percentage of its cost. To stay competitive, it makes sense for Evergreen to take advantage of China's offer to subsidize a new facility that will have considerably lower labor costs. And Evergreen wisely located early in Germany where energy policy creates demand for renewable--energy systems. Indeed, Evergreen's European sales have grown 20 times since locating there. But absent an American national strategy to help domestic companies remain competitive, individual firms like Evergreen are driven to locate in places where foreign-government policy creates a more lucrative environment.

First Solar is another homegrown American solar company that has gone global (see my April 2009 Prospect article, "Cities on the Front Lines"), after receiving $150 million in public and private funding to develop the product and manufacturing process. Looked at purely as a private business decision, it made sense for the company to locate in Germany to take advantage of the huge market there. But the company has also built four plants in Malaysia, and in September of this year, it entered into a memorandum of understanding to build a 2-gigawatt solar-power plant in China. First Solar employs about 1,000 in its U.S. plants, 2,000 in Malaysia, and 1,000 across Europe.

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In short, federal and state government subsidies are incubating U.S.-owned companies, which then do an increasing share of research, development, and production offshore. And many companies are giving away technology developed here to do so. To secure a $900 million contract for electricity-generating turbines, GE agreed to share much of the technology so Chinese companies could make the equipment on their own. Other U.S. and European companies have done the same. Delbert Williamson, GE's president of global sales at the time, told The Wall Street Journal, "They're interested in having total access to technology and we're interested in protecting the technology that we made significant financial investment in." While GE held back on sharing some of the technology and has since created more sophisticated turbines, the point is that companies wanting to do business in China must agree to its protectionist policies.

But then GE turns around and criticizes the U.S. for requiring domestic job creation in the stimulus package. GE's vice chair and energy business CEO, John Krenicki, criticized the minimalist "buy American" and other local content provisions in the stimulus package in an October Financial Times article arguing that "rampant protectionism" will hold back the creation of green jobs.

Corporate CEOs know that the decisions that make sense for their companies are not necessarily good for the country. In October, Duke Energy announced a joint venture in which it would work with China-based ENN Group to develop commercial-scale solar-power projects in the U.S. for which ENN would supply the equipment. Duke CEO Jim Rogers explained to The Wall Street Journal that while he understood the deal undermines the goal of President Obama's energy policy to revitalize U.S. manufacturing, the erosion of the U.S. manufacturing base "is irreversible. There's nothing I can do."

But that's too pessimistic. There is plenty that we can do. For starters, the U.S. needs to pass an energy bill with a strong portfolio standard to create a larger U.S. market for renewable energy. Then we need to combine our energy policy with a coherent industrial policy whereby industries that aim to become global winners thanks to government subsidies do not just produce offshore for global markets but provide good jobs in the U.S. Further, we need to require more local sourcing of components of foreign wind and solar companies in the U.S. and help our manufacturers retool to fill this demand. And we need to insist that foreign competitors like China play by fair rules of trade. It is committing industrial suicide if we leave our remaining great corporations and our start-ups to negotiate one-sided trade and production deals with nations whose policies are far more strategic than our own.

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