[Hot US Solar]③ Benefits for Domestic Industry but Real Gains in China?..."We Must Revive the Domestic Industrial Ecosystem"

Editor's NoteThe biggest beneficiary of the U.S. Inflation Reduction Act (IRA) is 'renewable energy.' More than 40% of the allocated funds, amounting to $160.3 billion, are designated for tax credits related to renewable energy. While the U.S. cites inflation control and climate change response as the basis for the legislation, it is interpreted that the underlying intent is to attract new production bases to the U.S. in competition with China, the leader in renewable energy. So far, many global companies appear to be investing in the U.S. as intended by the American government.

In particular, the solar power industry is expected to grow rapidly, becoming the largest component of the U.S.'s future energy mix, which is currently based on fossil fuels. Due to U.S. efforts to counter China, an unprecedented opportunity has arisen for the domestic solar industry. However, the reality that the major solar supply chains depend on China remains a challenge to be resolved. We have examined the response strategies of domestic solar companies to the Inflation Reduction Act and the industrial policy directions to support them.

[Image source=Yonhap News]

[Asia Economy Reporter Jeong Dong-hoon] The aftershocks of the U.S. Inflation Reduction Act (IRA), which provides hundreds of trillions of won in tax credit benefits for eco-friendly energy, are intensifying. Particularly, there is growing interest in where the dominance of the solar panel industry, a representative of renewable energy, will flow.

While expectations are rising that domestic solar companies will benefit from the void left by Chinese companies excluded from the support, concerns are also emerging that they may not gain substantial advantages due to their heavy reliance on raw materials and supply chains mostly sourced from China.

◆U.S. Solar Industry Lacks Proper Means and Justification for Sanctions on China... Will China Ultimately Reap the Benefits?=According to industry sources and the U.S. government on the 6th, the Inflation Reduction Act aims to curb inflation by reducing the fiscal deficit by about $300 billion over the next decade. Key provisions include the introduction of a minimum corporate tax rate of 15% for large corporations, tax credits for purchasing eco-friendly vehicles such as electric cars, and tax credits to promote investment in renewable energy.

However, detailed provisions regarding renewable energy were not disclosed. This contrasts with guidelines for electric vehicles, which require parts and minerals to be produced in the U.S. or countries with which the U.S. has free trade agreements (FTA) to qualify for subsidies. This reflects the unavoidable reality of the solar supply chain being dominated by China.

The U.S. government plans to finalize detailed guidelines by the end of the year, but there are criticisms that it is difficult to impose additional import restrictions or exclusion measures on Chinese solar equipment because the U.S. has already imposed high tariffs on Chinese solar panels for the past four years.

The U.S. 'solar tariffs' began under the Trump administration in 2018 to curb Chinese panels dominating the global market by imposing a 30% high tariff on imported panels. This was justified under Section 201 of the U.S. Trade Act as a 'safeguard' to protect domestic industries from damage caused by cheap Chinese imports. The tariff rate was gradually reduced to 15% over the four-year imposition period (until 2022). In particular, in February this year, the 15% tariff on imported solar panels and related equipment was extended until 2026, four years later. However, the import quota was doubled from the previous level, and key components such as 'bifacial panels' were excluded from tariff imposition, leading to criticism that 'the core has all been handed over to China.' Although the Chinese solar industry bears the tariff burden, the enactment of the Inflation Reduction Act creates conditions where the benefits of U.S. solar industry growth may ultimately return to China.

China controls a significant portion of the global solar supply chain. As of last year, Asia leads with 57%, followed by Europe at 21%, and the U.S. at 16% in the solar industry. China leads in new installations with 54.9 GW. The Chinese solar industry is the fastest growing globally, supported by strong government promotion and support and a high market share within the supply chain. The global solar supply chain's dependence on China is very high, currently reaching 72% for polysilicon, 98% for ingots, 97% for wafers, 81% for cells, and 77% for modules.

A 168MW solar power plant in Texas, USA, constructed and operated by Hanwha Q CELLS. Photo by Hanwha Q CELLS

◆Korean Solar Industry Cedes Supply Chain... Experts Urge Protection and Nurturing of Domestic Industrial Ecosystem=Domestic companies are gradually withdrawing from the market, overwhelmed by the volume offensive of Chinese products. Woongjin Energy, which produced ingots and wafers, filed for court receivership in 2019, and SKC exited the solar protective film business, ethylene vinyl acetate (EVA) sheets, in 2020. With LG Electronics exiting the solar module business, only Hanwha Q CELLS and Hyundai Energy Solutions remain among major domestic solar panel companies.

In response, the government has introduced a carbon certification system that quantifies and verifies total greenhouse gas emissions to strengthen the competitiveness of domestically produced solar modules. However, there are analyses suggesting that China’s reduction in coal use and expansion of renewable energy may render this ineffective in the future.

Professor Yoo Seung-hoon of the Energy Policy Department at Seoul National University of Science and Technology expressed doubts about expectations that the domestic solar industry will benefit from the Inflation Reduction Act. Professor Yoo said, "(The IRA) helps a limited number of companies that have production plants in the U.S. to some extent," but added, "Small and medium-sized enterprises that only have factories domestically actually import Chinese components for assembly, so they are unlikely to benefit."

He continued, "The domestic solar industry has focused only on the distribution of solar panels and neglected the domestic industrial ecosystem of materials, parts, and equipment, leading to market encroachment by Chinese companies," and emphasized, "To protect domestic industry, it is necessary to build an ecosystem where large and small-to-medium enterprises grow together." Professor Yoo also suggested establishing a renewable energy public corporation (tentative name) to steadily create demand for the domestic solar industry. He said, "Assigning the role of distributing renewable energy to a public corporation and restricting it to use only domestic products will create a domestic industrial ecosystem," adding, "Only when companies manufacturing and researching domestically exist will employment be created and the industrial ecosystem strengthened."

Professor Hong Jong-ho of Seoul National University’s Graduate School of Environmental Studies said, "The government must seriously consider the impact and ripple effects of the Inflation Reduction Act," and added, "In the complex political, economic, and geopolitical conflicts such as the Russia-Ukraine war and U.S.-China tensions, countries are trying to establish self-contained industrial systems." He continued, "While Korean companies will benefit to some extent, the Korean solar industry must carefully consider whether this is truly beneficial," and warned, "If investments in the U.S. replace domestic investments, we must consider the impact on the Korean industry within the next two to three years."