New Shores - A Tale of Two Technologies

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This transcript is from a CSIS podcast published on October 12, 2023. Listen to the podcast here.

Allegra Dawes: Over the past 10 years, the cost of solar and wind has fallen dramatically. This cost decline has contributed to a dramatic increase in the use of wind and solar in global power systems.

News Clip: And wind and solar power are booming to record levels. 50 countries, including the US, generating more than 10% of their electricity last year from wind and solar power.

News Clip: Wind and solar now represent 12% of total electricity production.

Allegra Dawes: But getting to net zero will require more. For solar, the pace of deployment is accelerating around the world, and building resilient and scalable supply chains will be a key focus. In wind, the next frontier for the US is deploying offshore wind. That is, turbines installed in the ocean, along coasts. Today we are looking at two different sectors, the solar industry and the offshore wind industry. Both technologies are set to play important roles in decarbonizing the US' and the world's power supply. These industries are at different stages of maturity, but both are looking to rapidly increase deployment and build a domestic supply chain. So how does onshoring supply chains work in different sectors? How should policymakers think about the successes and shortcomings of green industrial policy in both these spaces and how can we bridge the gap between ambitions and reality in these industries?

From the Energy Security and Climate Change team at CSIS, I'm Allegra Dawes, and this is New Shores, a podcast series on green industrial policy and the U.S.' effort to onshore and friendshoring clean energy supply chains. On today's episode, we'll take a look at developments in the domestic solar and offshore wind supply chains. We'll start with solar. During this podcast, we have looked at different motivations behind onshoring and friendshoring supply chains. One of the main goals of increasing domestic supply capacity is to ensure energy security. Unsurprisingly, China plays a large role in the global solar supply chain, which poses a threat to energy security. MJ Shiao, the Vice President of Supply Chain and Manufacturing for the American Clean Power Association, describes the current global solar supply chain.

MJ Shiao: Over the past 15, 20 years for solar, China has taken first an increasing share and then currently a dominant role in supplying solar globally. And it's a little bit different and unique in the US because we have different policies and tariff regimes where a lot of the manufacturing for solar cells and modules that come to the US are actually from Southeast Asian countries, but when you look at the rest of the world, China is typically around 80% of global manufacturing, and in certain verticals like solar wafer, almost 98% of global manufacturing.

Allegra Dawes: While the U.S. has mainly sourced from Southeast Asian countries, China's concentration of solar supply has proved challenging for US players in the market. Supply chain constraints have at times limited the pace of deploying solar energy in the U.S. Scott Moskowitz, the director of strategy and market intelligence at QCells, one of the world's largest clean energy companies, explains.

Scott Moskowitz: We've seen in the last three years in particular, during the COVID pandemic, but even before that due to some of the trade disputes, that the U.S. has not controlled the pace in which it installed solar energy in the United States. In spite of really strong demand in a market that really wants to do that, the country has been too dependent on imported products that have been subject to supply shocks.

Allegra Dawes: This dependence is in part because the domestic supply chain is not vertically integrated. So, to break it down, manufacturing solar panels has five main parts. Polysilicon is turned into ingots and wafers, which are then turned into photovoltaic cells. And finally, a solar module is produced. The middle steps, producing ingots and wafers, are dominated by China.

Scott Moskowitz: There have been no makers of solar wafers, which is the next step in the supply chain in the United States for some time. And so, the only market for a U.S. polysilicon manufacturer is external, around the world, and that 97% of the supply chain right now for that product is in China where there are tariffs in place on the import of U.S. polysilicon.

Allegra Dawes: MJ agrees that the U.S. supply chain has failed to bridge this gap.

MJ Shiao: If you look at the announcements that we've seen, so at ACP, we've tracked around 76 gigawatts of new solar manufacturing facilities across, I think, over 50 different facilities. A lot of that is concentrated on module manufacturing, but we're still seeing, for example, fewer than 20 gigawatts in cells, wafers being announced in the U.S., and if that's the case, then the U.S. will continue to depend on cell imports.

Allegra Dawes: Achieving energy security and supply chain resilience goals depends to some degree on vertical integration. The IRA and the move to onshore supply chains do not automatically result in vertical integration. Expanding the U.S. supply chain should not simply focus on extending capacity to produce solar wafers. There is also a need to grow into different segments of the value chain. The IRA can help to achieve this goal if it values all segments of the supply chain, which is a challenge given the breadth of the legislation. MJ explains this.

MJ Shiao: What we see today is, certainly the Inflation Reduction Act takes some steps to incentivize those pieces. But for example, if you look at the solar polysilicon tax credits, they're much smaller relative to the rest of the steps in the solar supply chain for a product that is much more volatile from a commodity market standpoint as far as pricing, and also takes a lot more upfront investment than a lot of the other steps down the supply chains.

Allegra Dawes: Despite this, the overall industry reaction to the bill has been overwhelmingly positive. Beyond opening opportunities to ensure security and resilience, this investment is also going into U.S. communities. Here's Scott on QCells' investment after the IRA.

Scott Moskowitz: It's incentivizing scale that we have not had here before. Again, the investment that Qcells made back in January is a 3.3 gigawatt investment in ingots, wafer cells and models. It's $2.5 billion dollar investment, and we already are going to have another five gigawatts of module assembly. That's scale that's never existed in the United States before, and what that enables companies to do is do everything they can to become as cost-competitive as possible.

Allegra Dawes: In addition, scaling the domestic industry translates to jobs. Remember the Biden administration strategy for green industrial policy, to catalyze economic development? In solar, that strategy seems to be working.

Scott Moskowitz: QCells, we're hiring 3000 additional people in Georgia over the next two years to scale up from the about a thousand that we already have. That is a huge amount of people to hire in an economy in which the unemployment rate in Northwest Georgia where our factories are is 3.5%.

Allegra Dawes: But even with the IRA tax credits and the economic benefits, it's unreasonable to assume that the U.S. can or should produce every component of the solar industry. Building trading partnerships with friends will still be important, just like with batteries. MJ thinks that more work will need to be done to achieve this vision.

MJ Shiao: I think what happens is that there's often tension with some of those countries that we want stuff to be built in from the perspective of... I think about when the IRA was passed and how many EU policymakers suddenly looked at that as a threat and not an opportunity to collaborate. But that being said, we are seeing some encouraging signs where some countries have taken the IRA as inspiration, where Canada has its own version of tax credit policy for clean energy now, where it could be helpful to building clean energy supply in North America as well.

Allegra Dawes: Developing mechanisms to build international support will be important for the global deployment of solar. While solar accounted for around 4% of U.S. energy supply, the offshore wind sector is much less developed. The US today only has seven operating offshore wind turbines and there are no large projects operating in U.S. waters. Atin Jain, a senior associate with Bloomberg New Energy Finance working on offshore wind, describes the supply chain for this sector.

Atin Jain: The U.S. offshore wind supply chain is currently in its infancy, and actually, the timely availability of equipment at a competitive price is one big challenge that the industry faces. There are also other challenges around macroeconomic volatility that has really impacted the prices and profitability of projects.

Allegra Dawes: Despite the lack of an established and responsive domestic supply chain, the US has big goals for offshore wind. The Biden administration set a target of 30 gigawatts of capacity by 2030. For context, that would mean that the US would have to install around 2,100 turbines over the next seven years. Atin thinks this will be a challenge.

Atin Jain: I think that 30 gigawatt by 2030 US offshore wind goal is actually as big as trying to reach the moon in the 1960s, and in many ways what's really happening today is that the industry is trying to run before it can walk. So I think we have made some good progress already, but I would rate the progress as 6/10 on where we are in terms of the target and what really the road lies ahead of us.

Allegra Dawes: Even though reaching 30 gigawatts of offshore capacity is a lofty goal, project developers are eager to get started. Varun Sivaram, a senior vice president in Orsted, one of the world's largest offshore wind developers, sees a lot of opportunity in this sector.

Varun Sivaram: It's an excellent and ambitious goal. It's one that we should achieve. So by 2030, we have set a goal of 17 to 19 gigawatts of clean energy capacity in the US, including three to five gigawatts of offshore wind. We are already the only producer of offshore wind in the US right now, and we're building the country's first offshore wind utility-scale farm, South Fork, that's going to come online soon. We are deeply invested in and support the Biden administration goal.

Allegra Dawes: Reaching that goal will require growth in the domestic supply chain. Right now, project developers have to source components from around the world. Atin explains.

Atin Jain: At this point in time, the projects that are in construction are actually using imported equipment. There are several things that often can go wrong with sourcing multiple equipment’s from different vendors, different suppliers, from different parts of the world. Delays can have a cascading effect, so it is actually always better to have your equipment coming from closer to home sources. So if U.S. can have a local supply chain, there's nothing better than that.

Allegra Dawes: A domestic and localized supply chain is seen as a pathway toward resilience. We've heard that before. In batteries and solar, shorter supply chains are a tool to achieve greater manufacturing and deployment resilience, but onshore wind has a particularly long supply chain. Not only do projects require turbines, foundations and electrical cables, the industry also depends on large infrastructure like ports and ships to install these turbines in the ocean. Varun highlights the challenge in building this supply chain at the scale and pace required to meet the U.S.' offshore wind goals.

Varun Sivaram: Look, it's a new industry, and so we've got to build things like specialized vessels, bespoke manufacturing capabilities here in the US, factory and port facilities here in the US. These are large and complex infrastructure projects. You can't accomplish these overnight and in many cases, they're going to be more expensive in the early stages.

Allegra Dawes: Beyond resilience, shorter supply chains for offshore wind can also reduce transportation costs, particularly for large components.

Varun Sivaram: These are, for example, large and heavy components. It makes sense to economize on transport costs down the road once we actually have a robust ability to manufacture these components. So I'd love to get to, long-term, a sustainable American industry that has strong investments in robust local content.

Allegra Dawes: We'll turn back to the question of costs in a few minutes, but first, there is a clear desire for a local supply chain to improve resilience and reduce delays for projects. The IRA again has helped to stimulate investment in the supply chain for offshore wind. Atin explains.

Atin Jain: I think the Biden administration's policies around the Inflation Reduction Act's tax credits to the manufacturers and also to the developers really do play a big part in putting the carrot freely in front of the developers and the turbine makers in trying to localize the supply chain and using more local equipment.

Allegra Dawes: The IRA includes additional tax credits for meeting domestic content requirements and labor requirements. In part, this is why offshore wind developers are eager to invest in communities near energy projects. Varun gives some examples of Orsted's approach.

Varun Sivaram: The offshore wind industry as it grows really supports actual companies' investment in communities, and there's two different ways that we do this. One is, we support US manufacturers, and the other is, we encourage foreign manufacturers to come set up shop here, produce for our market, and even export abroad.

Allegra Dawes: The U.S. has become an attractive market for international companies to invest in clean energy technologies and projects. We hear that in batteries, solar, and now offshore wind. This is one of the successes of green industrial policy, but despite the early signs of investment, there are limits to onshoring and launching a domestic supply chain. This is where cost comes back in. Particularly in the short term, sourcing components from international producers may be cheaper and faster.

Varun Sivaram: In the short term, sure, it would in fact be faster and cheaper initially to use our foreign supply chain, and we are actually going to have to work with our foreign supply chain in the very near term to get these first projects off the ground. But in the long run, I typically see trade-offs. But I actually think in this case, in the long run, in offshore wind, you do have a potential win-win there, where if you have a robust domestic supply chain across the value chain, maybe not for every single component but for a lot of it, you do have a potentially lower cost offshore wind sector in the U.S.

Allegra Dawes: The cost of onshoring and friendshoring is one of the major questions facing this green industrial policy experiment. Can reorganizing and building new supply chains be competitive? This is a critical question for both solar and offshore wind. In solar, the U.S. industry is confident that onshoring production will be cost-competitive. Here's Scott again.

Scott Moskowitz: Solar is now among the most cost-effective forms of energy that exist in many places where it's cheap to install solar and there's really strong sunshine all the time. Solar is the cheapest form of energy that has ever existed, and so there really isn't necessarily a trade-off in terms of, if this stuff is manufactured in the U.S., does that make it too expensive?

Allegra Dawes: Scott sees the effort to onshore the solar supply chain as a question of energy security. The subsidies for this sector are less focused on supporting a new industry that is not yet competitive. They're focused on diversifying supply away from China.

Scott Moskowitz: And so that's why this is really an energy security issue, we've reached this point in our industry's history where solar's cost-effective. No matter where it's made and at a general price range, it's going to be competitive with natural gas, it's going to be competitive with wind, it's going to be competitive with nuclear, hydropower, every other major form of energy.

Allegra Dawes: For offshore wind, managing costs is more harrowing. Rising costs and increased interest rates are beginning to have serious impacts on the developing industry.

News Clip: ... the Federal Reserve announcing its decision on interest rates now. The Fed will raise rates by a quarter of a percent.

News Clip: ... and labor shortages, extreme weather, shipping delays, supply chain disruptions weighing on people across the country.

Allegra Dawes: Varun explains some of the financing and inflation challenges facing projects.

Varun Sivaram: You've seen an unprecedented pace and speed of interest rate increases, levels now not seen for more than 20 years, more than 5% increase in just the last couple years, and that strongly affects the cost of capital, of building these capital-intensive offshore wind projects. Beyond that, you've had high inflation recently and supply chain challenges, and so that increases the input costs that go into building an offshore wind farm.

Allegra Dawes: These costs have had a significant impact on the development and competitiveness of the industry. Atin broke down some of the impacts that increased capital costs and operating costs have had on the price of energy generated by offshore wind.

Atin Jain: But actually, when you look at offshore wind specifically, what we have estimated at BloombergNEF is that the levelized cost of electricity or a subsidized US offshore wind project, that has actually increased to about $114 per megawatt hour in 2023. This is about 48% higher from the 2021 levels.

Allegra Dawes: This increase in the cost of electricity has been driven in part by inflation across the supply chain. Capital expenditure, or the investment companies need to build and expand these projects has also increased.

Atin Jain: Project developers have publicly highlighted that the capital costs have increased by about 23% and the operational expenditures also by about 18%. And if you look at it, the high inflation rate has really affected the cost of materials, labor, fuel and logistics, really increasing the project cost for most developers. When we look at the impact that these capital cost increases have had, what we have found essentially is that the levelized cost impact of these CapEx and OpEx surges is about $17 per megawatt hour on the LCOEs.

Allegra Dawes: This increase in the cost of electricity comes from many sources, including inflation and interest rates. We've talked a lot about the tax incentives for clean energy included in the IRA during this podcast series. So, how much do these subsidies do to offset the risk of cost increases?

Atin Jain: Now we assume that developers previously were qualifying for about 30% investment tax credit, and now actually they can qualify for about 40% investment tax credit with some bonus tax credits. So these tax credits actually shave off about $7 per megawatt hour from the LCOEs, and then the final number actually is about $114.

Allegra Dawes: That's still a significant cost increase. Many project developers in the US are looking to renegotiate their contracts to ensure that their projects remain economically viable.

Atin Jain: So I think what we have seen is that about 9.7 gigawatts of US offshore wind projects across four states, that is New York, Massachusetts, New Jersey, and Connecticut, either already looking to renegotiate or cancel their offtake agreements. This 9.7 gigawatt number is actually a massive number already, considering that there is about 17.8 gigawatt of capacity that was contracted by these states in total.

Allegra Dawes: Getting these initial projects off the ground, or more accurately, into the sea, will be essential for the growth and trajectory of this industry. There is no easy fix to some of the cost headwinds plaguing the industry. However, building strong relationships between government and companies can help. Varun explains.

Varun Sivaram: I believe that a few factors are going to get us there. I think we have this extraordinarily productive set of interactions with state and federal policymakers. I think they understand the challenges of getting offshore wind, in particular, permitted and deployed as fast as possible. I'm also optimistic because I really believe that we're starting to see the benefits, economically and politically, of this American supply chain starting to emerge.

Allegra Dawes: Atin also highlights the need for close collaboration between industry and government and the need to evaluate individual projects' challenges.

Atin Jain: So I think every project is at a different stage of development and really what needs to happen is looking at it on a case-to-case basis, and the government really working with the developers in making sure they understand the specific nature of challenges some of these projects face, and working out a solution jointly.

Allegra Dawes: For both sectors, investing in a domestic supply chain is seen as a pathway to ensure the US' role as a leader in the technologies. For solar, MJ explains.

MJ Shiao: If the U.S. wants to continue to remain a dominant player, we have to not only be good at deploying the technology, but we also have to be good at supplying the technology and actually developing the technology itself, which is why it's so important to bring these supply chains back to the US, because that's where the innovation happens.

Allegra Dawes: Likewise, Atin believes that the US can become a leader in offshore wind.

Atin Jain: I think in many ways, offshore wind industry is not really different industry than many of the other clean energy technologies industries. But I would want to leave you with one thought, that the U.S. actually is a world leader in many different areas, and I can't really think of any reason why it can't be a world leader in offshore wind.

Allegra Dawes: While there are pronounced differences in the maturity of each industry in the US market and the cost pressures project developers face, there are some similarities as well. For one, a domestic supply chain is seen as the pathway to enable deployment. These industries also raise important questions surrounding the vertical integration of supply chains and the sequencing of supply chain buildout and deployment. In solar, the absence in wafer manufacturing left the upstream and downstream segments of the industry susceptible to disruptions and delays. In offshore wind, the challenge of building a brand new supply chain while also meeting ambitious deployment goals has contributed to cost increases and widespread project development challenges. Next time on New Shores, we'll see how onshoring and friendshoring is disrupting traditional patterns and assumptions of international trade and where this policy experiment may lead.