The Rebirth of US Domestic Solar Manufacturing
The Freeing Energy Podcast #70: Andy Klump: What Do Stuck Boats, Melted Rocks, and Geopolitics Have to Do with US Efforts to Transition Away from Fossil Fuels?
In this interview, CEA’s CEO, Andy Klump, shares his insights on how and why the economics of solar are shifting in the short term, and what roles the energy crisis in China, as well as backlogs in global shipping, are having on U.S. solar and battery projects. Andy also gives an outlook on the future of domestic solar manufacturing in the U.S.
Podcast Transcript
Bill Nussey:
Welcome to everybody in the Freeing Energy universe. We’re expanding beyond the free energy world and going all the way to the free energy universe because today's guest, who has the distinction of being our number one repeat guest since the beginning of Freeing Energy time, Andy Klump, is helping us get to the broadest possible perspectives that include all of the universe now. So as many of you have noticed, and for those of you that missed, the world of clean energy has been somewhat upended in the last few months as governments wrestle arms and put up tariffs and things get complicated. There's also this little issue about supply chains. And if you haven't been watching, this is going to be tough, make sure to get your Christmas gifts early. But I'll tell you if you're a solar project developer, this has been going on for a while, and it's really tough. So we wanted to bring you guys the inside scoop on what's happening. And honestly, I don't think there's a better person in the world than my good friend, Andy Klump, the CEO of Clean Energy Associates. Welcome, Andy.
Andy Klump:
Thank you very much for having me today, and happy to speak with your listeners.
Current Supply Chain Challenges in the Solar Industry
Bill Nussey:
So let's just jump right in. There are supply chain issues across the board in every single industry, and certainly solar is not new to this, but it's probably getting hit harder than many people are aware. So what's going on in the broader supply chain industry and how's it affecting solar?
Andy Klump:
Yes, Bill. It is a perfect storm of supply chain chaos on all fronts. We’ve really seen some abnormalities, starting really with COVID last year, but even at the start of this year, we've seen increasing spikes and a number of raw materials. Certainly polysilicon has been at the top of the list, but if you look down, it also includes other materials such as glass, EVA, and a whole host of issues related to energy price hikes in China, as well as logistics. So it's an amalgamation of many different issues. It’s a question of where do you want to begin.
What is Polysilicon and Where is it Sourced?
Bill Nussey:
Let’s start with: What is polysilicon and why does it matter?
Andy Klump:
Polysilicon is the upstream raw material for crystalline solar panels. And if I have to start with, to describe it well, I have to explain what is silicon and what is quartzite, because quartzite comes out of the ground and is mined directly from the Earth's crust. Roughly 27% of the Earth's crust is actually made of silicon. But in its elemental state, it's only about 97% pure. And so there is a process to turn that quartzite into metallurgical grade silicon, requiring a two-story tall furnace, which requires the burning of a lot of impurities and getting to 99% purity. And it's at that point that the metallurgical grade silicon becomes the key feedstock to polysilicon. And so to answer your question in a long way, polysilicon basically takes those dull gray rocks, to make them shiny gray rocks in its typical chunk polysilicon format. And then the rest of the process goes on, from ingoting to wafering, to cells and modules from there.
Bill Nussey:
I’m nerding out on this, man, this is actually super interesting to me. So where are people getting the dull gray rocks? What countries and parts of the world are dull gray rocks coming from?
Andy Klump:
Where there is an abundance of energy and also where there is proximity to a polysilicon facility. So many of these sites are co-located in different regions and they're located around the world. So some of the largest U.S. manufacturing takes place in Hemlock, Michigan. Hemlock actually produces the polysilicon, but they source metallurgical grade silicon from the U.S., a closer facility. But there are times where they actually import product from other locations such as Canada or Brazil.
Bill Nussey:
So this is interesting because the top headlines are that we get every bit of our solar from China, and at least in this very first part of the supply chain, some of it's being done in the U.S. That's an interesting twist.
Andy Klump:
Correct. It actually is. And it's also important to note that metallurgical grade silicon is not just for the solar industry - roughly 15-20% goes into solar. But the other 80% goes into a wide variety of industries, ranging from sealants, which are, you think about the caulk in your bathroom. It also goes directly into automotive, it goes into aluminum, it goes into cosmetics. So 80% of the world's metallurgical-grade silicon goes into a lot of non-solar facilities, and a lot of people aren't really familiar with that.
Bill Nussey:
As most people say, 70% of the solar that we're using in the U.S. is coming from China. So what happens to the metallurgical grade silicon here in the U.S., or wherever it's sourced, to become wafers that turn into cells?
Polysilicon Suppliers
Andy Klump:
You're absolutely correct, it's roughly a little bit closer to 80% of the world's polysilicon that comes from China. And many of those facilities are located in a number of different regions. There is a wide attention given to certain Western regions of China, but it's also made in the south and Sichuan, Yunnan, even in the north, Inner Mongolia – a number of places throughout China manufacture polysilicon, and that is getting a lot of attention. But once again, there are other major non-Chinese sources of polysilicon. I mentioned Hemlock, also Wacker Chemie polysilicon; Wacker Chemie is a German company, they actually make polysilicon in the U.S. as well as in Berghausen Germany. I've actually been to that facility. And there are also other major manufacturers, like OCI out of South Korea.
So polysilicon does get made in a number of different locations. And increasingly there's been a lot of attention given by the U.S. government to having polysilicon in other regions outside of China. And so we're now seeing increasing demand for polysilicon in different regions. So some companies like Jinko are actually buying polysilicon directly from Germany, they're buying from the U.S., and they're buying it from South Korea. And that's all going to a new facility that Jinko is building in Vietnam, so Jinko’s actually making an ingoting and wafering facility in Vietnam that will be operational in Q1/Q2, and they will actually be then shifting those wafers to Malaysia where they make cells and modules. So there's actually a very large 7 GW non-Chinese solar supply chain that is emerging by leading Chinese companies. So a lot of interesting dynamics are happening in the global supply chain right now.
PV Prices in China are Increasing
Bill Nussey:
Just hearing about polysilicon and how it's occurring all over the world and how quickly supply chains are shifting, Jinko’s example is a great one, it explains both the amazing aspects of the supply chain, but also just how delicate it can be. And it’s fascinating, what this is creating. So let's go all the way downstream, as much as I'd love to have this deep insight on all steps of the solar chain, because it's fascinating. Let's go to the people who are buying solar panels today, particularly in the U.S. How does this affect them? What's going on for their world? You deal with a lot of these people as customers. What does the world look like to them as buyers of solar products?
China’s Energy Crisis
Andy Klump:
There still is an energy crisis in China, which is that China is now limiting the amount of energy that's going to energy intensive industries. And if one looks at a variety of sectors, we now see the different parts of the value chain that all require a lot of energy. It's metallurgical grade silicon, polysilicon, and ingoting. So the facilities in these sectors are actually getting limitations, the amount of power that they can actually use. And that's actually causing a spike in the pricing. So metallurgical grade silicon cost in China have actually quadrupled in the last several weeks. Polysilicon prices have jumped another 25%. And that's on top of a tripling of the price from earlier this year from roughly, it was at around $10 per kilo, then jumped to high twenties. It is now in the mid to high 30 U.S. dollars per kilo. So, in total, in aggregate in the last 10 or 11 months, it's increased by roughly 3.5-4x. And now you're seeing all these costs go down the whole value chain. And so the cost of solar panels as a result of these issues, sometimes these prices are going as high as 40 or 41 cents, even for a large utility scale buyer. So that is 41 cents per watt, delivered. Whereas if you look back about a year or more ago, we saw some predictions that 2022 or 2023 shipments would be in the 26 to 27 cents per watt range. So we've seen this swing where pricing has jumped almost by 15 cents per watt. So that is a substantial jump.
Bill Nussey:
Can these people still get the solar panels, or are they being priced out of projects? How does that work for people building solar projects, particularly the smaller scale ones, in the U.S.?
Andy Klump:
As local energy is a key theme, there are many small residential and C&I (commercial & industrial) players who don't have large utility scale buying needs, but they still have sub-MW or multi-MW type of requirements. And many of these folks have been buying from inventory, or some have still obtained lower-cost product that is below 40 cents per watt. But unfortunately, a lot of this inventory is now being bought up, or has been already resold. And so the new product that's coming to the U.S., as I said, was in the low forties for a utility scale buyer, but it could be mid to high forties for someone who's a distributor or a large residential buyer. And then consequently, the end price is increasing to the low fifties for someone who's just buying a pallet at a time or installing a rooftop solar installation at the time.
So the initial price point when the utility scale market was in the high twenties, maybe for them, it was already low forties or mid forties. So the relative jump may have just been 6 to 10 cents, but that still is a significant increase. So the cost increase is not 70 or 80%, but it still is 15 to 25%. And that’s meaningful for some of the players who depend on that amount for their margin.
Now fortunately, if you look at the flip side, energy demand across the world has been increasing. We've now seen increasing price of natural gas and oil, and a lot of other commodities. So there is a demand from the market and a willingness to pay slightly higher pricing. But once again, it is very counter to the entire trend we've seen in solar in the last decade, where it just had this nice, smooth, ongoing price decline. And now all of a sudden we're seeing a price increase, which the industry has just not faced, really since I started in the industry in 2006 to 2008, when there was a spike driven by feed-in tariffs out of Europe. So a very different dynamic than 14 or 15 years ago.
Outlook on China’s PV Prices
Bill Nussey:
What can we expect in the next year or two or three? How does this resolve itself, if it does?
Andy Klump:
If I first look at the next six months, it's really crucial because we're now entering the winter months in China. And China has alerted the nation that there are certain energy cuts in certain provinces, but part of the reason they're being proactive is they want to make sure there are necessary coal reserves for the heating of homes in the winter, and ensure that energy supply for the large mass of consumers throughout the Northern part of China is safe and secure. So I think they're accomplishing that by making this proactive move. So that being said, I think when we get through the winter months, I think some of the demand for coal as a source of heat will actually subside.
China also, on a long-term basis, does have a commitment to reduce its dependence on coal. Currently, China was on a trajectory to get towards 50% of its energy needs from coal by 2030, and early this year, in January of 2021, they made a commitment by 2060 to be carbon neutral. So once again, that is still several decades out, but if you look back a decade or so ago, China was 80% coal. Now it's roughly in the 70-65% range probably. It was trending closer towards 60, but I think it's still around 65% more or less right now. So I do think getting beyond this current energy crunch, as they move into 2022, some of the prices may start to go back down.
Shipping Costs have Increased
But the shipping cost is another factor. So we've seen the shipping cost of an ocean freight from China to the U.S., which used to be as low as $1,800 a container, maybe $2,000 at the bottom, which was definitely below market and some of the logistics companies were losing money at that point in time, you now saw a pricing rise as high as $22,000, sometimes as high as $25,000 on a spot market basis to the east coast. Which is a little more expensive than to the west coast of the U.S. So literally a 10-12x increase in price. Now I've seen that come off of some of those spikes, and I've seen some suppliers obtain rates around $18,000, some as low as $14,000 to $15,000 per container. So still once again, 6.5-7x what the typical cost is.
Bill Nussey:
Wow. I went down to Savannah this weekend and I did my best to see all the ships that are sitting offshore. Couldn't see any of them from where I was at, but the channel that goes into the docks where they pick the containers off seemed relatively open. So my tiny little universe seems like everything's fine, but those prices tell a very different story about how broadly this supply chain and how many ways the supply chain is being affected right now.
Andy Klump:
And I'll comment, Bill, different ports have been impacted in different ways by this development. So if one looks at Long Beach - at one point in time, and we are tracking this week to week, one week there were 50 vessels that were waiting outside the port. Then it jumped to 55, 60, I think it peaked around 70 to 75. But you literally had over 650,000 containers, which is actually causing a lot of emissions as these large ocean vessels are just cycling in place, but all those containers were held by the port of Long Beach. So Biden actually called the head of Long Beach and said: Can your team start working 24/7 rather than just doing a one 8-hour shift, the day shift? And so once again, a number of ports in the U.S. already operated 24/7, but they started doing that in the U.S. So part of the issue of the supply chain shortage on logistics is the fact that there are not enough U.S. drivers to literally take product off the ports. There’s obviously a lot of protocols with COVID and there've been many cases of workers who've had COVID that have caused delays. So once again, a confluence of factors that are all a perfect storm have been causing this delay. But I think other ports are not as backed as Long Beach, California, but certainly Long Beach is a meaningful one, and one that has been responsible for a lot of these delays.
Outlook on U.S. Domestic Manufacturing of Solar Supply Chain
Bill Nussey:
When we talk about how complex the global supply chain is, particularly around solar, it gives rise to one of the most excitable conversations - maybe exciting, but certainly excitable conversations a part of these days, which is: Can the U.S. start making its own solar products again? And I'd love to get your perspective on where the U.S. is in terms of domestic manufacturing. I think a lot of people will be pleasantly surprised to learn that the very first part of the supply chain is actually already here. But what about the rest of it? What's being done to make solar wafers, cells, and we already make some panels in the U.S., but what's the big picture?
Andy Klump:
So one has to keep in mind that there is some domestic manufacturing for the solar supply chain in the U.S. already. First of all, on the crystalline side, the upstream materials I had already talked about. Hemlock Semiconductor out of Hemlock, Michigan does produce their own in-house polysilicon; Wacker also has a facility in Tennessee; REC Solar in the Pacific Northwest does manufacture polysilicon that's used in the solar supply chain. And all this is often shipped to different locations where there's ingoting and wafering outside the U.S. So the area where the U.S. is short on right now is ingoting and wafering. But there are some cell facilities, a small amount and some module assembly facilities. But I will definitely say that the U.S. domestic manufacturing throughout the whole crystalline supply chain is a bit lighter than other regions.
Now, on the thin-film side, First Solar is one of the largest manufacturers of thin-film solar panels made from CadTel (cadmium telluride). First Solar does have a facility in Perrysburg, Ohio. They're expanding a further 3 GW expansion that they had announced. But First Solar also manufactures a lot of their products in Kulim, Malaysia as well as in Vietnam. So, some don't realize, that they think they're buying from a U.S. manufacturer, but they're actually buying products that are made from Southeast Asia.
Increasing Support for U.S. Solar Supply Chain
But to answer your broader question, I absolutely do know that there are plans in place and I do see there's a lot of support for more domestic manufacturing throughout the solar supply chain in the U.S. And I do see, we've actually worked with some manufacturers and completed due diligence on behalf of investors who are actually investing more in terms of both cell and module capacity in the U.S. So this expansion is happening right now on a small scale basis, but there are probably no more than a dozen players that are really looking seriously. But once again, Hanwha, Jinko, LG, there are a handful of folks that are well-known in the industry that do manufacture modules in the U.S. And there's a chance for those companies to expand, but there also new manufacturers that are re-evaluating the U.S. And part of it depends on what subsidies come out from the U.S. government. And there is some serious attention, in the infrastructure bill, also with the ITC that will actually encourage more manufacturing domestically.
And I personally have had the good fortune of being in the U.S. for the last two and a half months, and I did make a visit to Washington D.C. and met with some folks in the White House, NSC, Department of Energy, and Department of Homeland Security. And part of this topic did come up, and there is a commitment on a number of different governmental fronts of folks who actually want to have more domestic manufacturing. So I do see this being a trend that will play out.
I think that reshoring is an important theme, particularly when you look at the high logistics costs that can be avoided. But the key theme I mentioned with every one of those meetings, and I’ll also share with your audience, is it’s important for the U.S. to look holistically, not just add solar cells or modules, but really the holistic crystalline supply chain, from polysilicon all the way to modules and all the subcomponents as well. Because even someone who is launching a module manufacturing facility, if they're launching that in Texas, for example, but they have to ship glass from Pennsylvania or get EVA from California, it still becomes very expensive to ship everything from different parts of the country. And this is part of the reason that China and other Asian countries have made such big successful effort at building a supply chain - they don't just think about the end product. They also think about the sub-components and they create a cluster effect so that these different sub-component manufacturers are grouped together. That reduces the cost of the need for working capital, reduces the cost of logistics, and they really do create an advantageous cost position. So that's one of my pieces of advice to folks in the U.S., is to think holistically and have a 10-year plan, not just think about a 4-year plan to get some politicians re-elected. But really think about holistically, how do you create an ecosystem?
Bill Nussey:
There's a story in my upcoming book about you and I sitting in the headquarters of a large Chinese manufacturer and talking to one of the executives there. And he told a very similar story about how the Chinese government was very intentional in co-locating most parts of the solar supply chain within a single region. And that's been replicated around China. And it's a good example of where a government can play a massive role because, left to their own, those sub-components or the places along the value chain may not have coordinated, but with the government support and incentives and whatever mechanisms they use in China, it worked. And now China's really dominant in this factor. And I do think that the U.S. government struggles to create that top-down policy, even though it's really in the country's best interest, but I'm optimistic that once we get over this hill of policymaking in the couple of weeks, and we get out of COP26, hopefully there'll be some positive momentum that the business of the U.S. can latch onto and build a supply chain here, the whole thing.
India Making Push Towards Domestic Solar Supply Chain
Andy Klump:
I completely agree, Bill. And I'd also like to give another case study of another country that's going through a build-out of its supply chain, that's India right now. So India has had a very strong manufacturing tradition in solar. If you look back at someone like Tata, you know, BP and Tata had a joint venture about 30 years ago. They successfully worked together on a joint venture status for about two decades. One of the good folks on our team, Dr. Mohan Narayanan, actually was involved with that facility. I do know other folks who worked at that facility who've been in the industry. And later Tata bought out BP. And so they've continued to produce as one of the top four or five manufacturers in India. But what's happened recently is the Indian governance made it a big push towards reshoring and taking more of a domestic content approach, and actually providing greater incentives for domestically manufactured product, and also put tariffs on Chinese modules and also some of the sub-components.
And that date is mid 2022. So that's part of the demand effect that's actually caused a price increase, is higher demand for both solar cells and modules has led some of the Chinese manufacturers to have less supply available for India. And consequently, there are many folks, and I will say many dozens, who are going after a build-out of large facilities. One even looks at a large industrial group called Reliance that acquired REC Solar, and they're intending to take that high efficiency technology back to India and build a large facility there, as well as other locations.
But this does take time. And India has been at this initiative for the last 6-12 months. Many have lobbied for this and we’re now seeing this policy in place. And so there is, but it does take time to build out facilities, particularly when one looks at an integrated facility in some large companies like Reliance, definitely have the capability to pull this off.
Bill Nussey:
You know, there's a lot of talk about how the government helps and just to briefly touch on it, you know, in the U.S. we have the ITC, which provides a discount or a tax break for folks building projects, solar projects. I'm a fan of providing an ITC-like solution for manufacturing investments in the U.S. - we'll see, I'm not holding my breath. There's also affordable loans. The U.S. has a Loan Programs Office, which is run by Jigar Shah, who we're all a fan of, and he brings a lot of solar smarts to that program. And there's a variety of other programs. And so let's think about, I'm curious, think about India as a best case example after the Chinese. How long will it take India to develop a robust vertically integrated supply chain in the country? Is this a 2023 kind of thing? Or is this a 2030 kind of thing? How long does it take for them to start making gigawatts within their own country?
Andy Klump:
Well I will say 2023 is far too aggressive I say 2030 might be a bit of an extended timeline. But look, this very well could take four to five years. So we could easily see to 2025 until India really has like a 10 GW scale throughout the whole value chain. There are manufacturers like Waaree that already produced in a multi-gigawatt scale for modules. But once again, to have that equal adoption of both polysilicon, ingots, wafers and cells, that will also take some time and a lot of investment. So once again, I will say, you know, three years is overly optimistic. Five years is reasonable. But you know, once again, 7-10 years is not unheard of.
It all really comes down to how much capital one wants to put at it, and how long are the policies in place to continue to encourage these manufacturers to build those out. And also, I would say the other key fact here is technology. And so I think being inclusive of who actually brings the technology in, because when asked to look at wafering, just as an example. I’ve been in the industry the last 15 years, and effectively the first 13 from 2006 to 2019, everyone is using standard 156mm sized wafers. And what happened in the last 2+ years is that some companies said, let's start making larger form factors. So there was then a 158.75, and then a 161, 166. Now the industry is actually looking at 182 versus 210mm wafers. And guess what? 97% of the world's wafers are made in China right now. And those last two standards, there's a battle between some of the largest manufacturers on which one will prevail.
And there could be another standard that comes out that's 230 or beyond in the future. But the reason the industry is shifting towards 600 watt or 650 watt panels. Currently I'm in North Carolina, just talked with a client that's actually deploying some of these 650 watt panels. They're actually using the 210 wafer size. So once again, with a dominant share of the overall global market position for ingots and wafers, these are mainly Chinese companies that are leading this trend. So inviting Chinese manufacturers with the same incentives to manufacture in different locations, whether that be in India or the U.S. or elsewhere, is also a smart trend. Because solar is a technology industry, so continuing to invest in the latest technology is important. And that's where I think different governments around the world need to think holistically. How do we involve the latest and greatest technology and continue to move this industry forward? Because ultimately that is what will lead the cost to normalize. And large-scale manufacturing is an important trend.
Bill Nussey:
I have to say, I'm really blown away by your command of numbers and facts and locations. You're like a walking dictionary. So this has been super interesting to me. I hope everyone else enjoyed it as much as I did. I feel like I'm walking away with a much richer perspective on what's going on. A little bit confused, but also a little bit optimistic about what can be done to improve this. And hopefully in the next couple of years, some of it will just iron itself out. We can get back to the business of just making tons and tons of solar installations around the world and get into clean energy as fast as possible.
Andy Klump:
Absolutely, Bill. I'm happy to be on the show and look forward to ongoing dialogue with yourself and your audience.