Why China Is Crushing the U.S. in Solar Energy

By any objective measure, China is crushing the U.S. in the business of solar energy. According to the International Energy Agency (IEA), China had installed 78 gigawatts (GW) of solar capacity by the end of 2016, and after a torrid installation pace in 2017 it may exit this year with around 123 GW, or enough to power the consumption of 20.2 million U.S. homes. The U.S. ended 2016 with 40 GW of solar installed and is expected to install about 12 GW this year for around 52 GW by year-end. 

On the manufacturing side, there's no question China has a massive lead over the U.S., particularly after Suniva and SolarWorld, two of the biggest solar manufacturers in the U.S., went bankrupt earlier this year. The problem for the U.S. is, it may be hard to ever catch up to China's solar domination. 

Image source: Getty Images.

China's domination in solar manufacturing

China and Chinese companies are by far the biggest solar manufacturers in the world. Canadian Solar (CSIQ -0.83%), JinkoSolar (JKS -0.46%), JA Solar (NASDAQ: JASO), and Hanwha Q-Cells (HQCL) are among the largest solar module suppliers in the world and are publicly traded in the U.S. Trina Solar, LONGi, and GCL-Poly are also major manufacturers with operations in China, but they're private or not traded in the U.S. 

The public companies give an illustration of how they fund expansion. You can see below that Canadian Solar, JinkoSolar, JA Solar, and Hanwha Q-Cells all have over $600 million of short-term debt and notes payable. They've literally funded billions of dollars in manufacturing expansion with short-term debt. 

Source: Company earnings releases. 

This wouldn't be possible without state-run banks in China handing out loans. These loans aren't earned with profits from operations, which are almost nonexistent, but are rather used as a way to increase China's manufacturing expansion and jobs. The U.S. government could give the industry similar support, but it doesn't. 

Why China builds so many solar power plants

Solar power plant construction is driven by developers knowing where they're going to sell energy from the plant lon-term and how much they'll be paid. In the U.S., developers sign agreements with utilities, businesses, or consumers to back the construction of a plant. This means there have to be thousands of agreements signed each year to keep the solar industry's installers working. 

China has instituted a feed-in tariff and a program called Top Runner, which are going to drive installations in 2017. The feed-in tariff rate of $0.10 to $0.13 per kilowatt-hour (kWh) is higher than recent contracts signed in the U.S. for less than $0.05 per kWh, so it's easy to understand why developers are building as much as possible. Top Runner is another feed-in tariff program for high-efficiency solar cells that China hopes will drive up to 10 GW of installations in 2017 alone. 

Feed-in tariffs can be a blunt instrument for installing solar because they take into account regional needs for energy but drive a lot of installations very quickly. 

An underappreciated factor driving China's solar boom is the growth in China itself. China's electricity demand jumped 5%, or about 281 terawatt-hours (TWh), in 2016 (enough to power 25 million U.S. homes). Since 2007, U.S. electricity consumption is down 78 TWh per year. 

When a country's electricity consumption is growing, it needs new power plants. Since solar is cost-competitive, it makes sense that a large percentage of its new power plants are solar. The U.S. doesn't need new power plants, meaning each large plant built has to replace an old one. That makes the growth of the solar industry harder in the U.S. versus China. 

China is going to continue dominating solar energy

These trends in solar aren't going to change anytime soon. China has made the solar industry a priority and is giving government support to develop manufacturing and push for solar power plant installations. I don't see the U.S. doing the same, which will keep the U.S. behind China in the race to dominate solar energy.