Chinese solar panel manufacturers are preparing to shift steps in their production processes to South Korea, Taiwan and the United States in response to the filing of a trade case against them in Washington, and are working on a way to retaliate against U.S. exports, the NY Times reported Monday. 

Facing tariffs of 50% - 250% on panels made in China, and Commerce Department rules that heavily favor the US in these types of lawsuits, Ocean Yuan of Grape Solar and others are predicting significant shifts in the global solar supply chain, and likely price increases as a result.

4 Steps to Making Solar Cells:

1. Using molten polysilicon to grow crystals or cast blocks of polycrystalline silicon - this stage requires enormous amounts of electricity to melt quartzite rock at over 3,000 degrees Fahrenheit. The US one of the world’s largest producers of polysilicon, in states like Tennessee and Washington, because it has access to a lot of inexpensive hydroelectric power. Using hydro is also much cleaner than Chinese coal-fired electricity, and so the US is a net exporter of polysilicon, a large part of our solar trade surplus.

2. The second step is cutting and polishing the material into thin, smooth wafers. This step would likely remain in China.

3. The third step involves chemically treating the wafer and adding electrical contacts to turn it into a solar cell.  Turning wafers into cells is the costliest, most high-tech and most highly automated step in producing solar panels, representing about a third of the total cost. Chinese manufacturers are considering shifting this part of the operation to South Korea or Taiwan. Taiwan already has large manufacturing capacity for solar cells - nearly 5x the US market -  while opening new factories in the US is a lengthly and expensive process due to environmental permitting regulations because of all the chemicals involved.

4. The last step involves connecting 60 or 72 solar cells together, covering them with glass, enclosing them in an aluminum frame and adding an electrical junction box. Final assembly involves a lot of labor in bolting components together, for which regulatory approvals tend to be simpler than for solar cell manufacturing, so this piece - which typically accounts for 20% of the total cost of making a solar panel - would likely shift to the US.

Cautious Response from Chinese Solar Companies

There is currently only one Chinese module assembly site in the US. Located near Phoenix, AZ, and owned by Suntech Power, it has a capacity equal to about 3 percent of the American market, according to GTM Research. Whereas companies based in China manufactured 41 percent of the panels installed in the United States in the third quarter of this year.

Companies are looking to take action right away because the U.S. Commerce Department will rule by mid-March on the anti-dumping complaint and by late May on the anti-subsidy complaint, and each ruling is likely to be retroactive for at least 90 days, and possibly retroactive to the department’s opening of the case on Nov. 9.

In perhaps the first sign of a changing relationship, Renewable Energy World reports that China's largest solar developer is delaying plans to develop $500 million of solar projects in California, Texas and New Jersey. In a news conference, a company official said the potential for tariffs on Chinese solar panels imported into the U.S. made going forward too risky. "If the solar panel prices increase by, say 30 percent in the United States, following the move, then we would certainly drop the plan because there's no profit to be made," Cao Huabin, the general manager of CECEP Solar Energy, told media in Beijing.

The lawsuit charges that "Chinese solar-cell and -panel producers benefit from an all-encompassing range of illegal subsidies from the Chinese government, including massive cash grants”. Recent reports however, indicate that while the China Development Bank has approved nearly $30 Billion in credit lines for major solar companies, less than $900 Million has actually been borrowed by the companies, and the interest rates for these loans are comparable with market averages in the 6% range.

Nevertheless, observers including Jessica Ng, a Bloomberg New Energy Finance analyst, predict that China is likely to take a more cautious view in the coming months in supporting its clean technology manufacturers to calm trade tensions. Its delay of the official release of its 12th five-year plan for renewable energy may be an example of this “to avoid fanning the flames in light of the US complaint”, Ng said. "China is attempting to deal with its overcapacity problems and will likely consolidate manufacturers so there are “one or two” companies producing 5GW of panels annually by 2015", she said.

It will likely take time to ramp up more US module assembly sites, and other Chinese companies may consider delaying projects or selling inventory elsewhere.

So the question is, what impact will that likely have on solar prices during the 1st half of next year?

Rising Prices in 2012?

I emailed Ocean Yuan, CEO of Grape Solar this morning for his response. Ocean said, "Since China is a non-market economy, U.S. government will benchmark Chinese costs with a market economy in Asia that has comparable GDP, labor cost, land cost, etc., in addition, these countries must have solar panel industry."

Ocean's estimates for price increases of shifting manufacturing to these countries include:

• India - 30% higher
• Korea - 20% higher
• Phillipines - the only solar company is Sunpower’s factory which is 60% higher
• Taiwan - 10% higher

In Q4 2011, says Ocean, the quantity of solar panels that are “risk free” is limited. These would be shipments received prior to November 9^th when the case was opened by U.S. department of Commerce. This limit to supplies will therefore drive manufacturer's prices up at least 10%.

In Q1 and Q2, 2012, prices will be anywhere from 10% to 30% higher depending on where the panels are made. On average, it will be 20% higher - but these are just manufacturer's costs.

Distributor's and retailers will each add another 20 - 25%, so the end price to consumers could be 30% or more - essentially erasing the drop in prices that we've seen over the course of 2011.

With the Federal Cash Grant program set to expire, and these potential price hikes on the horizon, it may be a rocky start for solar next year.