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Introduction: Trump is not all bad
Missing perspectives
The tariffs’ effect on system prices
Discussion
Table
The tariffs’ effect on solar-energy costs
Discussion
Table
The tariffs’ likely economic effect
Conclusion: the desperate need for more private investment
Introduction: Trump is not all bad
President Donald Trump may corrupt and cheapen everything he touches. His style may be lying, erratic and unpredictable. The way he Tweets, talks and operates may justify catcalls of narcissism and suspicions of instability and mental illness, whether or not he is clinically committable.
But not everything he says or does is bad. The latest iteration of his “policy” on the Dreamers—protecting 1.8 million of them and providing a path to citizenship—is a consummation devoutly to be wished. He may lack both the political skill and the staying power to make it happen, but his latest shift in position is a good thing.
Those with cooler heads, including members of his own party and those who resist him, must examine everything he says and does with a fresh eye and an open mind, precisely because he changes
his mind so often. We should not be put off by his execrable personality and style so much as to refuse reflexively to take yes for an answer.
One thing for which a skeptical but open response would be helpful is Trump’s new tariffs on imported solar cells and panels. Imposed by
presidential proclamation, they go into effect February 7. No doubt there are ships queuing up in our harbors right now, hoping to beat their onset.
Missing perspectives
The
New York Times, prominent economists, and most of our business community seem to have piled on a reflexively negative view. They all pan the tariffs as thoughtless, poorly motivated and likely to be counterproductive.
Wednesday’s front-page
New York Times story (
Jan. 24 at A1), opened with an irrelevant “feature” on a solar farm in Zebulon, North Carolina, then got down to numbers on page A15. It accurately noted that the tariffs phase down linearly from 30% to 15% over four years, from 2018 to 2021. It also noted that the first 2.5 gigawatts of capacity each year are exempt from tariffs. But then it revealed that “260,000 [Americans] are employed in the solar sector, but fewer than 2,000” in manufacturing.
It thus implied that Trump’s solar tariffs would cut off our nation’s nose to spite its face. They would cost us, the
Times’ story seemed to say, tens of thousands of jobs selling and installing solar arrays (and manufacturing their non-silicon-cell infrastructure), merely in order to save or add a few hundred jobs making solar cells and panels. A later
op-ed piece by one Varun Sivaram (Jan. 25 at A27) and a
more recent column by Nobel-Prize winning economist Paul Krugman (Jan. 26 at A21) were explicit and highly critical on this point.
It’s natural, I suppose, for business analysts and economists to fret about jobs. And, as we’ll see, the Trump tariffs may indeed cause layoffs in solar sales and installation, at least in the short term, as the tariffs wind down to their steady state.
But the
Times and its business and economic writers all missed two vital points about our solar industries. First, no one but distributors and other intermediaries buys solar cells or panels by themselves. The end-users—who pay the bills—buy them only as parts of whole systems. This simple fact vastly reduces the economic impact of the Trump tariffs, as simple arithmetic below shows.
The second point is a whole series of broader perspectives on the tariffs and their aims: the scientific, technical and long-term perspectives. The
Times, Sivaram and Krugman seemed prepared to abandon American manufacturing and innovation in solar cells and panels in order to keep our sales and installation industries thriving in the short term. Krugman practically said as much. But if that happens, the endgame of the current economic strategy for this industry is clear: Americans will sell and install solar photovoltaic devices designed and made abroad, mostly in Asia.
Isn’t that precisely the
opposite of how China is beating us at our own capitalist game? In industry after industry, China is moving steadily up the scientific and technical food chain, transitioning (for example) from making lawn chairs and hand tools to making iPads and computers. Now it’s developing electric cars and quantum-computing devices of its own.
Do we Americans really want to
devolve from inventors into passive consumers of devices that are the key to humanity’s vast future transition from fossil fuels to renewable energy? Do we want to do so even as China is doing exactly the opposite, assuming leadership in innovation and manufacturing in industry after industry, often by stealing our own intellectual property or using the commercial incentive of China’s vast market to induce our capitalists to transfer it?
So let’s take an unjaundiced view of the Trump tariffs, with a more open mind and a broader perspective than are possible in a short newspaper column or in “news” stories written by reporters with little or no background in economics, let alone science or technology.
The tariffs’ effect on system prices
No end-user buys solar cells or panels for or by themselves. In the end they become part of working systems to generate, control and (in some cases) store electricity generated from solar energy. So insofar as concerns demand, it’s the price of the
total system that matters, not the solar cells or panels that are only part of it. In order to understand the tariffs’ practical effect, we have to calculate precisely how much they affect the price of the entire system.
Next, we have to know an economic factor that every college student of economics studies: the “price elasticity” of demand. This economic variable is usually a function of total industry output. In the solar industry it’s also a function of the
ultimate price variable: the price of solar energy, per kilowatt-hour, generated by the entire system. All this may seem complicated, but it doesn’t involve much more than simple arithmetic.
In several analyses on this blog (
1,
2,
3 and
4), I’ve broken installed solar-system and energy pricing into two basic variables. The first is the purchase price of solar cells or panels per Watt
capacity. This is a standard industry price factor, used to evaluate progress in solar-cell manufacturing. (It is
not the price of electrical energy that the cells or panels generate;
that variable is expressed per kilowatt-hour, not Watt, and requires some additional arithmetic to discover.)
The second fundamental variable is what I call the “turnkey factor”—a dimensionless multiplier applied to the per-Watt-capacity price of the cells or panels to arrive at the per-Watt-capacity
installed price of the
entire solar array. This multiplier accounts for the prices of assembly and installation and the rest of the array, including foundation, supports, wiring, inverters, control and switching equipment, and (if any) storage batteries.
The price of the
entire array is what matters to buyers. So the turnkey factor is crucial in analyzing the effect of the tariffs. In solar arrays for consumers, the turnkey factor can be as high as 10. That
was the actual factor for the (nominal) 6 kW ground-mounted solar array for my house, pictured
here and installed in 2013.
If the turnkey factor is 10—as it was for that array, based on actual prices paid (
not including the federal tax credit)—the price of the panels is only one-tenth of the total price. That’s 10%. Thus the Trump tariffs, if in place when I installed that array in 2013, would have raised the total price by only 3% in the first tariff year and by 1.5% in the fourth.
Now let’s look at the price effect of the tariffs for various types of solar arrays. Probably big ground-mounted arrays like mine still have turnkey factors as high as 10. Roof-mounted arrays don’t need expensive aluminum or steel support structures or concrete pads, so they might get down to a turnkey factor of 6. Large-scale commercial arrays, with their huge economies of scale, can
get the factor down to 4, according to industry reports.
So here’s a table, for turnkey factors of 10, 6 and 4, of how the Trump tariffs affect the
total-system price of working solar arrays in the first four years:
Price Increase of Entire Solar ArrayDue to Trump Cell/PanelTariffs |
Year | 2018 | 2019 | 2020 | 2021 |
Tariff | 30% | 25% | 20% | 15% |
TURNKEY FACTOR | | | | |
10(Ground-mounted consumer arrays) | 3% | 2.5% | 2.0% | 1.5% |
6*(Roof-mounted consumer arrays) | 4.8% | 4% | 3.2% | 2.4% |
4(Utility-scale arrays) | 7.5% | 6.25% | 5% | 3.75% |
* Estimated
As you can see, the effect of the Trump tariff on the price of the entire working solar array ranges from 7.5% for utility-scale commercial arrays in the first year to 1.5% in the last year for ground-mounted consumer arrays like mine.
The tariffs’ effect on solar-energy costs
Are these industry-killing price increases? In order to answer that question, we have to look at the effect on the ultimate price variable—the cost of energy, per kilowatt-hour, generated over the array’s useful lifetime.
In an
earlier essay, I showed how to calculate the lifetime cost of energy from
any solar array from first principles, including reasonable (and conservative!)
estimates of the effects of night, latitude and weather. These first-principle estimates are accurate within twenty to thirty percent. For my own solar array, based on figures from actual operation, the calculated estimates of energy output were about
twenty percent low, and therefore the calculated cost estimates were about 20%
high. Anyway, as we’ll see, that general level of accuracy is sufficient to analyze the probable effect of the Trump tariffs on demand for solar arrays.
Here, taken from the table in my earlier analysis (and interpolated for turnkey factors of 6), are the costs per kilowatt-hour of energy produced by solar arrays, the cost after application of the Trump tariffs over its four-year ramp-down, and (for comparison) the utility cost of producing a kilowatt-hour with coal or natural gas at today’s prices (without considering the “externalities” of pollution and global warming) and nationwide average figures for the industrial, commercial and retail prices of electric energy:
* Interpolated
** These figures assume that the tariffs apply only to the original solar panels, i.e., that the tariffs will be phased out within 25 years. They are conservative in assuming that solar-panel prices will not fall over a century—an assumption contrary to the steady development of technology and the manufacturing learning curve. Note that the rounded price of energy doesn’t change with tariffs because the tariff-induced changes are small compared to the price of panel replacement; so rounding erases the small differences.
The important thing to know about this table is that the price increases apply for the entire life of the solar array. Why? Within ten percent, the price of energy from solar arrays
depends entirely on the initial capital investment—the price of buying and installing the solar array system. Solar power requires no fuel or pollution remediation, and so has only one variable cost: maintenance. The maintenance figure for the entire utility industry is about ten percent. It’s likely to be much less than ten percent for solar power, which requires little maintenance. In comparison, fossil-fuel generators have huge maintenance costs: they have electric generators and other rotating equipment operating at high temperature, and they have pollution “scrubbers” whose active elements must be regularly replaced.
The tariffs’ likely economic effect
The tariffs’ effect on solar-energy costs suggests several conclusions. First, the Trump tariffs are not likely to motivate a shift (at least one based on price alone) from solar back to coal or natural gas. For utility-scale arrays, the Trump-raised cost of energy over an array’s entire working life does not exceed the cost of generating energy with coal or natural gas (let alone its retail price), at any time during the four-year ramp down. In addition, the cost of solar energy is certain (fixed at the outset by the capital investment in the array), while the cost of power from any coal or natural-gas plant will depend on the vagaries of market prices for fuel over the entire life of the plant. The investment in solar arrays thus provides something highly prized by business: certainty.
Although the Trump tariffs may raise the cost of energy from
consumer arrays above the (utility) cost of
generating energy from coal or natural gas, no consumer is going to build a coal or natural-gas power plant in his home. As the table shows, the cost to the consumer of generating energy from a solar array will always be less than the
price the consumer would have to pay any electric utility at retail, or even at commercial or industrial rates. So consumers will still have an economic incentive to install solar arrays, although the incentive will get a bit stronger as the Trump tariffs ramp down. Consumers will also still have a basis for amortizing the cost of their arrays to “payback,” the more so if they
use their arrays to charge electric cars.
Thus the Trump tariffs may
reduce the price advantage of solar arrays over coal and natural gas, but they will not eliminate it. Based on the cost per kilowatt hour of energy produced, solar-array buyers will have and retain no rational alternative,
perhaps besides windmills. And windmills are much harder for consumers to permit, build and maintain than solar arrays.
Timing, however, is another matter. Some buyers of solar arrays may wait three years to buy in order to get the lowest tariff-raised prices. This effect will be most pronounced for utility-scale installations, for which the Trump tariff’s system-price increase is highest, due to the low utility-scale turnkey factor. Some utility-scale buyers may even try to get out of contracts for which imports of solar cells and panels will not occur by February 7 (the tariff’s effective date). For contracts under negotiation, many utilities may delay importation of solar devices and their actual installation until the Trump tariff drops to 15% on February 7, 2021.
This effect could cause layoffs in the sales and installation industry, but mostly for utility-scale projects. Smart incumbent firms will shift their focus to consumers as quickly as possible and for the tariff’s first three years. The tariffs will affect consumers’ costs of total systems (and consequently their cost of electric energy), but the tariffs will never raise the cost of energy above the retail price that a utility would charge, now 13₵ per kilowatt-hour. And this is so even if these first-principle estimates of the cost of energy from solar arrays are 30% low, rather than 20% high, as comparison with actual experience with my own solar array suggests.
Even in the tariff’s early years, when its price effect on arrays and their energy is highest, it will probably not even overcome the price-advantage of installations in new residential construction, as distinguished from retrofits. So during those years, the emphasis in selling solar arrays to consumers will probably shift to new-home construction and suburban development. Solar City, which makes solar panels that double as roofing tiles, will be particularly well situated to exploit the new-construction advantage.
If this analysis is right, there will be a surge of new utility installations and a resurgence of consumer solar-panel retrofits as the tariff drops, and especially as the tariff reaches its low steady-state in 2021. In the interim, employment in sales and installation firms will probably decline, as will employment in the industries that make the non-solar-panel parts of arrays, such as foundations, support structures, cables, control elements, and inverters.
The policy purpose of temporarily dislocating these industries is to give American solar-cell and solar-panel makers time and a price umbrella with which to recover from imports allegedly subsidized by foreign governments and therefore unfairly underpriced. Much depends on whether makers seize this opportunity, which they can only do by investing in R & D and manufacturing plants.
The tariff and the price advantage it gives American manufacturers decline to a presumed steady state after four years. So the sooner this investment is made, the better. In the best of all possible worlds, American makers of solar cells and panels should be making plans to invest in R & D and manufacturing right now.
In essence, the Trump tariffs invite American solar cell and panel makes to invest massively in R & D and plants at precisely the time at which their sales may be falling due a reduction of demand caused by the tariffs’ effect on total-system prices. That’s a tough ask.
Yet the theory is sound. If American makers continue to suffer a price disadvantage due to foreign governments’ unfair or illegal subsidies of foreign manufacturers, they will
never have the money to invest in R & D or plants in order to gain a price advantage, and their technology will lag. Eventually, that vicious circle will result in foreign domination of innovation, design and manufacturing and a shift of American industry to selling and installing foreign products—an economic and technological dead end.
We are already well on the way to that dead end. Yet even Sivaram, in his op-ed diatribe against the tariffs, admits that American manufacturers still own 20% of American demand for solar cells and panels. That is no small thing.
Conclusion: the desperate need for more private investment
The Trump tariffs may be a Hail Mary pass to avoid further deterioration in the “front end” of the American industry, but they are a reasonable expedient. In fact, it’s hard to imagine
any viable alternative. Further government subsidies of our own—even below-market-rate loans—would not only increase our already high government debt. They would also violate the very international rules that we are using to impose the tariffs, and they would encounter massive political resistance from conservatives.
The underlying problem is our fly-by-night American culture. Our money is simply not as patient as money in Asia.
You have only to look at our banks’ behavior leading up to the Crash of 2008, or the massive rise and recent drop in the price of Bitcoin, to understand how much the gospel of “get rich quick” drives our economy. Additional evidence is the rapid rise of firms, like Facebook and Uber, one of which has unwittingly undermined our democracy, the other of which has famously neglected real problems of its drivers and customers.
Solar and wind energy require patient money. Solar in particular requires a long time frame, for the large capital investment in a solar array makes sense—and produces the
lowest cost of energy of any technology now known to mankind—only when amortized over the long working life of a solar array.
Today solar-panel makers provide a “
linear warranty” of useful (albeit slowly and predictably declining) power for 25 years. But the physics of solar panels
suggests that their useful lifetime is likely closer to a century, at
slow, steadily and predictably declining power output. Even if it’s really only 25 years, the cost of replacing panels three times during the longer lifetime of the rest of the array’s equipment does not eliminate the cost advantage of solar over alternative technologies in utility-scale arrays. The reason is that, while replacement of course increases the total capital cost of the array (the numerator), it also increases the lifetime output of solar energy, by
raising average energy output (the denominator) during the shorter periods of decline.
So exploiting solar energy properly requires a shift in time perspective analogous to, but longer-term than, the shift to thirty-year home mortgages in the last century. That shift jump-started our housing market and gave our country the highest proportion of home ownership in the world. A similar shift to longer-term thinking could renew our chances to lead the global conversion to solar energy as innovators and manufacturers, rather than just to follow as passive consumers and installers.
If we Yanks and our big banks can’t adopt or accommodate that long-term perspective for solar, no tariff will save us. We will inevitably lose the race that our whole species must run: to convert to renewable energy (principally solar and wind)
before fossil fuels run out and/or we have pushed our planet so far from the temperature regime in which our species evolved that life on Earth become Hell.
So the Trump tariffs are a gamble at best. They accept temporary pain in the solar sales and installing industry in order to let the research and manufacturing industries
regain the leads that they once had. It’s a reasonable gamble, but it depends on American money developing some staying power that it hasn’t much shown lately.
If they can’t find good reasons to invest in their own operations, American firms like Apple should consider investing in solar R & D the huge sums that the Trump tax cuts allow them to repatriate with historically low tax costs. The returns from doing so will be long-term, but handsome, both in money and enhanced prospects for the survival and happiness of our species.
Endnote 1. The cost of electricity from windmills is hard to calculate for two reasons. First, the cost of installing them is proprietary and therefore hard to find in public materials, let alone on the Web. Second, the cost of maintaining them is significant, far more so than that of solar arrays, whose “maintenance” consists largely of sweeping snow, dust and leaves off their surfaces when necessary. For windmills, maintenance costs, too, appear to be proprietary. I have had little success in locating good figures for either capital or maintenance costs, and not for lack of trying.
Endnote 2. One possible alternative is unlikely, if not impossible, in a Republican-led administration with a Republican Congress. The
government could invest in leading-edge solar panel R & D as “basic research,” just as it once invested in atomic weapons and energy, synthetic rubber, the Internet and fracking technology. Then it could try to recover the expense by licensing the results of that research to American panel makers. But even if this solution were politically feasible, the four-year time scale of Trump-tariff ramp-down is probably too short to implement it effectively.
Endnote 3. In his broadside against the Trump tariffs,Varum Sivaram reports that one American company, with panel-manufacturing facilities abroad, fears that “any hit to short-term cash flow would force cuts in research-and-development spending.” But, at the same time, he accurately notes the importance of R & D in the survival of American industry:
“[I]nnovation is the only hope for the American solar manufacturing industry . . . . New solar technologies have recently made astounding strides in the laboratory. A front-runner, a material known as perovskite, could be printed in dirt-cheap rolls and achieve far higher efficiency than today’s solar panels.”
He can’t have it both ways. He can’t lament the tariffs’ hit to “short-term cash flow”—mostly to sales firms and installers, with a bit to American firms with foreign manufacturing—and at the same time ignore the opportunity that the tariffs provide for investors in American solar R & D
now.
Yet the tariffs provide only an
opportunity. It’s now up to American investors (or foreign investors in America) to step up to the plate. Perhaps the USTR could keep an eye on industry investment and phase the tariffs out more quickly if investment is not forthcoming.
President Trump’s State of the Union Speech
Let’s give the Devil his due. Donald Trump managed to contain his inner demons long enough to deliver a lengthy speech prepared by skilled writers. As PBS’ new White House correspondent Yamiche Alcindor observed, he kept his ad libs to a minimum.
Trump’s diction was good, his delivery workmanlike. The man
can read and perform.
Like all such speeches, Trump’s was a group effort with clear partisan political aims. His was well crafted. It showed how much more effective Trump could be as a leader if he just stuck to the script in public, resolved disputes in private, and stuck to backroom deals once made.
All in all, it was not a bad speech. It tried to compensate with unity for a year of over-the-top divisiveness. It had some concrete proposals, although few specifics about them. Its tone was positive, not negative. It didn’t insult anybody, not even Kim Jong Un. And it tried to repair the President’s well-deserved reputation as a racist with “optics,” namely, a series of human props including many who were black or Hispanic.
Those props themselves told a story that no pundit seemed to notice. The much-vaunted “State of the Union” speech is undergoing an historic transition. It’s morphing from a chief executive’s honest summary of past successes and plan of action to a bit of show business. And who better to accelerate that transition than “reality” show master Donald Trump?
David Brooks had the facts at his fingertips. There were more human props in
this speech, he said, than in any State of the Union Speech since Ronald Regan introduced human props in 1982.
The human props’ stories were dramatic and moving. Most had tears in their eyes as they stood for extended applause. But virtually all their stories had a single unstated message: we are a nation under siege. From natural disasters, through our forever wars, to the opioid epidemic and the depredations of immigrant gangs, we need to circle our wagons.
The unstated subtext was masterfully subtle: “We need a strong man to lead us, and here I am.” Trump even lead the frequent applause as Soviet leaders used to do, his loud claps amplified through his open mike.
The President reinforced his authoritarian subtext by emphasizing, again and again, in how many ways he had begun to erase Obama’s legacy. He pointed at lowering taxes, exalting fossil fuels, repealing the “Obamacare’” individual mandate, adopting a policy of ambiguity and perseverance in war and diplomacy, and imposing vast restrictions on immigration. The subliminal message again was loud and clear: “I alone have put America back on the track to greatness.”
The speech also blew some dog whistles for Trump’s base. It impliedly disapproved the kneel-during-anthem protests and called repeal of the Obamacare’s individual mandate a step toward “choice.”
Although short on detail, the specific policy proposals were apt and potentially enticing. They included: (1) $1.5 trillion for an infrastructure program, leveraged with state, local and (“where appropriate”) private money, (2) a paid family leave program, (3) vocational education, and, of course (4) a grand bargain on immigration—citizenship for 1.5 million dreamers in twelve years, in exchange for the Wall, restricting family immigration to spouses and children, and eliminating the lottery.
All in all, the speech had an overwhelming message for Democrats and progressives: never underestimate your enemy.
Donald Trump may be a political ingenue without perceptible skill, whose intemperate personality is self-defeating more often than not. But the Republican Party is anything but. It’s a permanent minority party whose minority is getting more permanent by the day. Yet it has managed to capture all three branches of our government, and its propaganda apparatus, including Fox, is the most effective in human history.
To use a term from the Trump-bumped stock market, the GOP has “outperformed.” Trump’s first State of the Union speech, which was self-evidently a Party product, was just one example.
The Dems’ body language told the story. Throughout most of the speech, they sat mute, stony faced, some even bent over in obvious dejection. They applauded rarely, just for obviously obligatory tributes to the hero-props and our military and first responders. Only Chuck Schumer (D., N.Y.), ever the courtly and flexible legislator, stood and applauded
ideas that Dems could readily support. A few others followed his example.
If you had looked only at the “optics,” you would have seen a closely divided Congress, with one side triumphant and celebratory and the other beaten and dejected. It was not a sight to light up a progressive’s eyes.
Joe Kennedy’s Response
In his official response, Congressman Joe Kennedy (D. Mass.) took a big gamble. Far more than Trump’s speech, his was virtually all emotion. From our Pilgrims to the present day, he extolled the virtues of immigrants, the value of diversity and equality, and the long and fruitful struggle to achieve them, which is far from won.
Kennedy’s response had no memorable reference to policy. It was almost entirely an appeal to identity politics. It seemed directed entirely to the Dems’ “base,” including his immediate audience. In stark contrast to the sea of grey hair in the Capitol, Kennedy’s audience seemed even younger than he is at 37.
Unlike Trump’s speech, Kennedy’s seemed not directed at broadening the “base.” It was well written and well delivered, apart from Kennedy’s apparent nearness to tears on several occasions. But compared to Trump’s triumphant and “leaderly” tone, reinforced by relegating divisiveness to dog whistles, Kennedy’s fell short. In comparison, and despite its occasional poetry, it came off as the whining of disempowered youth.
In the best case, Kennedy’s speech will serve its purpose of energizing the Dems’ base and will be utterly forgotten by November. In the worst case, if Dems’ campaign this way all year, they will either lose the midterms or win far less decisively than they ought to.
Hate Trump and his backers they may. But they cannot win on tribalism and whining. They
must ally with minorities of all kinds, but they must do it quietly, below the radar of everyone, including the mainstream media. (This is what Barack Obama and Eric Holder are now doing so well.) They must eschew the words “socialism,” “left,” “left wing” and even “progressive” as if they were the political equivalent of Trump’s “shit-holes.”
Instead, the Dems must promote specific, concrete proposals for action, such as Medicare for All. They must describe them with neutral, comprehensible (not tribal!) words that any voter can understand. And they must explain, in words of one syllable, why and how those proposals will make the average voter and family better off. In short, they must act like the political professionals who drafted Trump’s State of the Union speech and so advanced his and the GOP’s agenda.
Trump may be anything
but a professional pol, but the people now backing him are. Politics
is a profession, one which takes years to master, despite the rush to declare Oprah Winfrey president. If nothing else, Trump’s State of the Union Speech reminded us all of that lost truth.
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