Solar energy is seen as an important alternative energy source on the road to a decarbonized society. But the sun has set on America's once-vibrant solar industry, and the highly competitive Japanese companies that used to shine there have been eclipsed by the rise of Chinese firms that now dominate the market. International economist, Shimpe Takemori offers his insight into the factors behind this waxing and waning of solar fortunes.

Green panels on the White House

In 1979, then-US President Jimmy Carter installed 32 solar panels on the roof of the White House as a symbol of his goal for solar energy to meet 20 percent of the nation's energy needs by the year 2000.

At the dedication ceremony, Carter announced: "A generation from now, this solar heater will either be a curiosity, a museum piece, a road example, or one of the largest and most interesting May be a small part of the adventure the American people are taking - harnessing the power of the sun to power our lives as we move away from our debilitating dependence on foreign oil.

More than 40 years later, Carter's climate policy remains undecided, and America's approach to decarbonization has proven inconsistent.

In the words of Carter's successor, President Ronald Reagan: "Government is not the solution to our problem, government is the problem." When Reagan moved into the West Wing, he pulled the plug on Carter's environmental incentives and took the solar panels off the roof.

While current President Joe Biden has said that the US will decarbonize by 2050, his predecessor Donald Trump withdrew from the international Paris climate agreement.

This lack of predictability is also evident in the country's private sector. American oil giant Exxon Mobil Corp. K's decision in late May to fill a handful of seats on its board with directors who support decarbonisation has prompted institutional investors and capital markets to follow suit. But it may turn out to be the latest "green rush" of many that have come and gone in the past.

A sharp drop in investment

The previous green rush took place between 2006 and 2011. In the United States, solar energy opened the floodgates of startups and venture capital. But after the boom collapsed, many of these players went bankrupt. The collapse was compounded by two factors. First, this period coincided with the last phase of the US housing bubble. When the housing bubble collapsed, the shock triggered the Lehman crisis, which dampened all investment appetites, and invited a sharp drop in investment, particularly in new sectors such as solar energy.

Second, after suffering a heavy blow in the Lehman debacle, China redoubled its public investment. Solar energy was designated as a strategic industry and was supported with low interest loans. As a result, Chinese solar batteries, which accounted for only 2% of the global market in 2003, grew to represent a 60% share by 2011.

Unlike fossil fuels, renewable energy sources such as solar and wind are free in terms of raw material costs, but require large investments in equipment. As a result, it becomes necessary to use economies of scale, taking advantage of mass production to reduce the investment cost per unit of electricity generated.

By increasing production, China was able to reduce solar production costs by 80 percent in the 2010s, making solar a cheaper source of energy. Meanwhile, China's low-cost onslaught undercuts the U.S., killing U.S. domestic solar battery production.

Systemic competition

The solar sector has followed a distinctive line of today's industry leaders, moving through stages of growth from the United States to Japan's manufacturing expertise and now China's low prices.

After being pioneered by Bell Labs in 1954, solar energy became the playground of startups led by American university researchers as oil prices rose in the 1970s.

Japanese companies appeared on the scene in the 1990s, developing residential photovoltaic (PV) systems supported by the then Ministry of International Trade and Industry's New Sunshine Project (see below). As of 2005, Japan accounted for nearly half of the world's solar cell production, and four of the world's top five producers were Japanese manufacturers: Sharp Corporation, Kyocera Corporation, Sanyo Electric Company and Mitsubishi Electric Corporation.

But as China grew, many Japanese companies pulled out. The retreat was partly due to the cash-strapped Japanese government's decision to end a program that had been buying back electricity generated by private households at a fairly fixed price. Japan's Achilles' heel, however, would be the government's failure to establish a system capable of facilitating large-scale power generation.

Initially, Japanese companies fitted their vehicles with highly efficient solar cells that cost more. In contrast, Chinese companies have focused on inefficient but cheap sales.

Although suitable for small-scale residential installations, Japanese solar cells proved unsuitable for the thousands of arrays required to produce large amounts of energy. In the mid-2000s, Europe began to embrace renewable energy in earnest. As specialized solar companies sprung up around the world, expensive Japanese services were pushed out of the market.

The tendency of Japanese manufacturers to develop specialized solar panels can be traced back to infrastructure problems in the country's electricity system. Amid the gradual liberalization of the electric power sector since 1995, the separation of power generation businesses from transmission businesses has increased. Nevertheless, old habits die hard, and management has prioritized the delivery of electricity generated by its own companies.

In a power ecosystem that gravitates around thermal and nuclear generation, electric power companies have seen solar and wind as an unwelcome intrusion. Most of the solar energy is produced naturally during daylight hours. Companies must reduce their thermal power output to deliver solar power during this critical window. If power companies avoid making adjustments to these capacities, specialty operators will struggle to find a foothold to enter the renewable energy business.

Two constraints.

Despite favorable environmental conditions with strong winds from mainland China, Japan's offshore wind power generation is said to be 20 years behind industry leader Europe. In Japan, solar power is still primarily for residential use, and large-scale power generation involving specialized operators is almost nil.

It has friction.

A fundamental systemic reform of the electricity industry is needed to promote renewable energy towards decarbonisation. In particular, the government should make a clean break in the separation of power generation and transmission businesses, as well as restructure the nation's approach to power generation, and focus on renewable energy over thermal power. Means should be prioritized.

In order to advance the goal of solar energy production, the nation will need to overcome two obstacles.

First, this mountainous island nation has very little flat terrain. Large-scale solar panel installation will be done in hilly areas, which will require significant investment.

Second, the domestic industry must find a way to push back against China's formidable competitive advantage when it comes to solar cells. From a broader perspective, Japan's next task is to consider how its free market—as it relies on agile market sentiment and democratic politics—could fit into China's growing authoritarianism. The bottom line can compete with public subsidies, in an industry predicated on economies of scale. .

Eventually, Japan may need to switch from solar power, the country's main source of renewable energy, to generating electricity from offshore wind. Joint wind projects in partnership with leading European companies are already underway in the Hokkaido and Tohoku region – areas that boast ideal locations for offshore wind power generation.

The Sunshine Project

After the first oil crisis, Japan launched a national project in 1974 to develop new energy technologies in cooperation with industry, government, and academia. The research explored the use of solar, geothermal and hydrogen energy as well as coal liquefaction and gasification. In 1978, a Moonlight project was launched to develop energy-saving technologies, and in 1993, the two initiatives were merged under the New Sunshine Project banner.

to the peof

Takemori Mitsubishi, 65, is chairman of UFJ Research and Consulting Company and a senior fellow at the Research Institute of Economy, Trade and Industry. A specialist in international economics, he taught as a professor at Keio University until March 2021. He currently serves as the private sector member of the Government's Council on Economic and Fiscal Policy