Focusing Industrial Strategy: Which Clean Energy Supply Chains Should Have Priority?

The Inflation Reduction Act (IRA) was bold: it sought to make the United States competitive in all clean energy supply chains, including solar and hydrogen, and carbon capture, utilization, and storage (CCUS). But in a world of global value chains, fierce competition, and limited public resources, it will be hard to achieve leadership in all of these supply chains. Must the United States compete in all areas and domains, or are there some sectors when it can afford greater reliance on foreign production? When can it consider a supply chain to be sufficiently de-risked? When can onshoring and friendshoring be deemed successful? 

These questions are critical for policymakers. As U.S. Deputy National Security Advisor for International Economics Daleep Singh put it, America’s efforts to position itself in global value chains for critical technologies will array along “a continuum between resilience and dominance.” This insight suggests the need for thought leadership on what resilience is and what kinds of risk might be acceptable. This kind of thinking can add strategic focus, sharpening and deepening U.S. clean energy industrial policy. 

The admission that there are trade-offs for the government to consider, and that some objectives are in tension, suggests the need for a broad multi-factor framework for focusing industrial strategy and directing public support for clean energy manufacturing. Such a framework should help policymakers to consider various risks and opportunities while setting priorities for investment and policy coordination. 

In this memo, we draw on the work of the U.S. Foreign Policy for Clean Energy Taskforce to propose such a framework and test its operationalization in the solar power sector and the batteries sector. 

The Global Context: EU and Chinese Industrial Policy

Goals are an essential part of industrial policy. In 2015, as part of its Made in China 2025 plan, Beijing set goals for what share of its market should be supplied by domestic production, determining that 70 percent of industrial robots and 80 percent of renewable energy equipment should be produced in China. The country is now the world leader in manufacturing solar panel components and production equipment, and in 2022 it accounted for more than half of robot installations worldwide. It continues to achieve a leading position in key technologies from solar panels to drones and beyond.

European policymakers have also increasingly set specific supply chain resilience targets, particularly since the COVID-19 pandemic and the Russian invasion of Ukraine caused major disruptions. The European Union’s Net Zero Industry Act set a target of establishing manufacturing capacity equal to 40 percent of annual deployment needs. And its Critical Raw Materials Act of 2023 set targets for domestic production and established a goal that no single third country supply “more than 65% of the Union’s annual consumption of each strategic raw material at any relevant stage of processing.”

The EU uses more complex mathematical formulae than a general 65 percent target (see Annex II) for classifying the “economic importance and supply risk” of certain raw materials, but it only uses them to determine the safe level of mineral stockpiles, not for any larger policy toward technological development and supply chain resilience. Most recently, the September 2024 Draghi report on European competitiveness called for Brussels’ industrial policy to do more to differentiate between sectors where the cost disadvantage is too large to be competitive and sectors where Europe could have an innovation edge and sees high future growth potential. 

While the EU approach of setting a ceiling for supply chain concentration is more appropriate for the United States than domestic targets modeled off China, it could use more nuance. To create strategic focus, the United States needs different targets for different clean energy sectors. These targets must take into account what is achievable and accurately assess the dangers of overreliance and the benefits of friendshoring.

Introducing a Framework for the United States

A supply chain resilience framework for U.S. clean energy sectors should be detailed enough to support policy differentiation; for example, it could suggest a 30 percent target for production in the United States or in friendly countries for one supply chain and a 60 percent target for another. The framework should also aid in the analysis of real-world geopolitical risks. One risk is that China could restrict access to critical materials and components, hampering U.S. clean energy technology manufacturing and deployment.

We propose a supply chain resilience framework that evaluates a clean energy sector on four broad measures: economy-wide impacts, competitiveness, supply chain risk, and national security. The four factors address the following questions:

• Economy-Wide Impacts: How significant is the sector to the overall economy? What is the risk that a supply shock would have significant consequences? 
• Competitiveness: Can the sector become globally competitive? Could it eventually become profitable without subsidies and supply foreign markets?
• Supply Chain Risk: How diversified is supply? Can a small number of actors (states or firms) exert significant influence over production in the United States and allied countries? How exposed is the U.S. economy to geopolitical risks in the sector’s supply chain?
• National Security: Is the technology needed for national security applications? 

Each of these factors is measured with multiple indicators. These indicators could be used to develop a composite risk index: policymakers could determine which factors they perceive as most important and weight the index accordingly. The hyperlinked sources provide more information on the methodology between the calculations for each factor.

Testing the Framework for Solar and Batteries

Table 2 operationalizes each of the factors for the solar power sector and the batteries sector as a proof of concept for the U.S. supply chain resilience framework. Synthesizing the indicators into a composite risk index and supply chain threshold is beyond the scope of this analysis. Although a full study would require more intensive data collection and analysis, the table demonstrates that the framework is tractable. 

Discussion

The preliminary research for the solar and battery sectors suggests that this framework can effectively differentiate between sectors. Taken individually, certain indicators can illustrate the importance of either sector, but taken together, the indicators reveal enough variation to make difficult decisions.

On balance, the batteries sector has much larger economic impacts, more direct national security applications, and more competitiveness potential than the solar power sector. While the solar sector currently out-performs battery manufacturing in terms of revenue and employment statistics, the economy-wide impacts and forward-looking indicators included in the framework favor the batteries sector.

The solar sector’s current lead on revenue vis-a-vis batteries is slim and likely to fall over the medium-term, particularly considering China’s significant overcapacity and manufacturing pipeline for PV modules and upstream components. As the leading solar analyst Jenny Chase of BNEF puts it, “solar is a horrible business.” Regarding employment, the batteries sector offers greater growth potential because its value chain feeds into the EV and automotive sectors, critical manufacturing industries which alone employ more than three times the solar sector’s workforce across manufacturing, construction, and installation. 

The solar sector also faces stronger headwinds over the medium- and long-term, as Chinese firms can produce modules significantly cheaper than their U.S. counterparts. At 11 cents per watt, Chinese modules are nearly one-third the cost of U.S. equivalents, a ratio that will likely expand as Chinese production and overcapacity continue to grow. U.S. market share of modules—currently just over 4 percent of global production—is therefore unlikely to increase significantly, despite U.S. government support in the form of subsidies and tariffs. While China maintains a cost advantage in battery pack manufacturing, its lead is narrower, currently producing packs only 11 percent cheaper than U.S. equivalents on a dollar per kilowatt hour basis. 

The batteries sector also leads on innovation potential, as U.S. firms are developing leapfrog chemistries that could supplant Chinese lithium-ion incumbents. Lithium-sulfur, solid state, and silicon-anode chemistries offer greater efficiency and durability than current lithium-ion cells and present opportunities to de-risk U.S. supply chains by removing dependence on upstream processed material currently dominated by Chinese firms. The opportunity for the United States to leapfrog to next-generation technologies is also smaller in the solar sector, given China’s manufacturing advantage and the need to pair perovskite modules with c-Si modules.  

Though both sectors face a difficult market environment, given overwhelming control among Chinese firms (see China share and HHI in Table 2), the U.S. batteries sector holds a clear advantage in terms of announced and under construction projects relative to solar. Related, in batteries total ex-china pipeline and production for cells would meet ~55% of 2035 ex-china demand for batteries.  Solar’s ex-china project pipeline, on the other hand, would only achieve less than one-third of the expected ex-China demand by 2035.

The final set of indicators addresses the broader national security and resilience implications of each sector. Through this lens, batteries have greater dual-use nature in defense applications due to the direction of global militaries in fielding electric or hybrid vehicles and the increasing power requirements of military vehicles in general. Solar cells, and upstream solar components, do not have an equivalent military dual-use. Upstream solar supply chains, however, due to the transferability of highly specialized technical expertise involved in polysilicon production, have a greater potential for specialized manufacturing capabilities to be directed toward military production of chips. Technical expertise required in battery manufacturing does not have the same transferability to weapons manufacturing, other than the general supply chain logistics expertise required by all complex production chains.

This framework thus appears to pass the tests laid out above and provides a strong basis for a practical approach to the questions of bolstering U.S. supply chain resilience. 

Correction: In the U.S. Market Share section of table 2, "percent of global production" has been clarified to mean "percent of global production capacity," not output.