Solar's China Syndrome?

A recent report by the International Energy Agency has highlighted the dominant role of China in the world’s solar supply chain and its implications for the global energy transition.

Solar PV is an important technology in the energy transition internationally. It has also played a critical role in Australia’s transition and as a result we now have more than 3 million homes with solar installations on their rooftops as well as a growing number of solar farms connected to the grid.

The IEA’s Special Report on Solar PV Global Supply Chains illustrates how central the role of China has become in expanding solar installations worldwide. More than 80 per cent of all manufacturing stages of solar panels, which includes polysilicon, ingots, wafers, cells and modules, now occurs in China’s factories and its share of polysilicon, ingots and wafer production could soon hit 95 per cent based on the manufacturing capacity it is putting in place.

China is also home to the world’s top 10 suppliers of PV manufacturing equipment. Those kinds of economies of scale have been a key reason for the dramatic fall in the cost of solar technology (by more than three quarters in the last decade, see figure 1), but the geographic concentration of a critical supply chain also brings with it challenges that governments will need to consider.

Figure 1: Global PV manufacturing capacity, demand and average module selling price, 2010- 2022

The IEA estimates that one out of every seven panels produced internationally comes from a single manufacturing site in China. The supply chain concentration, it notes, makes the energy transition vulnerable to disruption.

Between 2010 and 2021 China strengthened its already leading position as a manufacturer of wafers, cells and modules and its share of global polysilicon production capacity almost tripled. (see figure 2).

Figure 2: Solar PV manufacturing capacity by country and region, 2010-2021

The report indicates that in the last five years, only the Asia-Pacific region outside China has become capable meeting any meaningful share of its needs.  While North America and Europe have significant module-manufacturing capability, they still depend almost entirely on China and Southeast Asia for solar cells. The exception is for manufacturing capacity linked to thin-film technology, which relies less on China.

In 2021 around 38 countries had module assembly capabilities but just 19 countries had an assembly capacity of at least 1GW. Yet China was still responsible for about 70 per cent of production up from 50 per cent in 2010.

Given the high concentration of solar PV manufacturing in China and some in Southeast Asia, almost all countries with high solar PV demand are large importers. In the last five years, the European Union has imported 84 per cent of its installed solar PV modules, the US 77 per cent and India not far behind with 75 per cent. The modules produced in those regions depend 60-80 per cent on imported PV cells.

In 2021, higher polysilicon and module prices, coupled with rising demand, push the value of PV trade to nearly USD40 billion, a record.  Given China’s position as both the biggest producer and consumer of polysilicon, wafers, cells and modules, international solar PV trade volumes can be impacted by China’s domestic demand.

According to the IEA, annual solar PV capacity additions need to more than quadruple to 630 gigawatts (GW) by 2030 to be aligned with its Roadmap to Net Zero Emissions by 2050.  To do that global production capacity for polysilicon, ingots, wafers, cells and modules needs to more than double by the end of this decade. Given this diversification of supply chains will become more critical.

Cost advantage

The cost competitiveness of existing solar PV manufacturing is a key challenge to increasing the diversification of supply chains. China is the most cost-competitive place to manufacture all components of the solar PV supply chain and its costs are estimated to be 10 per cent lower than India, 20 per cent lower than the United States, and 35 per cent lower than Europe.

One key cost component is electricity costs accounting for more than 40 per cent of production costs for polysilicon and nearly 20 per cent of the costs of ingots and wafers. The IEA estimates that the electricity cost involved in polysilicon production is around USD75/MWh, which is nearly a third lower than the global industrial price average. Access to cheaper power for manufacturing will be a critical element in diversifying production.

The IEA report suggests measures that can assist would include:

• Building solar PV manufacturing around low-carbon industrial clusters to gain economies of scale. Solar panel manufacturers can also use their products to generate their own renewable electricity on site, thereby reducing both electricity bills and emissions. Electricity-intensive solar manufacturing could be located near emerging industrial clusters (e.g renewablebased hydrogen), enabling them to benefit from cost-competitive renewable electricity. Meanwhile, economies of scale and vertical integration of manufacturing can reduce variable costs and further increase competitiveness.
• Recycling of solar PV panels offers. If panels were systematically collected at end of life the IEA estimates it could meet more than 20 per cent of the solar PV industry’s demand for aluminium, copper, glass, silicon and nearly 70 per cent for silver between 2040 and 2050. The caveat is that existing PV recycling struggles to generate enough revenue to recover the cost.
• De-risking investment and facilitate investment in manufacturing through initiatives like finance and tax policies, tailoring demand support policies, encouraging public-private collaborations.
• Strengthening international cooperation.