Navigating Uncertainty: The Future of China’s Solar Industry

 

Despite China's unparalleled solar manufacturing capacity reaching 1,000 gigawatts in 2022, the industry is grappling with a profitability crisis due to plummeting prices.

In the smoggy heartland of Shaanxi province, China, the prowess of the nation’s solar industry is vividly displayed in Longi Green Energy Technology’s factory. Here, advanced robotics and precision engineering transform polysilicon wafers into high-efficiency solar cells and modules. Longi, a titan in solar manufacturing, epitomizes China's dominance in the solar supply chain, from raw polysilicon to the final solar modules.

China’s solar manufacturing capacity reached an unprecedented 1,000 gigawatts (GW) in 2022, according to Wood Mackenzie, dwarfing the combined capacity of the rest of the world. This exponential growth, tripling since 2021, has significantly outpaced global demand. Despite initiatives in the US and other regions to boost domestic production, China's output remains unmatched, capable of producing more than double the solar modules needed globally each year.

This vast production capacity has driven down the cost of solar energy. During the COVID-19 pandemic, polysilicon shortages led to a spike in module prices. However, since then, prices have plummeted to record lows of under 10 cents per watt, as reported by pvInsights. This cost reduction has been beneficial for consumers and developers, counterbalancing the rising costs of capital for solar farm projects.

While the rapid growth in Chinese solar manufacturing has benefited consumers through lower prices, it has also created a profitability crisis within the industry. Prices for polysilicon, wafers, cells, and modules have fallen below their average production costs, squeezing profit margins. Consequently, Chinese solar export revenues declined by 5.6% last year, despite a surge in volume, according to Wood Mackenzie.

Longi, facing financial strain, announced a 5% workforce reduction in March 2023, attributing the cuts to an increasingly complex and competitive market. The share prices of major Chinese solar firms, including Longi, Trina Solar, JA Solar, and Jinko Power, have suffered significantly, reflecting investor concerns about the industry's future profitability.

Smaller firms have been hit even harder. Lingda, a smaller solar cell manufacturer, scrapped plans for a $1.3 billion factory. According to an executive from another Chinese solar company, at least half of the businesses in the supply chain might face bankruptcy due to the current market conditions.

Despite these financial challenges, China’s largest solar companies continue to expand and upgrade their technology to maintain a competitive edge. Wood Mackenzie forecasts that China’s solar capacity will grow to nearly 1,700 GW by 2026. This relentless expansion is partly fueled by substantial state support. Local governments in China have long backed the solar industry through various incentives such as free land, free electricity, interest-free loans, and access to advanced technologies. Usha Haley of Wichita State University estimates that these supports account for about 35% of a solar company’s costs, potentially reaching up to 65% in some cases.

Recently, local governments have become even more generous, sometimes financing and constructing solar factories to lease or sell to companies. This trend has been partly driven by the downturn in China’s property sector, which has forced local governments to seek alternative revenue sources. In Zhengzhou, for example, officials are increasingly willing to support struggling solar firms.

However, this state support may not be sustainable. Many Chinese provinces are struggling with high debt levels, and solar companies must compete for government aid with other industries facing overcapacity issues. Rhodium Group, a consultancy, reports that over 20% of Chinese industrial firms were unprofitable last year, underscoring the broader economic challenges the country faces.

Efforts to mitigate China’s overcapacity through exports have met resistance abroad. European Commission President Ursula von der Leyen recently stated that “the world cannot absorb China’s surplus production.” In June 2023, the European Union announced provisional tariffs of 26% to 48% on Chinese electric vehicles, hinting that similar measures might be applied to solar modules. The US has imposed anti-dumping duties on Chinese solar manufacturers since 2012, and although the EU lifted similar measures in 2018, concerns over dependence on Chinese imports persist.

Despite Chinese leaders’ denial of an overcapacity issue, there are signs of internal acknowledgment. Xi Jinping, in a recent meeting with business executives, warned against over-investment in sectors like solar modules, suggesting a need for balanced and merit-based investments.

The future of China’s solar industry seems poised for a period of consolidation. Jenny Chase of Bloomberg NEF describes the cyclical nature of the industry as a “solar coaster,” characterized by brief periods of profit followed by extended phases of minimal margins, bankruptcies, and market exits. While lower module prices might eventually spur increased demand, helping balance supply and demand, the near term appears uncertain.

In a practical sense, while China’s solar industry has made remarkable strides in reducing the cost of renewable energy globally, it now faces significant challenges due to overcapacity and falling prices. The industry's future will depend on its ability to navigate these challenges through technological innovation, strategic consolidation, and perhaps a recalibration of state support. The world will be watching closely to see how China’s solar giants adapt to these evolving dynamics.