This is an extract from a recent report “Progress in Diversifying the Global Solar PV Supply Chain” by The Renewable Energy Institute.
Key Factors and Issues behind China’s Domination
China’s competitive edge in solar PV manufacturing over other countries comes from four key factors: economies of scale, supply chain vertical integration, technological innovation, and government support. In this list, economies of scale and supply chain vertical integration are the two most important factors. Compared to other electricity generating technologies, solar PV is characterized by its simplicity and reproducibility, making it well-suited for mass production. Mass production enables economies of scale. China managed better than any other country to reap these economies of scale. The recipe to maximize economies of scale is straightforward: the bigger, the better. For each segment, China built all the world’s largest factories (i.e., these factories are located in China and are owned by Chinese manufacturers). Some of these facilities are enormous (i.e., with manufacturing capacity of dozens of gigawatts per year) and concentrate substantial shares of the world’s solar PV manufacturing capacity.
In a very competitive environment such as that of the solar PV industry, vertically integrated companies (i.e., companies active in several segments of the supply chain) have consistently outperformed pure-play companies (i.e., companies active in only one specific segment) financially. On the one hand, integrated manufacturing processes are more cost efficient. On the other hand, vertically integrated companies can compensate for losses in one segment through profits in another. Examples of fully or partially vertically integrated companies include JA Solar, JinkoSolar, LONGi, Tongwei, and Trina Solar, which are well-known for being the world’s five largest manufacturers of cells and modules.
In addition to economies of scale and supply chain vertical integration, technological innovation and government support also helped China assert its domination over the solar PV supply chain. Regarding technological innovation, thanks to research and development (R&D), continuous improvements in solar PV manufacturing could be achieved resulting in higher conversion efficiency (from 16% in 2012 to 22% in 2023) and lower raw material use (e.g., silicon and silver), thereby reducing costs. Likewise, automation of processes by using machines increased productivity and decreased the need for manual labor, offering cost efficiency gains. As for government support, a mix of incentives targeting both supply and demand has been implemented in favor of solar PV manufacturing in China. On the supply side, grants and low-cost loans from state banks have been made available from the mid-2000s. On the demand side, feed-in tariffs and auctions for solar PV have been introduced in 2011 and 2019, respectively. The goal of demand side measures was to create sustainable demand accompanying the growth of the country’s manufacturing capacity.
Finally, it may also be noted that the Chinese solar PV industry benefits from affordable electricity prices. In 2023, electricity prices for large industrial customers in energy-intensive industries were around $0.07 per kilowatt-hour (/kWh) in China. This was slightly higher than in the United States ($0.06/kWh), but much lower than in the European Union ($0.11/kWh). Affordable electricity prices are critical because solar PV manufacturing is electricity-intensive, in particular polysilicon manufacturing due to high temperature requirements. In China, solar PV manufacturing capacity is concentrated in a few provinces and autonomous regions (i.e., regions granted a degree of self-governance from an external authority). Geographic concentration of large manufacturing plants presents advantages in terms of cost minimization. Into more details, upstream, polysilicon and ingots manufacturing capacity are mostly located in the center (from north to south: Inner Mongolia, Ningxia, Sichuan, and Yunnan) and the northwest of the country (Xinjiang) where electricity prices are low thanks to cheap electricity generated from coal and hydro. Downstream, cells and modules manufacturing capacity are mostly located in three eastern provinces (from north to south: Jiangsu, Anhui, and Zhejiang) near or along the East China Sea, where products can be exported by maritime shipping on container vessels.
On the downside, geographic concentration exposes the supply chain to some drawbacks. The potential disruption risks associated with this type of concentration include natural hazards such as earthquakes and fires, and extreme weather events such as drought and flooding. For instance, in 2020 and 2022, the global production of polysilicon was reduced because of flooding and fire issues at a handful of Chinese plants. The incidents that occurred in 2020 led to an estimated 4% decline in annual polysilicon production, contributing to the near tripling of polysilicon prices between 2020 and 2021. Because of higher polysilicon prices, and disruptions due to the COVID-19 pandemic (e.g., congested shipping ports increasing freight prices), the prices of modules rose for the first time in 2021 (around +20% compared to 2020), even if more modules manufacturing capacity became operational. Thanks to polysilicon manufacturing capacity expansion and lower freight prices, module prices resumed their downward trajectory from 2022.
Criticisms against the Chinese solar PV industry
Despite its accomplishments the Chinese solar PV industry faces harsh criticisms because of human rights violations, unfair trade practices, and environmental pollution. First, in May 2021, the Sheffield Hallam University, United Kingdom revealed that millions of indigenous Uyghur and Kazakh citizens from the Xinjiang autonomous region were placed into state-imposed forced labor programs. Investigations concluded that forced labor was used in polysilicon manufacturing. Violating human rights is obviously always condemnable, and it logically caused public outrage. Second, from 2012 onward, the United States started applying antidumping and countervailing duties (AD/CVDs) (i.e., duties imposed to offset subsidies or dumping on imported goods) to solar cells originating in China because it found that Chinese manufacturers sold subsidized cells at dumping margins in the United States. Additional American sanctions for unfair trade practices followed since then. To avoid these sanctions Chinese companies established manufacturing plants in Southeast Asia, where sometimes only minor processing is completed. Third, solar PV manufacturing is electricity-intensive, and 61% of China’s electricity was still generated from dirty coal power in 2023.
Without minimizing the previous criticisms against the Chinese solar PV industry, another major issue is China’s aggressive export strategy, which is to blame for global oversupply. As a result of continued oversized growth in China in the past few years, the world’s solar PV manufacturing capacity exceeded demand by 2-4 times, depending on segments, in 2023.
Oversupply makes competition among manufacturers fierce. In the solar PV industry today, price, not differentiation (i.e., the unique qualities of a product), is the decisive factor to outcompete rivals. To maintain their market shares, manufacturers sell at prices below production costs. Rock-bottom prices of solar PV products accelerate global decarbonization by making it economically very attractive to invest in the installation of solar PV. Nevertheless, given that many solar PV manufacturers, including almost all the top ones, are now confronted with losses, the current situation cannot indefinitely continue.
Counteractions in United States, Europe, and Asia
United States: In August 2022, President Joseph Biden (Democratic) signed the Inflation Reduction Act (IRA) into law, marking the most significant action the American Congress has taken on clean energy and climate change in the history of the country. In the framework of the IRA, two federal tax credits stimulate domestic solar PV manufacturing: the advanced manufacturing production credit (tax code: §45X) and the advanced energy project “(investment)” credit (§48C). These tax credits are not stackable. The tax credit to be chosen depends on forecasted profits. Beginning in 2023, the manufacturing production credit introduces new production tax credits (PTCs) for the manufacture of solar PV components. The funds to be allocated are uncapped. Credits are fully available from 2023 to 2029 and are then phased down from 2030 to 2032 (i.e., 75% in 2030, 50% in 2031, and 25% in 2032). No credit is available after 2032.
Though these tax credits are generous, they are insufficient to close the manufacturing cost gap with China. Among these sanctions, it is interesting to stress the anticircumvention orders applying to Cambodia, Malaysia, Thailand, and Vietnam. These were decided because some Chinese manufacturers were shipping solar cells through these four Southeast Asian countries for minor processing in an attempt to avoid paying AD/CVDs.
For over a decade, American federal and government organizations have found evidence that China’s cost advantage is partly due to unfair trade practices. In retaliation, they have implemented a set of trade sanctions against the Chinese solar PV industry throughout the years.
European Union: In May 2022, the European Union (EU) announced its Solar Energy Strategy, as part of the REPowerEU Plan – the EU initiative to put an end to its dependency from Russian fossil fuels by massively and rapidly deploying renewable energy. The EU Solar Energy Strategy aims to bring online over 320 GW of solar PV by 2025 and almost 600 GW by 2030 (cumulative installed solar PV capacity reached 255 GW in the EU in 2023). These ambitious targets were set by highlighting solar PV as a cost-effective decarbonized technology. At that time, this expansion of solar PV was also seen as an opportunity for the EU to reinforce its industrial leadership.
To this end, the decision to launch a European Solar PV Industry Alliance was made. As of September 2024, considering the moderate pipeline of solar PV manufacturing projects under construction and announced in Europe, the EU strategy somewhat disappointing. In particular, ingots and wafers manufacturing capacity were not taking off, jeopardizing the European Solar PV Industry Alliance’s objective of production capacity of 30 GW by 2025 along the entire supply chain.
It is likely that European solar PV manufacturing capacity will not dramatically increase soon, and that Europe remain dependent towards the Chinese industry. Europe is aware of this problematic reliance, but it prioritizes solar PV demand over domestic solar PV supply to decrease its electricity prices and reduce its greenhouse gas emissions, which are deemed more urgent issues.
Japan: Japan’s strategy to strengthen its solar PV supply chain is very different from that of the United States and the EU. Japan only has little manufacturing capacity based on crystalline silicon and there is no plan to expand the production of this technology in the country. Instead, Japan is putting the emphasis on an innovative technology: perovskite, invented by Professor Tsutomu Miyasaka, Toin University of Yokohama in 2009. The Japanese government claims that there is a “scarcity of suitable terrain” for the installation of solar PV based on crystalline silicon, which faces space constraints due to weight issues, making its expansion difficult in the country. This claim is incorrect as the potential for crystalline silicon remains largely untapped in Japan.
Sticking to this erroneous narrative, the Japanese government promotes thin, light and flexible perovskite cells. Another advantage of perovskite over crystalline silicon for Japan is that the primary material for producing perovskite cells is iodine. With a share of 30% in 2023, Japan was the world’s second largest producer of iodine.
For perovskite, the Japanese government aims to achieve a power generation cost as low as ¥14/kWh in 2030 and ¥10/kWh in 2040. In comparison, according to BloombergNEF, the power generation cost of solar PV based on crystalline silicon was ¥10/kWh in 2023, and it is projected to be ¥7/kWh in 2030. In November 2024, the Japanese government published its Next-Generation Solar Cell Strategy in which it announced the aim of introducing at least 20 GW of perovskite in Japan by 2040.
Affordable and rapid decarbonization does not need to wait for perovskite to become mainstream. Just like the EU, Japan should take advantage of cheap crystalline silicon imports, preferably not only from China, but also from Southeast Asia and India for diversification purposes.
Southeast Asia and India: Southeast Asian countries (i.e., Cambodia, Indonesia, Laos, Malaysia, Philippines, Singapore, Thailand, and Vietnam) and India are also increasing their domestic solar PV manufacturing capacity, contributing to the diversification of the global supply chain away from China. As of 2023, Southeast Asian countries were active across the whole solar PV supply chain with rather significant manufacturing capacity in each segment, and especially in cells and modules. Vietnam, Thailand, and Malaysia were the regional leaders. Behind, Indonesia started to catch up with this trio with the commissioning of new modules manufacturing capacity.
India only had cells and modules manufacturing capacity. This manufacturing capacity was smaller than that of Southeast Asian countries, but bigger than those of Europe, Japan, and the United States. In Southeast Asia, most of the manufacturing capacity is owned by Chinese companies. However, non-Chinese companies also own meaningful manufacturing capacity. Moving forward, based on the pipeline of projects under construction and announced, the growth of solar PV manufacturing capacity in India and Southeast Asia is expected to be similar.
In India in the 2010s, domestic-content requirements were introduced by several government purchasing programs (e.g., 50% of capacity auctioned reserved for projects that use domestically manufactured solar cells and modules). And from 2022, customs duties of 25% on cells and 40% on modules started to be imposed on imports. This strategy helps bridge the gap with Southeast Asia and enables the emergence of Indian companies like Waaree Energies, Adani Enterprises, and Premier Energies.
Access the report here
