China’s photovoltaic manufacturing sector dominates global PV manufacturing. It is well past time to stop disputing the reality and for other governments to consider the opportunity cost of not following suit by supporting domestic manufacturing with incentives and subsidies.

Aiko Solar recently announced that it had received RMB 300-Billion from the government for expansion purposes, publicly announcing what China’s manufacturers had previously disavowed. Figure 2.1 observes China’s solar cell capacity growth from 2011 through 2021. At the end of 2021, China’s solar cell sector was so far ahead of the rest of the world that it is difficult to imagine a change in the situation.

Figure: China and ROW Solar Cell Capacity Growth, 2011-2021

How did China accomplish its goal of dominating solar cell manufacturing? First, it subsidized its industry; manufacturers enjoyed cheap or free labor and energy, and they engaged in aggressive pricing strategies that rendered competition almost impossible.

Though cheap energy in and of itself is not bad, coal as a primary driver of solar cell manufacturing is counter worldwide goals to limit global warming.

The definition of cheap labor depends on the market, but free labor based on forced labor should not be countenanced.

Although not a strategy specific to China, aggressive pricing was used by the industry observers and insiders as proof of progress – even as manufacturers in Germany, the US, and Japan failed. The typical talking point concerning the inability to compete was that China’s manufacturers were more efficient than manufacturers in other countries. In reality, they were just able to accept lower margins for a longer period.

Aside from almost erasing the competition, the industry has no real data to support cost improvement instead relying on back-engineering based on assumptions.

As solar manufacturers were priced out of the market in Europe, the US, and Japan, the US switched its goals to either becoming a cutting-edge solar technology IP machine, which didn’t happen or finding the next-generation technology, a goal that produced CIGS manufacturer Solyndra.

For the most part, the US and Europe provided support for markets (demand), ceding solar cell manufacturing to China. No one foresaw a prolonged supply chain disruption period caused by a global pandemic.

By choosing to support their markets instead of manufacturing, focusing on next-generation technology instead of commercialized technologies, while continuing to support fossil fuels, countries missed an opportunity to invest in domestic solar manufacturing – they could have invested in both. The opportunity cost of the choices countries other than China made is to end up in a situation where there is no domestic manufacturing precisely when it is needed and losing the long-term jobs that come with thriving manufacturing industries.

Two years into the pandemic, global supply chains remain upheaved. At the same time, the solar industry continues suffering the realities of disruptions in production and shipping, not to mention volatile prices for all components.

In 2022 the global solar industry faces a variety of risks – all, except the last, interrelated.

  • Pandemic Risk
  • Recession Risk
  • Tariff Risk
  • Incentive Risk
  • Supply Chain Risks
  • Price Risk
  • Quality Risk
  • Political Risk
  • Military Conflict Risk
  • Climate Change Risk

Pandemic Risk: The risk that the mutating virus will continue shutting down manufacturing and potential projects causing ongoing supply chain upheaval.

Recession Risk: Inflation, consumer uncertainty, the war in Ukraine, and China’s slowing economic growth indicated a high potential for a recession at the end of 2022. A major recession could lead to an investment pullback and end-user reluctance to buy. Countries (in Europe, the US, and India) might become reluctant to invest in start-up manufacturing during a recession. During a severe recession, the probability of one or more down years in solar demand is high.

Tariff/Ban Risk: To avoid tariffs, manufacturers can establish manufacturing in new countries not subject to tariffs, or, in the country imposing the tariff, or can ship partially completed products through a manufacturer in a tariff-neutral country for minimal processing and on from there to its destination.

Tariff risk is currently specific to the US and India. The US market already has tariffs on imported cells and modules from China and other countries, with the 201 tariffs specific to China. The new US investigation into transshipments from manufacturers in China to subsidiaries and other manufacturers in Southeast Asia has upended the US market. It is unclear whether US bifacial exemption from the 201 tariffs will apply, and importers have pulled back in advance of the hearing cancelling contracts and refusing to sell to US buyers. The US currently has only one cell major manufacturer, CdTe producer First Solar, and about 4-GWp of module assembly capacity, most of which is ill-prepared to serve the multi-megawatt ground market. 

The US also has a custom’s ban and more than one law against importing modules produced with material manufactured in Xinjiang by forced labor. The original law was never enforced. The current law is under discussion concerning enforcement. In 2021, the CBD’s WRO stranded product in port led to the return of ~1.6-GWp of module product. Clearly, there is no justification for buying goods produced with forced labor. China has stated that the allegation is not true. Sellers and buyers run the risk that cells and modules will be rejected at US customs and returned to the shipper.

As with the US, India does not currently have sufficient capacity to serve its market. In 2021 it imported 99% of the cells and modules it installed. The country has established a reasonably generous incentive for manufacturers along the solar value chain to locate facilities in the country, but this will take time. In the meantime, India imposed a 25% tariff on imported cells and a 40% tariff on imported modules.

The US and India are protecting a domestic supply chain that they currently do not have.

The EU is going in a different direction and has suggested that its member countries reduce VAT to 0% to 5% on a variety of products that module from rooftop applications.

Tariffs are a tax on the buyer and encourage importers to develop workarounds or avoid the market altogether, something that the US is experiencing at the beginning of 2022.

Incentive Risk: Going hand-in-hand with political risk, it is the risk that the incentive will decrease over time, will not be renewed, or be subject to retroactive changes. The history of solar incentives supports all three outcomes and does not support stable, long-term incentives.

Supply Chain Risks: COVID manufacturing work stoppages have become common since 2020, leading to periods of constrained supply. Shipping disruptions and delays have become common. Once shuttered, even temporarily, resuming polysilicon production takes time and is costly. One result of the supply chain disruptions is higher prices.

But the real problem with the photovoltaic supply chain is that China, including its expansions in Southeast Asia, controls over 90% of polysilicon production, close to 100% of glass production, close to 100% of backsheet, EVA, and other materials, 86% of global cell capacity, and over 90% of global module assembly capacity. China’s manufacturers have a virtual monopoly on the materials required to manufacture a PV module and control the availability of products and prices. It will take years for other countries to develop supply chains sufficient to serve their domestic markets.

Price Risk: Price risk tags neatly with supply chain risk because, in a virtual monopoly, overcapacity does not necessarily lead to lower prices.

Quality Risk: Industry-wide, quality control receives less interest from manufacturers than ever. Pilot-scale production has shrunk from five years to one month, if that, and is likely one reason for poorly performing modules, another reason being poor packaging protocols. In 2021, at least 2.6-GWp of poorly or nonperforming modules were removed from the field. The solar industry’s accelerated growth has much to do with the lack of pilot-scale production as more and more product is rushed into the field without a proper assessment. The problem will only worsen, and buyers and governments will eventually lose confidence.

Political Risk: Many markets for solar deployment are unstable politically, leaving the country vulnerable to social unrest, economic unrest, and as with the current war in Ukraine, war.

Even in countries with relatively secure systems and governments, one election can change the outlook for solar deployment. All elections in all countries can and have resulted in governments being less friendly to renewables and less likely to promote policies that increase deployment.

Military Conflict Risk: Constant conflicts in the Middle East should have prepared the world for the high potential of conflict elsewhere.

Climate Change Risk: Coal is the primary energy source for polysilicon, wafer, and cell production in China and much of Southeast Asia. Therefore, even as the industry promises a cleaner future, it neutralizes this promise by contributing to the pollution that is driving global warming.

On the system side, extreme weather events are a risk to solar electricity production for all applications from rooftop to multi-megawatt ground mount. Climate change risk as it relates to solar goes directly to lost production and the need for rapid recovery and climate change weather forecasting.