China’s Dominance Of The Solar Photovoltaic Value Chain – Analysis
By Observer Research Foundation
By Lydia Powell
Background
Renewable energy, particularly solar energy, is available in all regions of the world, though some regions are more favourable than others for generating electricity from solar energy. The dispersed availability of solar energy led to the expectation that it will decentralise energy production and consumption and liberate the world from the geopolitical power that geographic concentration of traditional energy forms such as oil and gas entail.
The concentration of solar photovoltaic (PV) manufacturing capacity in China along with China’s control over minerals that go into the production of solar PV modules has challenged this view. Large economies, including India and the United States (US), are investing heavily in the domestic manufacturing capacity of solar PV modules in response. This may reduce the global dependence on China for solar PV modules, but it may also increase the cost of decarbonisation of the global energy sector.
The Solar PV Value Chain
The solar PV value chain begins with refining silicon dioxide (SiO2) into solar-grade polysilicon. In this important upstream segment of the value chain, China’s share has increased from about 30 percent 10 years ago to over 80 percent in 2022. Out of the top 10 companies producing polysilicon, seven are from China including the top three. The steps that turn polysilicon into ingots, wafers, cells, and finally solar panels are also dominated by China, accounting for a share of over 80 percent of global capacity in each. The top 10 suppliers of solar manufacturing equipment are also Chinese. Manufacture of other segments of the solar PV value chain such as the balance of module components (using glass for example) is also located in China. The production of inverters that convert direct current (DC) output to alternating current (AC) as well as aluminium and steel frames that are used to mount solar panels are also concentrated in China.
When the ongoing expansion plans of the Chinese solar industry are completed, its market share in all segments of the value chain is projected to increase to 90-95 percent. Huge capital investments estimated to be over US$ 50 billion in the last decade, strength in low-cost manufacturing underwritten by cheap electricity for energy-intensive production of polysilicon and ingots, loan guarantees for private investors, and strategic foresight are cited as drivers of the Chinese solar manufacturing industry. These supply-side factors were complemented by significant demand-side policies of western economies that inadvertently supported solar panel production in China.
As the use of fossil fuels and the consequent emission of carbon dioxide was identified as the cause of climate change in the 1990s, western governments, particularly the oil-importing large industrial economies of the US, Germany, and Japan, reinvigorated research and development (R&D) on solar energy that was initiated after the oil crises in the 1970s. The cost of manufacturing solar panels in the US, Japan, and Germany was high but federal subsidies in the US and attractive feed-in-tariff (FiT) offered by the Japanese, German, Italian, and Spanish governments created a demand for solar panels from households. China had a small solar PV manufacturing sector accounting for about 3 percent of global manufacturing capacity catering to demand from rural households in China that were not connected to the grid. Taking note of the growing demand for solar modules and the inability of western producers to meet the demand, China expanded capacity rapidly and seized the market for imported solar panels from industrialised economies.
The Ministry of Science and Technology (MOST) of the government of China supported the solar PV R&D activities and assisted enterprises to realise government targets articulated in its five-year plans. China’s 10th five-year plan (2000-05) identified renewable energy as a significant choice to optimise the Chinese energy basket. The 11th five-year plan (2006-10) provided US$ 6 million as annual funding for solar PV R&D and the 12th five-year plan (2011-15) increased it 12-fold to US$75 million to cover all segments of the value chain. In addition, the “national basic research program of China” (973 programmes) and the “national high technology research and development program of China” (863 programmes) and the “plan for national science and technology” facilitated the development of renewable energy technologies, particularly solar PV technology. From 2004, solar PV production in China also benefited from assistance offered through the “catalogue of Chinese high technology products for export” programme that included tax rebates, free land for factories, and low-interest government loans. China’s 13th five-year plan (2016-20) contained specific goals for solar PV technology innovation including the commercialisation of monocrystalline silicon cells with an efficiency of at least 23 percent and multi-crystalline silicon cells with an efficiency of 20 percent.
Globally, between 1980 and 2012, solar module costs fell by about 97 percent. According to a detailed analysis of factors behind the cost reduction, policies that stimulated market growth accounted for 60 percent of the overall cost decline in solar modules and government-funded R&D for the remaining 40 percent. R&D in advanced economies was important in the early years but the exponential cost decrease in the last decade was on account of economies of scale in manufacturing, for which China must be given credit.
Supply Chain Sovereignty
Global capacity for manufacturing wafers, cells, and finally solar panels exceed demand by at least 100 percent with most of the excess capacity located in China. But the production of polysilicon is a recurrent bottleneck reflected in the price of polysilicon. Polysilicon, the primary input material for the manufacture of solar PV panels starts with refining silica (SiO2) into metallurgical-grade silicon (MG-Si). The raw material silica or quartz is the second most abundant mineral after oxygen, but the refining process to convert it into MG-Si is capital-intensive, energy-intensive, and knowledge-intensive. This contributes to polysilicon price volatility as investment in capacity addition tends to be “lumpy”.
In 1990, the spot price of polysilicon was US$ 57/kilogram (kg) and stayed around that level until the late 2000s. In 2008, the spot price of polysilicon touched a high of US$ 362/kg because of the increase in capacity for the manufacture of ingots, wafers, and cells in China and the resultant increase in demand for polysilicon. By 2012, the price of polysilicon fell to US$ 22/kg as a result of anti-dumping duties imposed on Chinese producers by western countries. Over-capacity in low-cost polysilicon production in China sent prices down to less than US$ 10/kg in 2019. Since 2020, the price of polysilicon has demonstrated an upward trend touching US$ 40/kg in September 2022on account of demand recovery after the pandemic. The increase in the price of polysilicon and other critical minerals and metals that go into the production of solar PV modules will necessarily mean an increase in the cost of decarbonising the energy sector. Investments in domestic solar PV manufacturing capacity towards the goal of achieving supply chain sovereignty will add to those costs. Developments in India are a case in point.
Low solar electricity tariff has been driving solar installations in India. Since 2010, solar electricity tariff has fallen by 82 percent primarily because of low-cost solar PV modules imported from China. Since January 2021, solar electricity tariff in India has increased by 25 percent because of basic customs duty (BCD) of 25 percent on solar cell imports from April 2022 and BCD of 40 percent on import of solar PV modules to protect the nascent domestic PV manufacturing industry. The 40-percent increase in imported solar modules driven by the increase in polysilicon prices adds to the cost of tariff barriers. The overall increase in the cost of using solar PV systems will slow down the decarbonisation of energy systems, especially in developing countries that are cost sensitive. The resurgence of economic nationalism and supply chain sovereignty suggests that trade and security concerns continue to override climate change concerns. In the future, climate science may illustrate with a vengeance that it disagrees.
