China owns the solar supply chain, jeopardizing the energy transition

Production capacity for solar panels and their inputs needs to at least double by 2030 in order to meet global climate goals, but China’s continued dominance of the solar supply chain poses a grave threat to the world’s ability to meet these goals. That’s one of the key takeaways of a report released earlier this month by the International Energy Agency.

China has made massive investments in building out its solar manufacturing over the last decade — over $50 billion since 2011, or 10 times more than what Europe has spent, according to the report. The country’s industrial and innovation policies have also helped to reduce global manufacturing costs by 80%, enabling production to scale up exponentially. Thanks to these developments, solar has become the ​“cheapest electricity in history,” but China’s dominance has also left the rest of the world vulnerable to numerous supply-chain disruptions. To mitigate these risks, the report says, countries — including the U.S. — need to take steps to shore up their own manufacturing capabilities.

The road to dominance

The solar supply chain is long and unwieldy, involving an intricate sequence of extraction, refining, manufacturing and exporting. At the very start of that supply chain, silicates — silicon-containing minerals such as quartz — are extracted from Earth’s crust, and then go through various stages of processing to become polysilicon, a key ingredient in the crystalline silicon solar panels that make up 95% of global solar production, according to the IEA report.

China dominates every stage of this solar supply chain. The country ​“strengthened its leading position as a manufacturer of wafers, cells and modules between 2010 and 2021, while its share of global polysilicon production capacity almost tripled,” the IEA report says.

About 80% of the polysilicon used in solar manufacturing in 2021 was produced by China, while the remaining amount was split between Germany, Malaysia and the U.S. The report warns that with new manufacturing facilities in the works in China, the country will soon produce 95% of the world’s polysilicon, ingot and wafer.

The report highlights how the Chinese government solidified its dominance of solar manufacturing by enacting economic policies that supported the PV supply chain. For example, after the global financial crisis of 2008, China implemented a broad range of economic relief efforts across industries, including solar. One of these, the Golden Sun Demonstration Program, which lasted from 2009 to 2011, heavily subsidized investment in both grid-connected and off-grid solar systems by 50% and 70%, respectively. China also first imposed anti-dumping tariffs on American and Korean polysilicon in 2010–2011, which incentivized the ramp-up of Chinese polysilicon production.

Manufacturing costs for all solar components in China are 10% lower than in India, 20% lower than in the U.S. and 35% lower than in Europe, according to the IEA report.

Cheaper land, labor and operating costs have all contributed to China establishing itself as a manufacturing powerhouse over the last two decades, and solar is just one manifestation of that, says Pavel Molchanov, director and equity research analyst at Raymond James & Associates. China’s reliance on coal has also contributed to lower costs of production. ​“China as an economy is a high-carbon economy,” Molchanov says. ​“A disproportionate share of the energy used to manufacture solar panels and EV batteries and so on comes from the dirtiest form of electricity there, which is coal.”

Coal makes up over 60% of the Chinese power supply and over 75% in the two main provinces where solar manufacturing takes place.

Supply-chain vulnerabilities

China’s dominance of the market means access to solar components is at the mercy of fragile international relations. That disproportionate concentration raises concerns about energy security, says Molchanov. ​“Could there come a time, for example, when China goes to war with Taiwan, and would that disrupt the supply of solar panels?”

Two events in the spring and summer of 2022 demonstrate the perils the U.S. solar industry risks by relying too heavily on Chinese manufacturing.

In June, the Uyghur Forced Labor Prevention Act went into effect in the U.S., requiring American companies to prove their supplies don’t originate from forced labor of the Uyghur people in northwestern China. One of the main imports that’s facing heightened scrutiny under the new law? Polysilicon. In Xinjiang province, one of the two Chinese regions where most of the country’s polysilicon is produced, the total number of Uyghurs and other minority Muslim groups who have been forced into labor and ​“reeducation” camps since 2017 may exceed 1 million, according to an Amnesty International report.

And earlier this year, the small California-based panel manufacturer Auxin Solar disrupted the entire U.S. solar industry when it filed a petition with the U.S. Department of Commerce requesting that the agency investigate whether Chinese companies were violating tariffs by routing their solar goods through Southeast Asian manufacturers. The threat of tariffs spooked those manufacturers, which halted shipments to the U.S., delaying major solar installation projects across the country. After months of market disruption, President Biden issued an executive order in June waiving any new solar tariffs for 24 months.

These kinds of difficult-to-navigate dynamics discourage new players from entering the solar manufacturing industry, which already faces volatile market conditions and low profit margins.

The IEA report also points to the absence of ​“financial incentives and manufacturing support” in countries outside of China, making solar manufacturing a risky industry despite the global push for a shift to clean energy. According to the IEA, 49% of global polysilicon companies were at ​“medium risk” of bankruptcy in 2021. Vertically integrated solar companies are the most profitable and have the lowest risk of bankruptcy because their one-stop shops can absorb losses in one area by offsetting them with profits in another, helping them withstand capricious market conditions.

Diversifying manufacturing

The IEA report does suggest some steps countries can take to diversify the global solar supply chain.

It advocates several ​“policy action areas” to increase supply security, including financial incentives to stimulate domestic manufacturing, such as public-private partnerships and tax breaks. The report also encourages subsidies for solar manufacturing through grants and low-interest loans, as well as the diversification of import routes of raw materials and solar components. But the report also emphasizes that policy support needs to be sustained in the long term. ​“The effectiveness of direct supply policies can often depend upon how long support is provided,” the report states, noting that investors need to focus on ​“long-term competitiveness.”

So far, U.S. efforts to spur domestic solar manufacturing have been minimal. In June, a group of the largest U.S. solar project developers formed the U.S. Solar Buyer Consortium in an effort to ​“drive the growth of the American solar industry” by offering to purchase up to 7 gigawatts of domestically produced solar modules annually. Meanwhile, the Solar Energy Manufacturing for America Act sponsored by Georgia Senator Jon Ossoff (D) would provide tax credits throughout this decade for U.S.-based producers of all solar components, but it’s unlikely to pass in the Senate now that Senator Joe Manchin (D-West Virginia) has said he won’t support spending on climate in the budget reconciliation bill.

The IEA report also suggests expanding the recycling of renewable-energy hardware as a way to diversify the solar supply chain, saying that doing so could meet some 20% of raw material demand for solar by 2040. However, while the technology to recycle solar panels exists, there are few regulatory or financial incentives to drive recycling activity, particularly in the U.S. The result is that the infrastructure needed to ensure end-of-life products make it to a recycling facility is woefully underdeveloped.

The report notes that it’s difficult to assess the effectiveness of policies that target the solar supply chain due to the ​“complexity of multiple policy interactions and context-specific market developments.”

However, one thing is abundantly clear: Keeping all of the proverbial eggs in one basket creates risks the world can’t afford to take.