Chinese solar panel manufacturers, who collectively command approximately 95% of the global production capacity, have expanded their supply chains in recent years. At the same time, China’s industrial strategy has resulted in a slower domestic deployment of solar infrastructure. This trend has persisted over an extended period, resulting in an influx of cut-price solar panels within the European market, with pricing that challenges the viability of European manufacturers. The result of this market dynamic are twofold: some European manufacturers are compelled to explore alternative markets such as the U.S, while others have faced insolvency. The remaining European manufacturers are also grappling with the challenge of surplus inventory that is proving difficult to sell.
Historically, Europe boasted a robust solar manufacturing sector. However, the entry of lower-cost Chinese products precipitated a downturn in the European market. In response, Europe implemented anti-dumping tariffs in 2013 to safeguard its interests, albeit with limited impact. Recent years have witnessed a modest revival in European photovoltaic polysilicon and module production, yet Europe’s contribution to global output lingers at a modest 3-4%. Energy security has climbed to the top of the political agenda, in large part due to supply chain disruptions from the COVID-19 pandemic, the Russian gas crisis, and logistical complications in the Suez Canal. Europe now faces the challenge of Chinese overproduction and aggressive pricing strategies.
What are EU solar manufacturers calling for?
One suggestion has been a buyout of European manufacturers’ inventory. A buyout would be a short-term solution which could alleviate the immediate solvency concerns of European manufacturers however it will not change the dynamics of the current market.
A Solar Energy Charter has gained traction in the industry as a possible response to demand side challenges. Drawing parallels with the Wind Energy Charter, where member states pledged to adopt measures such as non-financial prequalification criteria in procurement processes, the aim is to guarantee a portion of the supply chain remains distinctly European.
There are a lot of factors to be addressed to not just secure the immediate future of European solar manufacturing but to ensure it can flourish in the future. Europe needs to alleviate the immediate solvency concerns, increase the supply of modules manufactured in Europe, increase the demand for those modules, and make European manufactured modules more competitively priced which can only be done with scale.
To scale up manufacturing, address supply concerns and enable better price competition further subsidies will be needed. One solution is a subsidy for operational expenditure (noting that energy and labour prices are much higher in Europe than China), or counter-guarantees for manufacturers to secure the finance required to scale up manufacturing capacity.
The way in for European manufacturers to re-emerge may be via new technologies or processes, for example, resulting in the reduction of water usage and waste in the production of polysilicon and wafers. It remains to be seen if this will be the case, although there are some green shoots in Europe which demonstrate this.
What else has been suggested as a possible solution?
The Net-Zero Industry Act (NZIA) has been touted as a possible solution and whilst it brings a simplified regulatory framework, Europe needs to consider whether its market design is fit for purpose to enable the growth of solar manufacturing capability. Comparing against the IRA where there is a ‘per watt’ subsidisation of manufacturing, whilst the NZIA is a positive reaction to the IRA, greater regulatory intervention is likely to be needed to support the industry.
Other methods are an exclusion of Chinese panels or high tariffs. A near-complete exclusion of cheap Chinese panels would further undermine Europe’s Green Deal targets as it would reduce the supply of Chinese panels and the development of solar projects, in favour of local manufacturing.
In terms of higher tariffs, Europe has recent history to look back on. In 2013 the European Commission imposed substantial tariffs on Chinese manufactured solar panels (at a time where Europe was particularly strong in the solar PV market). It contributed to a substantial decline of solar deployment in Europe and it did not provide any help to solar manufacturers in Europe. Given that Chinese-made panels can be produced for half of the cost of those manufactured in Europe, it is unlikely to give the European market the competitiveness it needs.
Increasing the cost of Chinese imports to align with Europe will not be the same as bringing European costs down because of the current economic environment and due to the sensitive project economics for European solar project developers. Many solar developers are reluctant to incur higher costs for European solar products when more economical international options are available however for some sentiment has shifted recently with some willing to pay a ‘green premium’ when dealing with suppliers with strong ESG credentials. We are also seeing solar module prices (from China) come down on the projects we are working on to the extent that clients have delayed executing their module supply agreement or purchase orders to obtain better prices from Chinese manufacturers.
Is the U.S also a concern for Europe in light of the IRA tax credits?
Some European manufacturers such as Meyer Burger have decided to close plants in Europe and focus on the U.S market, likely in light of favourable regulatory conditions under the IRA. Whilst direct support for renewable energy manufacturing is a small fraction of the total funding in the IRA, the manufacturing costs that are covered are substantial. It is possible that this may spark a trend but for broader reasons than IRA tax credits. A large proportion of the tax credits are applied towards the adoption of net zero technologies which has greatly increased the development of solar projects and demand for manufacturing capability. The U.S is likely to become (outside China) much more dominant in polysilicon and module production providing further competition to Europe.
Where does this leave policymakers?
To enhance energy supply chain security, will need to confront the inherent structural disadvantages of the European market, which includes higher costs for utilities (even before recent power price volatility), given the energy intensive nature of manufacturing, as well as raw material and personnel costs.
Another key question for policymakers will be how to support the scale-up. European companies will only be competitive against Chinese imports where they are able to achieve economies of scale with multi-gigawatt production capacity per site, across multiple sites. European manufacturers will also need to be adaptable to new technologies including higher levels of automation to realise efficiencies.
Whilst it is unlikely to close the gap in the timescales required to keep European solar manufacturers in the market, Europe could adopt new technologies to become more competitive. Higher cell efficiency which in turn brings greater power per module would bring down the per watt cost. To achieve this, European governments could consider R&D grants for manufacturers.
Regulatory developments in Europe have shown promise, including the revision of EU State Aid rules under the Temporary Crisis and Transition Framework. This allows the construction of solar factories to be subsidised by EU member states. While this is a positive step, it does not fully address the competitive disparity. With operational costs in Europe significantly outpacing those in the U.S. or China, manufacturers may be able to construct factories but find the operational expenses prohibitive, impeding their ability to scale. A potential remedy could involve state assistance for operational costs, not solely for capital investments.
If you would like to discuss module procurement strategies, contracting, or how to ensure that your supply chain meets today’s ESG standards please get in touch.
