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30 July 2020

How will the world handle China’s oversupply of Solar modules?

An abundance of Chinese solar panels could soon be dumped on the global market at record low prices, following a surge in post-Covid production. But with domestic economies faltering, developed nations will have to find a compromise between facilitating a low-cost transition to clean energy, while boosting local supply chains as much as possible.

Across China’s export-heavy sectors, manufacture has gone into overdrive, pretty much at the demand of the country’s government to boost the supply side of its economy. After the production slowdown from Covid-enforced lockdowns, the country has significant ground to make up if it wants to match its 2019 export sales, which exceeded that of any other country at $2.5 trillion (20% of its GDP); the US, in second place, exported $1.6 trillion worth of products.

Similarly, in the solar sector, the country holds the lead for exports, pulling in around $20 billion in revenues in 2019. In terms of market share in manufacture, Chinese companies account for over half of the global output of photovoltaic modules. Eight of the top ten module manufacturers are from China (Jinko, JA, Trina, LONGi, Risen, Suntech, Astroenergy and Talesun), the only exceptions being Canadian Solar and Hanwha Q Cells from Korea.

 

In terms of maintaining or building on this strong market lead, a rush of production – similar to the one we’ve seen in the oil sector from Saudi Arabia and Russia – has been a matter of priority for the Chinese solar sector. In spite of Covid-19, and factories running on reduced output for the likes of Jinko and LONGi, the country has claimed that solar panel output is actually up for the first half of 2020.

According to the China Industry Association, the country pumped out 59 GW of solar panels in the first half of the year, up 15.7% from the year prior. This came alongside claims that newly installed solar capacity was also up by 0.9% from H1 2019, hitting 11.5 GW for H1 2020.

But, like in pretty much all sectors, demand has not scaled to match and international trade has slowed down. Module exports of 27.7 GW between January and May were down 1.8% from 2019, and H1 2020 exports are likely to be in the region of 33 GW to 35 GW. This is not nearly as dented as the 35% dip in exports that the country observed in January, but with the manufacturing output increasing like it has, it appears that there will be an oversupply of modules in the region of nearly 20 GW as a result of this half’s activity alone.

This build-up of inventory, in a market which has long been commoditized, will see a further reduction in prices wherever the modules end being getting shipped to.

One of China’s options will be to try to dump these modules onto the national market, as it often does in sectors like steel when it finds itself in a position of surplus production. For residential solar in particular, this isn’t how we see things panning out. Household leverage in China is relatively high at the moment, meaning there’s not much credit to spare, and that they’re less likely to buy any goods – even if they are Chinese.

True, this will be more apparent in other overdriven markets like consumer electronics, but it will still be a factor in any level of national spending. This is especially the case as China seems persistent with pushing for subsidy-free solar, which will end up seeing a similar lack of domestic interest in the utility-scale sector through 2021 at least.

What China appears to be doing is banking on a rise in international demand following Covid-19. And to be fair, while this isn’t certain in many corners of the economy, it will be for solar power. Climate change isn’t going away any time soon, and the global consensus for a green economic recovery is growing at an astounding rate.

But this economic recovery will be domesticated, with politicians across the globe promising more local jobs and more local investment. Dumping Chinese products won’t be easy: there may be tariffs and returns on this China inventory could be minimal.

Both India and the US are already making noises about tariffs. India announced this week that it will look to end duty concessions for supply chain components for wind and solar, as it tries to ease its reliance on China for its accelerating solar and wind build out. Meanwhile, the US, as we’ll discuss later on, is likely to extend its 30% tariff for imported modules beyond the previous deadline of 2022 – at least while Trump is in power.

A tactic that China usually takes in this sort of situation is devalue the Yuan against the dollar, essentially pushing prices even further down for its exported goods in the eyes of the buyer. But the problem with doing this now is that China has so much dollar denominated debt that such a move would end up pushing the country further into the red, resulting in a higher default rate on non-financial corporation debt.

So when the tariffs happen, instead of this, Chinese goods will end up being more expensive on the European market and in the US, and it’s possible that inflation could pop up into the double digits – something we haven’t really seen since the 1970s. China will still want to push shipments of solar modules below the market price, it will just make less profit from it.

One of the key factors that will define how Chinese solar manufacturers continue to dominate the sector is the US market, and the tariffs imposed through the Trump administration.

In January 2018, the US Government imposed Section 201 solar tariffs on imported solar cells and modules. Bifacial panels have been exempt, then not exempt, then exempt again, but the overarching concept was to keep a 2.5 GW solar cell import cap to support domestic solar manufacturing, and 30% tariffs that would level the playing field and prevent overseas manufacturers – mainly those from China – from undercutting module prices. These targeted 30% tariffs are significantly larger than the 10% tariffs that Trump has imposed on Chinese imports for most other products.

Credit where it’s due, this worked well. US solar installations have continued to rise pretty consistently (although we expect a brief blip from Covid-19), and the market share landscape in the US has been forced to take a different shape to the one we see on a global scale. The top solar panel manufacturers in the US are First Solar, Hanwha Q Cells and Tesla/Panasonic, and Hanwha Q Cells had to set up manufacturing plants in the US to get there, satisfying the requirement for US-based jobs. Global leader JinkoSolar, in comparison, only has the fifth largest presence in the US, operating out of one small manufacturing facility in the US.

Another statistic that backs this up is that in the first three quarters of 2019, Europe accounted for 34.9% of China’s solar export sales while the US only accounted for 0.2%. Compare this to the 18.41% of total Chinese exports going to the US versus a figure of around 20% for Europe and you can see that the tariffs are doing what they intended – choking off China’s control over the industry.

However, the barriers are starting to lose their effect. Pressure is rising for the US import quota to rise, to stop the US losing out on market opportunities or maximum efficiency in decarbonizing its economy. Imports from China were 490 MW for Q1 2020, which already surpasses the total amount of imports from China through all of 2019 by 22%. This has largely been due to an increasing demand for bifacial solar panels, which have been falling in cost and have, for significant periods of time, been exempt from the Section 201 tariffs.

These tariffs are scheduled to phase out in February 2022, and the US government, whichever way November’s election swings, will face a tough decision about whether or not to keep it in place. We don’t think a democrat win can allow that tariff to stand, but it may be left off the agenda for a while, as the Us sorts out what kind of relationship with China it wants.

The negative side of tariffs in the US is that it has actively made solar modules more expensive – 79% more expensive than in Europe and 85% more than in China. If the tariffs are extended to 2026, it’s possible that it will cost twice as much to buy solar modules in the US than it will in Canada – the tariffs effectively keep the US two years behind the global cost-reduction curve.

But at the same time, the US has an equal number of politicians screaming for subsidy-free solar, because even ceding China an advantage here, means getting a trained solar workforce into high production mode. The future of the investment tax credit (ITC) – which has allowed developers to claim a tax credit of up to 30% of their project’s capital costs – hangs in the balance. Current phase down plans have ITC levels of 26% for 2021, 22% for 2022, and 10% thereafter. Despite pleas from industry, the government has refused further extensions to this plan.

The crux of this is that solar is less competitive with fossil fuels in the US than it is elsewhere, compounded by an administration that has facilitated a continuously low price of natural gas. This deters developers, and in the long term will significantly dent the outlook for solar installations across the country, leaving it out of step with climate ambition elsewhere.

We imagine that if Trump gets reelected, the current plans and tariffs will remain in place, with a continued lack of urgency around the energy transition.

If Biden wins however, things will get more complex. Two weeks ago, we wrote about his $2 trillion climate action plan, which seems to suggest an improvement of the ITC situation, with a promise to “spur the installation of millions of solar panels – including utility-scale, rooftop, and community solar systems.” If full-speed ahead was Biden’s approach, then we’d expect to see the tariffs abolished. On the other hand could he be capable of putting in place a tax scheme that is only applicable if the panels are made in the US?

Because then the democrats have this $700 billion “Buy American” campaign, which echoes Trump’s tariff-heavy “America First” philosophy, which has created uneven international trade, with slapdash isolationism, and suggests that he won’t simply let Chinese manufactures swarm in to gobble up their US competitors.

Having a strong stance on China will be something that Biden will be keen to put into his election campaign. With “Buy American,” Biden wants more US job guarantees, which will be enough to keep US manufacturers like First Solar in a financially sound position. We have estimated that the company needs about $1.4 billion each quarter to ward off Chinese competitors, and “Buy American” could keep its order books full enough to do that simply by insisting that all federal purchases were US built.

But this financial pressure will ease at some point, and the higher cost of deals in the US will put pressure on American companies. SunPower has already spun-off its manufacturing business to Singapore-based Maxeon; SunRun has recently managed to subsume Vivint – its closest competitor in the US residential solar market; and Tesla has so far seen very little profit from its solar business and seems to be placing more and more of its focus on energy storage.

The shift in focus to more residential and development-focused markets could be a sign that once China’s solar manufactures enter the US market, they could kill off the likes of First Solar in the same way that they killed off SolarWorld in Europe after similar struggles with tariffs and incentives – that’s if First Solar doesn’t make the downstream shift into the development business. This could be the inevitable outcome if pressure continues to rise for politicians to push for net-zero emissions as soon as possible; the likes of Biden may have to resign themselves to job losses in the manufacturing sector, in order to win renewables jobs in the implementation space.