The prolonged Hanergy scandal drew copious attention from the capital market towards the world’s largest solar module manufacturing country, China. While the issues with the self-claimed largest solar thin film producer stem more from its internal financial governance, the market also took the chance to utterly revisit the outlook of the nation’s solar PV sector, which accounted for 0.7 per cent of the total export of China in 2014.
The Chinese solar industry has been facing a forbidding downturn since 2012, when the market started to deeply discount valuation of the listed players, citing the excess production capacity and their over-dependence on export. The biggest names have not benefited from the country’s stock market boom this year since they are mostly listed offshore in Hong Kong or New York.
Today, the haze from overcapacity remains – for instance, China’s annual production capacity of crystalline silicon modules is 40 GW, outnumbering the global need of 35 GW per year. The other key PV technology, thin film, does not look more promising. Despite the burgeoning worldwide small-scale rooftop installations, where thin film is claimed to be competitively advantageous, a discreet visit to Hanergy’s key production base in Heyuan clearly revealed the abundance of idling thin film production lines at the moment.
Whether there exists excess production fleets depends also on the pace of demand growth, which is an extremely sensitive variable driven by factors including (but not limited to) the levelised cost differentials, policy support and upcoming developments on lower-cost battery technology.
Increase of annual global demand could yield a brighter future for the sector. Under the International Energy Agency’s New Policies scenario, which stands neutrally between the more aggressive 450 scenario and the conservative Current Policies scenario, global installed solar PV capacity shall reach 1291 GW by 2040 – equating to new annual installation totalling 42.6 GW based on the 2012 level, and over 50 GW per year if retirement of obsolete modules is considered.
Such levels, compared to the current worldwide need of 35 GW, uncover the demand growth potential. Meanwhile, the reduction of subsidies for renewable energy from Beijing provides a disincentive for new entrants, if not pricing out inefficient producers through further market consolidation. Nonetheless, Chinese PV production capacity has remained relatively stable in the past few years.
The glut of manufacturing capacity might gradually diminish, considering that the country is the largest solar PV consumer, purchasing one-third of the modules produced globally in 2013, according to the REN21 Renewables 2014 Global Status Report, with a promising growth momentum based on a nationwide technical capacity of 2700 GW. However, that also gives rise to yet another problem. Investors are pointing to the dependence of Chinese producers on exports. The dragon nation houses 67 per cent of the current solar panel production, meaning that half of the made-in-china modules are shipped abroad despite sizable domestic consumption.
Developed countries have been the main customers of these trades. Japan, Europe and the U.S. constituted respectively 34, 20 and 15 per cent of the total export value of USD14.4 billion in 2014. Any de-facto trade disputes with these nations thus become a crucial risk factor.
The U.S. anti-dumping tariffs on Chinese-made PV modules were increased to as high as 78.42 per cent last December. Across the continent, the European Union (EU) is planning to increase the minimum import price for solar panels, stipulated after a lengthy diplomatic negotiation in 2013. The EU also intends to remove the duty exemption status for several leading module manufacturers in China after their breach against the import price floor.
Not only do these measures reduce demand on Chinese exports, they essentially raise the clearance price for solar panels in these advanced and gigantic solar PV markets, thereby hurting the economics of solar power and possibly decelerating the originally cost-effective fuel switch in many developed countries. Both factors continue to place Chinese manufacturers in an inferior position.
The recent export dynamics, however, could challenge the status quo. Apart from a robust growth in export to Japan, which has been actively diversifying its energy mix after the Fukushima incident, the volume shipped to other developed countries, such as the U.S., Australia and other major European nations, has dropped drastically.
Superseding their prevalent demand are orders from emerging economies including India, Latin America and other ASEAN states, which grew 25.3 per cent last year.
These are countries appear less willing to confront China. Moreover, they drive future demand. 203 GW of new solar PV installations are expected in non-OECD nations over the next decade, exceeding the 167 GW capacity to be added in developed countries. Thus, establishing a sound business relationship with these rising trading partners could yield Chinese producers some apolitical and sustainable revenue streams.
While the previous claims on excess capacity and over-reliance on exports are less worrying in the medium term, the sector is still convoluted by various political and commercial factors. Among them:
- Outcome of the climate conference in Paris;
- the thriving manufacturing sector in India or Brazil; and
- the shortage of crystalline silicon as raw materials in China.
Investors should be critical in making judicious decisions, especially amidst the apparent stock market correction in the Shanghai index over the past two weeks.
ABOUT THE AUTHOR
Chun Yu Jonathan Poon is Master Candidate, School of International and Public Affairs, Columbia University, and Associate, China Sustainability Project, Center for Sustainable Development, Earth Institute.
FURTHER INFORMATION
http://cgsd.columbia.edu/where-we-work/china/