China's 'spare' solar capacity offers climate and energy access ...

Deployment rates for solar panels across the world are lagging behind the boom in global manufacturing capacity. Recent investment in manufacturing means that over the course of this decade, factories could produce more than twice the capacity of solar panels that is projected to be deployed.

As the fastest growing source of clean energy globally (generation growing by 26% per year for the last eight years), solar power is an essential instrument in decarbonisation, and is set to dominate electricity generation. Given its low cost and rapid deployability at a range of scales from single panels upwards, solar is also logically the cornerstone of programmes to increase electrification and energy access in countries where people lack it – and there are an estimated 675 million people without even minimal access to electricity, the majority in sub-Saharan Africa. Even with such impressive growth in deployment, the boom in manufacturing means demand is running behind supply, and the world is therefore set to realise less than half of the benefits that the solar power production line could deliver this decade.

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In this report, we analyse the scale of the benefits that would accrue through supporting deployment of panels produced with this ‘spare’ manufacturing capacity.

Supporting use of ‘spare’ solar capacity would also benefit communities where the panels are made, safeguarding manufacturing jobs and investment. With 80-85% of the solar manufacturing industry based in China, this is the country that stands to lose the most if factories close or have to run at low capacity – and already, Chinese companies are feeling the pinch, with workers being laid off and investment withheld. Further contraction is inevitable unless demand is supported in the next few years.

Fifteen years ago the Chinese government prevented its nascent solar manufacturing industry from contracting, in the face of similarly difficult circumstances, by supporting deployment within China. Now, the most obvious opportunity for supporting deployment lies overseas, in countries with low levels of per-capita GDP and energy access, and most immediately at risk from climate change impacts. These countries are the ones with the most to gain from a fast solar rollout, but are largely missing out due to the high cost of capital for financing renewable energy build.

The existence of such abundant and cheap quantities of ‘spare’ solar capacity is also an opportunity for developed nations, which have an acknowledged responsibility to support the Global South in delivering both the Sustainable Development Goals and global climate change targets, to make up for lost time. Solar panels are going to remain cheap for the foreseeable future even if deployment ramps up, creating a unique and immediate opportunity.

Worldwide manufacturing capacity for solar panels tripled between and , driven mainly by expansion in China. But global installation is running a long way behind production capacity, and manufacturers and investors are feeling the pinch.

Stimulated by the exponential growth of solar power in the previous decade, manufacturing companies ramped up investment in new production lines in the early s. The manufacturing capacity of factories worldwide tripled from to , and is set to reach 1,100 GW per year by the end of . About 80-85% of manufacturing capacity is based in China, which is also the clear market leader in upstream parts of the supply chain.

However, forecasts for deployment this decade suggest that more than half of this manufacturing capacity will lie unused, with neither government targets nor project pipelines running at a commensurate scale. Solar panel prices are accordingly at a historic low of about US$ 0.10 per watt, having virtually halved during .

This is already having an impact on manufacturers. In the first quarter of alone, Chinese companies cancelled or delayed an estimated US$ 8.3 billion of planned investments. Shares of major Chinese manufacturers have fallen by more than half since January . Longi, one of the world’s biggest solar panel producers, is laying off 5-30% of its workers, with its President Li Zhenguo saying recently that at current prices, ‘Most companies are barely surviving.’

Unless installation rates ramp up quickly, market analysts believe that a contraction in manufacturing capacity is inevitable, with production lines shuttered or mothballed. But there is no obvious route to market expansion. Export volumes from China have flatlined over the last year, having tripled in the previous four. Exports to Europe, the biggest market, are currently down by a quarter year-on-year.

In China itself, deployment rose by 50% in alone, and in the first four months of was up a further 24% year-on-year. But it is encountering a range of constraints including lack of grid capacity, reducing the scope for a further acceleration.

While a shortfall in demand could partially serve to weed out older and less efficient manufacturing plants, it will obviously carry negative consequences for jobs and the economy in communities where factories are located. Chinese companies may be particularly exposed to falling market conditions given that in other countries with substantial manufacturing capacity, such as India and the United States, governments are aiming primarily for domestic use, whereas Chinese companies are targeting both domestic and global markets.

Forecasts show a surplus in solar panel manufacturing capacity from to , presenting a significant opportunity to exceed the COP28 renewable energy tripling target if the spare capacity is utilised.

The International Energy Agency (IEA) projects that global solar manufacturing capacity will rise from 1,100 gigawatts (GW) in to 1,300 GW in . It forecasts that annual deployment of solar panels will run at under half of that level, rising from 400 GW in to 532 GW in .

We extend these projections out to , to allow for easy comparison with the target that governments agreed at the UN climate summit of tripling renewable energy capacity from the level by .

Based on the IEA’s figures, and taking into account that the utilisation rates of production lines are unlikely to exceed 85%, we calculate the cumulative manufacturing capacity over the period -30 to be 7,310 GW. We calculate cumulative projected deployment over the same period at 3,473 GW. (See Appendix 2 for methodology).

The difference is 3,837 GW. This can be regarded as ‘spare’ manufacturing capacity, representing solar panels that could be produced, installed and used, but under current targets and deployment projections, will not be.

According to the IEA’s estimates, the currently projected deployment of solar would raise globally installed capacity from 1,550 GW in to 5,023 GW by . Deploying the ‘spare’ solar capacity of 3,837 GW in addition to this would raise the global installed capacity in by over 75%, to a total of 8,855 GW.

The UN’s most recent assessment of progress towards Sustainable Development Goal 7, which aims to deliver ‘affordable, reliable, sustainable and modern energy for all’ by , concludes that delivery is off track. At current rates of progress, it estimates that 660 million people around the world will still lack electricity access in , the majority in sub-Saharan Africa.

In large part this is because the renewables revolution, much like the Green Revolution in agriculture half a century ago, is largely passing Africa by. While investment globally in clean energy is rising, less than 2% of it reaches Africa.

The negative impact this situation will have on prospects for social and economic development is compounded by the fact that many countries with poor energy access are also highly vulnerable to climate change impacts.

As things stand, the global transition to a clean energy system, with all the benefits it brings, is set to be deeply unjust. Countries and communities that would benefit from it most are set to miss out, and where it does take place in the developing world, it is set to be relatively more costly than in the more prosperous Global North.

Underutilised solar manufacturing capacity offers a chance to support the global energy transition, especially in Global South countries with low levels of energy access. Deploying even a seventh of the spare 3,837 GW of solar capacity could in principle extend basic electricity access to 809 million people.

Utilisation of ‘spare’ solar manufacturing capacity could significantly advance the energy transitions of countries that need it most, increasing energy access and avoiding the need to build new fossil fuel power stations.

This analysis looks at a group of countries generally positioned below the global average in terms of development, including many with limited energy access. These nations are in general vulnerable to impacts of climate change and supportive of a global clean energy transition. We define this group via membership of three blocs: the Least Developed Countries (LDCs), Alliance of Small Island States (AOSIS), and Climate Vulnerable Forum (CVF).

Collectively, this group comprises 95 countries – 45 in Africa and the Middle East, 29 in Asia and the Pacific, and 21 in Latin America and the Caribbean (full list in Appendix 1). Seven of these countries were omitted from the calculations in this report owing to absences of data, leaving 88 in the final analysis (44 in Africa and the Middle East, 23 in Asia and the Pacific, and 21 in Latin America and the Caribbean). As the population of the seven omitted countries is less than 1% of the total, their omission does not materially affect the conclusions.

Assuming that the rate of electricity demand growth seen across the 88 countries in recent years continues for the rest of this decade, we estimate the additional demand in at 676 terawatt hours (TWh). Meeting this additional demand entirely with solar would entail deploying a capacity of 454 GW before (for details on methodology, see Appendix 2). Deploying more solar capacity would reduce the proportion of electricity that each country obtains from fossil fuel generation, constraining greenhouse gas emissions, reducing import dependence and reducing exposure to fossil fuel price spikes.

Levels of electricity access vary widely across this group of countries. Twenty-five countries are at 100%, and many more close to it. But in some sub-Saharan African countries the level is much lower – 11% in Chad, 10% in Burundi and 8% in South Sudan. Across the 88 countries, the combined population without access to electricity currently numbers 519 million people. Given projected population growth, that number would be expected to rise to 809 million in , in the absence of measures to increase access.

As an indicative exercise, we calculated the additional electricity demand incurred in if electricity access were to be extended to the entire population of each country. Our estimate is that this would require 843 TWh of electricity compared with – 167 TWh higher than just meeting the expected demand growth. This could be delivered by deploying an additional 112 GW of solar capacity, bringing the required deployment to 566 GW, which is just one-seventh of the ‘spare’ solar manufacturing output.

Improving electricity access is a complex issue, and the indicative calculation above should not be taken as implying that ‘spare’ solar represents a complete solution. In some of the 88 countries, particularly those where electricity is already available around the clock and levels of access already good, solar panels would need to be properly integrated with the national system, potentially entailing buildout of the grid and flexibility measures such as storage. In other settings, where levels of electricity access, hours of availability per day and per-capita consumption are much lower, minimal additional infrastructure would be needed. But in these settings, a much more substantial rise in generation would be needed to raise the amount of electricity available per person per day to levels seen in more prosperous countries, while deployment of batteries alongside solar would extend electricity availability into the evening. However, the scale of the ‘spare’ capacity relative to the size of the expected demand increase highlights the fact that the ‘spare’ solar capacity could make a significant contribution, if deployment were supported appropriately.

Now, with Chinese manufacturers similarly hard-pressed, the option of significantly accelerating domestic deployment is far less feasible because deployment is already happening at significant scale and pace and running up against constraints. The US is again erecting trade barriers; and India, hitherto a rapidly expanding market for Chinese exports, is planning to meet national demand with domestic manufacturing. Against this backdrop, supporting deployment across the developing world is an obvious option if the Chinese government wants to keep as much as possible of the industry running through this difficult period.

The second gain is diplomatic. Western nations have acknowledged their responsibility to support the Global South’s energy transition on numerous occasions, from the UN climate convention onwards. They are also committed to supporting delivery of the Sustainable Development Goals. But they have repeatedly failed to provide the agreed collective sums of climate finance, are currently not delivering reforms to the international financial system (such as via the Bridgetown Agenda) that would speed up clean energy deployment by de-risking investment, and are not supporting implementation of SDG 7 well enough to ensure delivery.

‘Spare’ solar offers an opportunity for China to step into the breach. It is after all allied with all but one country in our analysis through common membership of the G77/China group, the 134-strong bloc which exists to ‘…provide the means for the countries of the [Global] South to articulate and promote their collective economic interests… and promote South-South cooperation for development.’ Given the severe climate impacts already affecting small island developing states and other climate-vulnerable nations, there could hardly be a more significant example of beneficial South-South cooperation than supporting the rollout of affordable solar energy in countries that need it the most.

The world needs abundant cheap solar power, for energy access, wider economic development and climate change. And it is available.

The figures in this report show the global benefits that would accrue from supporting deployment of ‘spare’ solar capacity.

This single move would ensure that governments collectively exceeded their target of tripling renewable energy capacity by by a substantial margin. Deploying just one-seventh of it in the countries that most need clean electricity would contribute to improving energy access and energy independence.

Supported solar energy deployment in Global South countries would bring a range of added development benefits to those countries. Solar would create jobs in the installation and maintenance whilst reducing fossil fuel import costs; but cheaper and more plentiful electricity would also provide a boost to industry and support countries’ underlying clean development. Parts of the supply chain could be relocated in-country, as is already happening in Southeast Asia where companies are progressively moving from solar panel assembly to the manufacturing of upstream components such as solar cells and silicon wafers. Given the synergy between solar generation and battery storage, solar panel deployment on a significant scale would make countries more attractive destinations for investment in battery manufacturing, as is already happening in North Africa.

These wider benefits could, in turn, contribute to a more sustainable mode of development that would bring long-term sustainable prosperity.

What emerges overall is an opportunity for South-South-North collaboration that has the potential to markedly accelerate progress towards agreed international goals on both climate change and development:

• China has abundant ‘spare’ production capacity, and companies that may atrophy without temporary market support. It also has established diplomatic and investment links with many poorer developing countries.
• Across the developing world, governments are keen to progress the energy transition but are hindered by economic factors largely beyond their control.
• Developed countries have an acknowledged responsibility to deliver support to the developing world that improves energy access, generates jobs and income, and ensures low-carbon development. They also have abundant expertise in energy transition-related skills and knowledge to share.

Although global geopolitics might appear unpromisingly frosty, China and the US cooperation on climate change endures, as evidenced by the joint Sunnylands Statement which saw the two governments reaffirm ‘their commitment to work jointly and together with other countries to address the climate crisis’. China and the EU also constantly maintain a dialogue on climate issues.

From the perspectives of clean energy access, development and climate change, the conventional representation of the current situation is flawed. The situation is not, as it is often described, one of over-production, but of under-deployment. The spectre of supply chain shortages is often cited as an obstacle to rolling out clean energy globally. Here, the supply chain is clearly in robust health; but governments and multilateral institutions are electing not to utilise the full extent of goods that it can produce, despite the social and economic advantages doing so would bring.

The opportunity to capitalise on the potential of solar energy will not last indefinitely. The workforce layoffs and investment delays already witnessed in solar manufacturing would be expected to deepen quickly unless governments act to support the market. The win-win-window will not be open for long.

Chapter 2

Projections of solar panel manufacturing capacity and deployment - were sourced from the International Energy Agency’s Renewables report. The IEA projects that global solar manufacturing capacity will rise from 1,100 gigawatts (GW) in to 1,300 GW in . Taking 1,200 GW as an average annual production figure for the period - gives a cumulative nameplate output of 6,000 GW. At an 85% utilisation rate, this gives a total feasible output of 5,100 GW.

We conservatively extend the manufacturing capacity time series to by assuming that the figure of 1,300 GW per year does not increase from to . This gives a cumulative manufacturing output - (assuming an 85% utilisation rate) of 7,310 GW.

The IEA forecasts that annual deployment of solar panels will rise from 400 GW in to 532 GW in , a cumulative capacity addition over the period -28 of 2,292 GW.

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We extend this estimate to by projecting that the average annual percentage capacity addition for the period - (7%) continues for and . This gives the cumulative solar capacity added - as 3,473 GW.

We extend the IEA’s baseline projection for overall renewable capacity forward to by assuming that the average annual growth rate forecast for the period -28 (14%) continues for two more years.

Chapter 4

Data on annual electricity demand, and renewable and solar generation for the countries in this report were sourced from Ember’s electricity data. Installed capacity figures were sourced from the International Renewable Energy Agency (IRENA). The year was taken as the most recent year for which there is comprehensive data available on all parameters for the countries analysed. Data on access to electricity was taken from the World Bank Data Portal; figures for are not available, therefore figures were used.

Due to issues with data availability, Ember does not collect or publish data on four of the 95 countries – Republic of the Marshall Islands, Federated States of Micronesia, Palau and Tuvalu. The World Bank does not publish energy access figures for a further three – the Cook Islands, Niue and Palestine. With a combined population of 5.4 million, these seven states account for less than 0.5% of the population across the 95 countries, and were excluded from all calculations.

For each country, electricity demand was forecast for by assuming that the average annual rate of demand growth during - continues for the period -. Using average growth figures for this recent decade, rather than for the last one or two years, reduces the impact of exceptional circumstances caused by the Covid pandemic, the Russian invasion of Ukraine, or more localised factors. The amount of additional solar generating capacity needed to meet all the growth in demand was then calculated based on IRENA’s global average capacity factor of 17%.

The number of people across the 88 countries without access to electricity now was calculated using the World Bank energy access figures and population data in the Ember database. Population forecasts to were obtained by assuming that the average annual rate of population growth during - continues for the period -. The proportion of the population expected to have electricity access in was calculated by assuming that the average annual rate of energy access growth during - continues for the period -. These two figures were used to calculate the number of people in these countries expected to be without electricity access in , and this was used to calculate the additional demand necessary to extend access to the entire population. The additional solar capacity needed to bring access to the 100% level in all countries was then calculated using the same 17% capacity factor.

This approach does not address wider inequalities in electricity access nor barriers to it, but provides a rough indication of the capacity needed to extend the current level of per-person energy access seen in each country, for those who have it, across the entire population.

When it comes to clean energy technologies, China is crushing it.

It dominates the supply chain of the main energy minerals. It’s not only rolling out solar power rapidly at home, it’s also exporting huge amounts of solar panels elsewhere. Take a look at the chart below, which shows solar PV exports from China to the rest of the world. Increasingly, these panels are going to low-to-middle income countries who are hungry for energy, and will go after whatever’s cheap: that’s Chinese solar.

It produces three-quarters of the world’s batteries. Its largest EV carmaker, BYD, is producing high-quality electric cars for as little as $10,000, and is growing rapidly in many markets across the world. BYD is now targetting the domestic battery market. CATL, the world’s largest battery manufacturer, is pushing the limits of battery technologies, with claims that it can add 300 miles of charge in just 5 minutes (I have some doubts about battery degradation, but I’d obviously love this to be true). The list goes on.

European and American manufacturers are being left in the dirt. One response has been protectionist policies: slapping on tariffs and implementing import quotas. A few newsletters ago, I argued that these were not good interventions if the goal was to increase the number of energy jobs in European and American markets. That’s because most clean energy jobs are in deployment and maintenance rather than manufacturing, and since higher costs slow down the rollout of renewables, increasing prices reduces the total number of people working in clean energy (even if the number working in manufacturing increases).

These policies also fail to address the fact that they will not make Western manufacturers competitive in a global market.

This raises the question: Why are solar panels and batteries so much cheaper in China?

The reactionary answer is that they’re only cheap because of unfair subsidies and exploitative working conditions. But that’s an outdated perspective on what’s actually happening. The idea that China could only compete with Western manufacturers by cutting corners rather than genuine expertise stinks of arrogance. China does provide subsidies to battery manufacturers, and there is convincing evidence that the country has relied on forced labour in some of its supply chains. I’ll address these points later. But, China mainly dominates these markets because it has produced a long-term industrial strategy for these technologies and has honed an optimised, modern supply chain as a result.

The notion that China’s manufacturing output is purely the result of some centralised, governmental program is misguided; it has developed an incredibly competitive market with companies fighting for any edge to cut prices and beat competitors. The solar and battery industries are pretty brutal to be in, with slim margins.

Let’s look at some of the reasons why these technologies cost so much more in Europe and the US, and what could be done to reduce the gap (if that’s actually what we want to do). I’ll focus on batteries, but the main lessons will be similar for solar PV.

The CRU Group has done fantastic work drilling into the global battery markets, where most of this data and insights come from.

Leading Chinese battery producers are also far ahead of their domestic competitors

Before comparing costs to those in Europe and the US, it’s worth noting that the best Chinese manufacturers — namely BYD and CATL — also have much lower production costs than others in China.

The chart and table below show the breakdown of where these costs come from. A few things stand out, which also explain the gap to Western manufacturers.

The first is that labour costs from BYD are lower, not because of much poorer salaries, but because of high levels of automation. BYD factories can have as few as 50 workers per gigawatt-hour (GWh) of production, compared to as many as 233 workers elsewhere.

The second is that “yields” tend to be higher, which leads to lower costs for cathode and anode production. "Yields" tell us the percentage of products that are good enough to be used in the next step of the supply chain. BYD has high yields, which means that nearly all of the components it builds meet the quality standards needed to be used in final products. Other manufacturers have medium or low yields, which means that a lot of components are of poor quality and need to be scrapped. That’s throwing money away, and is not good for material use either.

Leading manufacturers have these high yields because they’ve developed extremely state-of-the-art, optimised production processes with minimal mistakes.

What makes up the cost of battery production, and how does this compare across regions?

The final cost of batteries consists of three components: the materials, labour to put them together, and the cost of processing materials into the final product (which is mostly energy).

The chart below compares the costs of China, South Korea, the European Union, and the US.

Immediately, we can see where the extra costs are coming from. Material costs are a bit higher in the EU and the US. But, the biggest difference in the US is the high cost of labour. In the EU, it’s processing, because electricity is more expensive than it is in China and the US.

It’s not just about low labour costs; Chinese manufacturers have become highly automated

The following waterfall chart shows what the CRU Group thinks the US can do to increase its cost competitiveness. On the left, we have the baseline costs, and each bar to the right shows the potential cost reductions from different factors. In the “optimised case” prices have halved.

The first thing US manufacturers — especially startups without experience — can do is increase yields. The “optimised” case means ramping them up to 94%, which means that manufacturers today are achieving quite a bit less than that today. A significant fraction of battery components go to scrap because they’re of insufficient quality. This once again highlights how much leading manufacturers in China benefit from state-of-the-art, honed production processes with minimal room for error. Over 70% of electric car batteries that have ever been manufactured came from China, so this is not surprising.

Since China also refines a lot of the minerals and smaller components, its supply chains can become incredibly integrated, which also makes them more optimised.

The second big chunk is labour costs. Now, it’s undeniable that wages in the US are higher than they are in China. But this is not necessarily because Chinese salaries are abysmally low. Yes, they are low by American or European standards, but wages for factory roles are often higher than they are in the US’s southern neighbour, Mexico.

The biggest factor in labour costs is automation. The US uses six times as many workers per GWh (I initially found these numbers pretty shocking and hard to believe), so it’s not surprising that labour costs much more. China has invested heavily in automation, meaning many processes run with very little human input.

This is something else to keep in mind when considering the case for “bringing manufacturing jobs home.” There’s certainly scope for this, but it is at odds with the fact that low costs often rely on automation, not human labour. Especially with the growth of artificial intelligence, some manufacturing jobs could be increasingly vulnerable.

High energy prices are crushing Europe’s competitiveness

Labour costs and the lack of automation are also relevant for Europe. Another factor that is killing Europe’s competitiveness — not just for batteries but for many industrial products — is the high electricity costs.

If energy accounts for a substantial portion of the cost of manufacturing, then it makes no sense to build stuff in places where electricity costs are high. Unfortunately, that’s the dilemma for many European countries, especially compared to China and the US.

What about human rights abuses in Chinese labour?

The above data does not negate or deny the fact that China has very likely engaged in exploitative practices in some of its supply chains. I previously wrote about the issues around cobalt mining in the Democratic Republic of Congo (although this is not only an issue for China; other countries buy this cobalt too).

Here I’m talking about the forced labour of Uyghurs and other minority groups within China itself. This appears to be most prominent in the polysilicon industry for solar panel production, but there are also reports of it happening for lithium production, which is a key component of most batteries.

Xinjiang has become the main hub of clean energy technology production in China, in part because it is rich in resources and has cheap coal. The government’s “Poverty Alleviation Through Labor Transfer” is promoted as a program where millions of people have been transferred across China to regions where they can find work (not just in manufacturing, but industries like agriculture too). While this is promoted as a voluntary program, many report that labourers don’t actually have a choice.

Here is the US Department of Energy’s List of Goods Produced by Child Labor or Forced Labor. The US actually has a Uyghur Forced Labor Prevention Act (UFLPA), which aims to ban the import of goods produced with forced labour from Xinjiang. This — rather than thinking you’re boosting domestic energy jobs, while actually hurting them — is actually a good reason to have stricter trade policies.

So it seems very likely that there are — or have been — at least some exploitative practices in China’s supply chains. It should go without saying that I think that’s bad and unacceptable. But my point is that this is still not the reason (or is only a very small reason) why these goods from China are cheaper than elsewhere. The main driver of lower labour costs has been automation; not having a human worker at all.

What about all of the subsidies China hands out?

Yes, China has provided a range of financial support mechanisms to promote the development of its clean energy industries. These include potential tax breaks for battery makers that meet certain energy density and safety thresholds. CATL has also received substantial subsidies — in the order of the high hundreds of millions of dollars a year — to support research, innovation, and scale-up.

But China is not alone in doing this. Many countries — including the US — have used similar tools to support strategic industries. In its early years, Tesla received a $465 million loan from the Department of Energy (which it repaid) and has since benefited from billions in regulatory credits and tax incentives. The Inflation Reduction Act was set up to provide financial support for companies like Tesla, with potential subsidies in the tens of billions.

This is not a criticism of Tesla or the US; there are good reasons to do this. It called good industrial strategy. But you cannot support these programs while calling out China for “cheating” for doing the same.

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