China's Solar Energy Sector is Facing an Oversupply of Capacity

Strong government backing and substantial private investment have propelled China’s solar energy industry to become a global powerhouse. However, the sector now confronts significant hurdles, including punitive tariffs overseas and intense price competition domestically.

According to AFP, officials slated to meet in Baku next month at the COP29 summit aim to establish new financial targets to aid developing nations in combating climate change, potentially accelerating the shift away from fossil fuels. Last year, participating countries committed to tripling the global installed capacity of renewable energy by 2030.

China currently installs nearly twice as many solar and wind power plants as all other countries combined, maintaining a dominant market position. A leading Chinese company manufactures eight out of ten solar panels worldwide and oversees 80 percent of each production stage. Wood Mackenzie reports that ten of the world’s largest suppliers of solar panel production equipment are based in China, with exports reaching a record $49 billion last year.

Analysts attribute this dominance to significant government support. The International Energy Agency (IEA) notes that from 2011 to 2022, Beijing invested over $50 billion in new solar energy production facilities. Additionally, the industry benefits from access to inexpensive raw materials, readily available capital from state-owned banks, and extensive engineering resources.

“Chinese manufacturers are ahead of everyone else in terms of costs,” said Lauri Mulluvirta, co-founder of the Center for Energy and Clean Air Research, a climate think tank. “This meant that new investments would be directed to China, as that is where the competition is highest,” he told AFP.

Johannes Bernreuter, a veteran solar energy analyst, added that China’s focused investment has led to a “sharp increase in the learning curve… both in the field of solar cell technology and in the field of production know-how.” This development has fostered an “effective industry ecosystem.”

As nations worldwide strive to modernize their energy systems, China’s dominance in solar energy is increasingly problematic. The United States and other Western countries accuse Beijing of deliberately creating “overcapacity” and flooding global markets with discounted solar exports to undermine competition.

In response, Washington has doubled tariffs on Chinese solar panels to 50 percent as part of a broader initiative targeting $18 billion in Chinese imports across strategic sectors, including electric vehicles, batteries, essential minerals, and medical devices. The European Union is also investigating Chinese solar panel manufacturers for allegedly receiving unfair subsidies.

Most U.S. solar panel imports now originate from Southeast Asia, with Chinese manufacturers relocating production to the region to evade tariffs. China remains the primary source of solar panel imports to Europe from outside the bloc, posing significant challenges for other markets to bridge the gap created by “two decades of very strong and very successful Chinese industrial policies,” Mulluvirta noted.

Despite its global clout, China’s solar energy industry faces internal challenges. Experts warn that the sector’s rapid expansion has overburdened the domestic energy system and triggered a ruthless price war. Industry leaders have signaled the onset of an “ice age,” urging government intervention to halt falling prices, though no relief measures have been announced.

In July, an industry group reported a wave of bankruptcies and a more than 75 percent decline in new solar energy projects during the first half of 2024. David Fishman, a senior manager at Lantau Group specializing in the Chinese energy sector, cautioned that the price wars are akin to a “snake devouring its own tail.” “Companies are stuck in this circle of competition, where the winner is the one who is able to withstand difficulties the longest,” Fishman said. “Many companies will fail along the way.”

While the oversupply enabled China to install wind and solar power plants nearly six years ahead of schedule, the nation’s energy system now struggles to accommodate the surge. Renewable energy supplies are increasingly being curtailed to prevent network congestion, a process known as supply reduction. Fitch Ratings reported a 4 percent increase in supply reductions in the first quarter of 2024 compared to the same period last year.

Authorities may soon need to “stop approving new projects or allowing projects to connect to the network if this means that tariffs for reducing supplies may rise,” Fishman warned. “They need to build,” he added. “They need to catch up.”

In response to challenges in Western markets and limited opportunities at home, China is exploring new destinations for its solar exports. This year, Asia surpassed Europe to become the largest market for Chinese solar exports. Additionally, exports to Africa surged by 187 percent year-on-year in 2023, according to energy think tank Ember, though the continent still represents a small fraction compared to Europe.

Bernreuter views the industry as undergoing a “phase of restructuring and reorganization.” He anticipates that the Chinese solar energy sector will continue its rapid development and expand its global footprint despite current obstacles.

As the global push for renewable energy intensifies, China’s ability to navigate both international trade tensions and domestic market pressures will be crucial in maintaining its leadership in the solar energy industry.