Sunday read: China struggles with solar supply


From pv magazine 06/2021

It began last July, when an accident at GCL-Poly’s factory in the westernmost region of Xinjiang took a significant chunk of polysilicon capacity offline, just as China’s PV supply chain was recovering from the initial chaos of Covid-19. Industry analysts quickly calculated the potential reduction, which would result in up to several thousand metric tons of polysilicon supply cut off in 2020. And at first, they believed it wasn’t “a big deal,” because the industry had already developed the capacity to withstand such accidents. As it turned out, this was just the beginning.

Most analysts were proved right about the GCL accident. It resulted in a slight rise in polysilicon prices, but they fell again within a few months and did not show any obvious impact elsewhere along the supply chain. Soon after this, glass took centre stage in the price rise show. In the period from June 2020 to March 2021, the price for 3.2 mm PV glass almost doubled from CNY 27 ($4.20) to CNY 52 per square meter.

At the end of March 2021, glass prices suddenly slipped by more than 30%. But polysilicon, then, rapidly resumed increasing in price. Since February, prices for polysilicon have consistently grown – increasing roughly 100% in 100 days, from CNY 90/kg to CNY 180/kg. And this time, the reasons for the price rise are more complex than an industrial accident.

Bill of materials

As the fundamental material in the PV supply chain, the upstream polysilicon price determines downstream costs for wafers, cells, and ultimately modules. Wafer producers Longi and Zhonghuan Semiconductor, cell manufacturers Tongwei, Aikosolar, and Runergy have all raised their prices to transfer and release cost pressure downstream, to the PV module sector.

On top of this, several other components in a PV module bill of materials have raised prices since mid-2020. Silver paste, which accounts for around 10% of solar cell costs, almost doubled in price in August 2020 compared to the first quarter, due to a global silver price rise.

Prices for copper, used in connection cables, and aluminium, used in module frames, also increased by around 110% from low points last March. EVA films and polyvinylidene fluoride (PVDF), essential materials for module encapsulation, have also seen 200% price increases over the past 12 months.

Inverters, meanwhile, have been hit by a shortage of microchips, and mounting systems suppliers are struggling with rising steel prices. The extensive cost rise in so many links of the PV supply chain has resulted in rising prices for modules, pushing up the levelised cost of electricity at the project level.

Squeezed margins

Some have suspended project investments; waiting for prices to stabilise. The steep rise in module prices has left buyers worried that costs may keep rising to the point where prices at time of delivery exceed the contract price, putting the delivery at risk.

Insiders at China’s major state-owned energy enterprises, the main investors in renewable energy projects in China, say many PV projects have been postponed, though development contracts are still in place. Many EPCs have also suspended project development because their profit margin was squeezed to almost zero.

There are three main reasons for the sudden price jump across the supply chain. One is polysilicon supply; now the biggest factor influencing the whole PV system. Current production capacity for polysilicon is much lower than for ingot and wafer demand. After a massive capacity expansion since 2019, ingot and wafer production capacity increased from 135 GW in 2019 to 161 GW by the end of 2020, and there’s more to come, with further expansion set to happen in 2021.

However, China’s polysilicon supply capability can only support around 140 GW, and supplies outside of China can meet another 20 GW of demand. This relatively short supply is the root cause of the price rise.

Furthermore, polysilicon is highly monopolised by six domestic producers including Tongwei, Xinte, GCL, Daqo, East Hope and Asia Silicon. Especially Tongwei and GCL, which control the largest capacities, have strong abilities for price negotiation, and actually guide the polysilicon price. Downstream ingot and wafer products are, in the same way, monopolised by Longi and Zhonghuan Semiconductor. Cost pressures will transfer downstream, if the upstream players are not willing to reduce their profit margin.

The third reason is more like a “zero-sum game” played by the entire PV industry. Upstream suppliers have transferred cost pressure along the chain to the last manufacturer, the module maker. This segment, however, has refused to eat all the costs by itself, and looks to transfer price increases to its own downstream customers, including project investors. And this was a group the manufacturers had never considered upsetting before.

In China, the state-owned energy enterprises that invest in PV projects have installation targets that tie in directly with China’s pledge to reach its carbon emissions peak by 2030, and to be carbon neutral by 2060. These investors know that reaching the target is more important than profit, and their upstream suppliers know this as well.

In mid-2020, rising glass prices squeezed module makers’ profit margins. And they had no choice but to absorb the higher prices without increasing their own. But with the announcement of carbon neutral strategies, module manufacturers saw their chance.

By the end of November 2020, installations in China had reached only around 30 GW. But in December, new installations hit 18.2 GW. State-owned investors had realised they would have to compromise and accept higher prices to meet their targets, even if that means sacrificing profits. But this situation might not repeat itself in 2021, as China’s state-owned enterprises are now turning to wind power to meet their renewable energy targets.

What about wind?

In contrast to the rising cost of solar panels, wind power continued its slow-but-steady price reduction throughout 2020 and 2021. In early May, for the first time China saw a wind power bid price of CNY 1.7 per watt in a tender of the State Power Investment Corp. (SPIC), almost equal to the lowest solar PV panel price at that time. Considering the much higher utilisation hours of wind than solar PV, typically 1,800 hours versus just 1,250 hours for solar, the LCOE of wind power is now much lower than solar in China.

The country’s SOEs take responsibility for installing renewable energy to help the country reach its carbon-neutral goal, but they are not limited to using PV. They will apparently turn to wind power to meet their renewables installation target and protect profit margins. Wind power installations reached a historic high of 47 GW in December 2020, almost double the total installation from January to November. The solution was already found.

The China Photovoltaic Industry Association (CPIA) has predicted this year’s annual PV installation will range between 55 GW and 65 GW. But without significant cost reductions of PV panel prices from their current highs, the downstream installation market will not accept the increased cost, and PV installations will be cut off. Bringing prices back down to those seen in the first quarter of 2020 will require the efforts of the whole industry, especially those polysilicon suppliers.

Author: Vincent Shaw 

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