China has expanded its cleantech manufacturing capacity so much that industry players are searching for a way to decrease competition to make pricing more realistic and stop smaller producers from falling into debt. However, despite the problem being discussed widely last year, no solution has yet been found. In addition, while forecasts suggest that the Iran war and energy supply chain disruptions will refocus international demand for a green transition, thereby driving up purchases of solar components, this is unlikely to drive a big enough increase in demand to significantly dampen the oversupply.<\/p>\n
Last year, there were reports on China\u2019s industrial overcapacity spurred by the rapid growth of the solar manufacturing sector, which has driven up competition to unsustainable heights. The polysilicon sector, which is central to solar cell production, has become indebted, leading many companies working in the sector to explore possible solutions to the problem.<\/p>\n
In August, several industry players established a plan<\/a> for the biggest producers to invest a combined $7 billion to buy out the least efficient facilities and shut them down, to create a cartel and halt relentless price wars. This was expected to help make the sector more profitable by driving up prices, thereby helping producers pay off their debt. This is not expected to lead to a shortage of polysilicon, as China currently produces around twice as much as solar panel makers worldwide purchase<\/a>.<\/p>\n Despite the challenge being recognised long ago, several areas of China\u2019s solar supply chain experienced further capacity expansion last year, even with government and industry-led efforts<\/a> in place to restrict production. Manufacturing capacity in polysilicon, wafers, and cells increased by 9 percent, 11 percent, and 7 percent, respectively, compared to 2024, according to Morningstar. While module capacity decreased by 5 percent.<\/p>\n This April, China called for \u201cconcerted efforts\u201d<\/a> to ease the solar power industry\u2019s severe overcapacity crisis to bring an end to the country\u2019s price war. Proposed measures include capacity control, standard guidance, price enforcement, mergers and acquisitions and intellectual property protection \u201cto promote the high-quality development of the photovoltaic industry.\u201d At present, China makes over 80 percent of global solar panel components<\/a>, but the overcapacity of its manufacturing, also known as \u201cinvolution\u201d, has made the sector increasingly less profitable.<\/p>\n The low prices of Chinese solar components have not just caused a profitability problem in China but have also led foreign powers, such as the United States, to introduce tariffs on Chinese goods to enhance international manufacturing competition. Because of the extremely low cost of China\u2019s solar components, other solar production regions have found it impossible to compete. Europe has also started to diversify its solar supply chain away from Beijing, to reduce its reliance on China and boost energy security.<\/p>\n Following the recent geopolitical upheaval<\/a>, with several trade and energy supply chains severely disrupted, the United States and Europe are looking for ways to diversify their supply chains, with a view to developing stronger regional trade links, to reduce dependence on a single market, and enhance long-term energy security.<\/p>\n In reaction to the international response, in April, China\u2019s Ministry of Industry and Information Technology, the National Development and Reform Commission, and the China Photovoltaic Industry Association, as well as several major industry players, met to discuss possible solutions to the issue.<\/p>\n \u201cThe meeting required strengthened inter-departmental coordination and concerted efforts to continuously deepen the governance of the photovoltaic industry, and to fully promote comprehensive governance related to \u2018anti-involution,\u2019\u201d China\u2019s Ministry of Industry and Information Technology said in a statement<\/a>.<\/p>\n The response time is important as the global fossil fuel shortage is expected to encourage more countries to refocus on a green transition<\/a> by investing heavily in diversifying their energy mix to include a wide range of renewable energy sources. This could drive up the demand for solar panels and components in the coming years, although not to the extent required to meet China\u2019s overproduction capacity.\u00a0<\/p>\n \u201cPrices might go up slightly, or global demand might increase a little bit, but it won’t seriously impact the overall supply-demand dynamics,\u201d one solar industry executive told Reuters<\/a>. \u201cSome companies will make it and some won\u2019t\u2026 The problem is that the capacity is still there. It hasn\u2019t been shut down, cleared out or truly exited the market,\u201d they added. This means that if China still wants to be the biggest provider of these goods, it must tackle the pricing challenge.<\/p>\n Several good things have come from the Chinese government\u2019s rapid deployment of renewable energy capacity and the ramping up of cleantech manufacturing, such as the flattening of China\u2019s carbon emissions<\/a> in recent months. However, government incentives to increase cleantech manufacturing have created significant competition in the market, as well as led to a severe oversupply of solar components, which the government must now address to keep the sector profitable.\u00a0<\/p>\n By Felicity Bradstock for Oilprice.com<\/p>\n