This article is the second in a two-part series explaining the declining cost of solar. This time, we dig into Germany’s renewable energy ambitions and how they fuelled the growth of Chinese solar manufacturing and ultimately the cost of PV.
The growth of photovoltaic solar in China
From a nascent industry in the 1990s to a $91bn dollar sector in a little over two decades the solar PV market has grown rapidly and globally. Installed capacity has grown from 175MWp in 1995 to 233,000MWp in 2015. This dramatic rise can be attributed to the international expansion of the industry, especially in Europe and China. In 1995, Japan and the U.S. dominated global installed capacity of solar with 20% and 44% shares respectively. In 2015 China became the global leader in installed photovoltaic solar capacity (43 GW), surpassing former leader Germany whose installed capacity stood at 40GW. The growth of China’s solar industry is not the result of the invisible hand of the market. It is the outcome of a series of national policies that showed a sustained commitment to drive solar adoption. Interestingly, the policies that allowed the initial rise of Chinese solar, were German.
When it comes to the energy business, governments are in the business of picking winners. Policy can stimulate demand and it has.
Beginning in the late 1990’s the story of China’s rise to dominance in the solar PV market began with modest rural electrification programs. This soon changed. Political developments in Germany, particularly the Green Party’s governmental debut in 1998, created government driven demand for renewables. The Green-Red coalition bravely committed to aggressive targets for renewable energy and carbon emission reductions. Events in Germany triggered the entry of private local and international firms into the Chinese solar manufacturing sector, which sought to satiate Germany’s demand. As a result of this increasing demand, China’s manufacturing capacity grew. Through relationships with international suppliers, research institutes and other players in the then small global market, China was able to establish the human resources, patented technologies and knowledge of mass production required for Chinese solar’s rapid expansion.
By 2010, the industry showed enough promise to be deemed a “strategic emerging industry” by China’s State Council. At this stage however European demand was uncertain as a result of the 2009 financial crisis. Leading the Chinese government to commit to growing its domestic market to decrease dependence and strengthen this emerging industry. Enter the Golden Sun initiative. This programme subsidized 50% of the construction costs of an estimated 294 solar projects and subsidies were also given to many parts of the PV value chain including support for R&D in institutions and firms. The Golden Sun program was ambitious and the results spectacular: the market grew by over 300% in 2010 and 500% in 2011. In particular, special attention was paid to the development of quality low cost modules, resulting in China’s position as the global low cost leader.
This multi-tiered commitment to growing solar, positioned China to become the world’s PV factory when international demand began its resurgence. For instance Germany had committed to significant increases of solar in its energy mix as early as 2000; these plans would bear fruit in the next decade as the country increased it’s installed capacity between 2010-2012 by 7GW.
As European demand returned China was ready to capitalise and Chinese PV imports into Germany and the EU in 2011 were worth an estimated $21bn.
Chinese imports were substantially cheaper (below cost in some cases) than the local alternatives, putting pressure on local PV value chains; this would result in the anti-dumping legal action taken by German companies in 2013. China’s (or rather Chinese firm’s) realisation of the opportunity presented by PV may explain the decision by firms to sell at unreasonably low prices. Based on an observation from one of the BCG management consulting bibles, a “firms’ recognition of the value of market domination, particularly during incipient commercialization, leads to unstable pricing behavior.” The idea here being that market share at this early stage is more important than profits. Considering that Chinese modules constituted 64% of PV module production in 2013, this strategy was successful.
Following the demand, as usual, paints a clear picture. This section provided valuable support to the idea that the cost reductions in solar PV are policy driven as without the policy there would be no demand to compete for on the basis of lower price. It should be clear that Chinese solar did not progress in isolation and integral to its progression was the German-Chinese “co-evolutionary process of cumulative causation.” This also involved deepened R&D partnerships between leading research institutions in both countries. Despite more recent tensions between Germany and China, the success of both their renewable programmes would be impossible without one another.