COP28 commitments will require improvements to the solar supply chain

Europe has relied immensely on Chinese production for its solar growth, and analysts are warning that maintaining this reliance will make all renewable targets subject to the whims of Beijing.

The voluntary pledge by all countries to phase down fossil fuel use may have garnered the most attention at the COP28 UN climate summit in Dubai this month, but another pledge signed at the event will likely prove to be more impactful in the short term. 130 countries, including all EU countries, pledged to triple renewable energy capacity by 2030.

The commitment is one of the International Energy Agency’s five pillars for limiting global warming to 1.5°C above preindustrial levels by the end of the century. The signatories account for 40% of global carbon dioxide emissions from fossil fuel combustion, 37% of total global energy demand, and 56% of global GDP.

But meeting the goal of tripling renewable energy capacity by 2030 is going to require some major adjustments to supply chains, especially for solar power.

According to a new report by the Friedrich Naumann Foundation, a Liberal thinktank, the current global overdependence for solar components on China, which did not sign the renewables tripling pledge, attaches significant risk to many of these 130 countries’ ability to meet the tripling target.

No more is this more so than in Europe, they say. A diversification of solar supplies is badly needed, however the report also concludes that such a diversification would come with its own set of risks. 

“China’s monopolies in the renewable energy sector pose a unique challenge of its own,” say the report’s authors Nele Fabian and Maximilian Luz Reinhardt.

“Whilst a deviation of supply chains for renewable power sources may decrease political coercion risks, China’s dominance in the production of renewable energy technologies…creates a densely integrated power lever that continues to keep Europe under pressure even if it successfully de-risks in single key technologies.” 

Despite the risk, the report’s authors say that re-globalising supply chains for Solar PV is the best course of action for the European Union.

“Not only does Europe depend on imports that it can no longer rely on China to provide exclusively, but because its geographical positioning creates specific vulnerabilities, namely critical trade routes like the Suez Canal and the Strait of Hormuz, which expose it to potential disruptions of its international trade routes in general, not only for specific tech components,” they conclude.

The key question is – how can this be done in a careful way that doesn’t end up causing more problems than it solves?

The European Commission has signaled that it intends to take new trade protection steps against China in the renewable space.

In her State of the Union address to the European Parliament in September, President Ursula von der Leyen announced the launch of an anti-subsidy investigation into elextriv vehicles from China, saying, “Europe is open to competition but not to a race to the bottom. We must defend ourselves against unfair practices.”

That investigation was officially launched on 4 October. Later that month, the Commission put forward a wind power package of non-binding measures aimed at helping Europe’s struggling wind turbine makers under pressure from global competition.

The Commission already imposed 7.2–19.2% anti-dumping duties on imports of Chinese steel wind turbine towers in 2021. 

On solar, however, there has been disagreement over the past decade within the sector about whether protectionist measures against China should be rolled back, or expanded. “We have not forgotten how China’s unfair trade practices affected our solar industry,” von der Leyen told the European Parliament in September.

“Many young businesses were pushed out by heavily subsidised Chinese competitors. Pioneering companies had to file for bankruptcy.” 

In June 2013, the Commission imposed a 47.6% anti-dumping duty on solar panels from China following an investigation. In response, China immediately imposed an anti-dumping duty on European wine.

By the following month, Beijing and Brussels reached a compromise to settle the dispute and avoid a full-on trade war. The Commission agreed to instead set a minimum price for Chinese solar imports near spot market prices and allow China to meet up to half of Europe’s solar panel demand without tariffs.

Many accused the Commission of retreating in the face of German pressure to do so.

15 countries had voiced opposition to the tariffs saying it would cause too much disruption to the supply chain.

That argument is still being made today. By 2018, the Commission decided to end the remaining punitive measures, a move welcomed by the industry association SolarPower Europe, which represents the whole value chain, as “a watershed” that would “unleash a new solar age in Europe”. 

“The trade measures have made solar much more expensive than necessary in Europe,” said James Watson, CEO of SolarPower Europe, at the time. “By removing them, solar will now be the cheapest form of electricity in many EU countries.”

The result has been a mixed bag. Solar has in fact become the cheapest form of electricity to generate in Europe today, but that has been almost entirely driven by a Chinese supply chain.

The Friedrich Naumann Foundation estimates that approximately 70% of solar installations were dependent on modules imported from China, with EU domestic production able to satisfy at most 22.7% of planned installations. The situation has spurred growth, but hurt European component manufacturers. 

The European Solar Manufacturing Council has been pushing for the Commission to extend non-price criteria for domestically produced solar hardware into public procurements and auctions.

But SolarPower Europe opposes new EU tariffs on imported Chinese components, coordinating a request to the Commission with 400 companies making the point that Europe’s solar growth will be put at risk by a trade war.

“Launching an anti-dumping and/or anti-subsidy investigation and imposing duties on imports of solar PV products will be detrimental to the entire European solar value chain,” the letter said.

“How do we know that this will be the case? Only 5 years ago, anti-dumping and countervailing duties in place on solar panels imported from China, Taiwan, and Malaysia were abolished.

These duties had negative consequences, which taught us a painful lesson. Solar jobs, project investment, and solar deployment severely declined during the period of application of these trade defence measures and led to an increase in costs to our customers and consumers.”

However the Friedrich Naumann Foundation says the status quo is not an option. “The PRC has near total dominance at the upstream stages of the supply chain, including 97% of the world’s polysilicon wafer production capacity.

Even for supply chains that mainly rely on non-PRC inputs, an increase or decrease in the PRC’s supply are major determinants of the global market for polysilicon, wafers and other key components.”

In other words, if China wanted to turn of the spigot at any time, it would almost completely halt Europe’s solar expansion and make it impossible for the EU to meet its climate goals. 

“The PRC has a track record of weaponizing its dominance of critical supply to achieve geopolitical goals,” they note.

“Our modelling predicts that PRC bans on solar exports, for example, precipitated by geopolitical fall-out following a conflict across the Taiwan strait, could cost the EU €46.18 billion by 2030 in increased energy bills, or €103 per capita.

“Building alternative solar PV supply chains outside of the PRC is challenging due to high capital costs, energy intensive production and extended lead times on new production facilities,” it says.

However, the report says there are ways to de-risk Europe’s supply chain without causing a collapse in European solar, and it lays out three core principles to do so: de-risking new solar installations, scaling up EU solar production and diversifying the global supply chain.

“The EU should incentivize energy providers to diversify their supply chains by introducing minimum standards of supply chain resilience as a precondition for government support,” the report recommends.

And where should those alternative supply chains come from? Some could come from EU production, however, “countries in Latin America and Southeast Asia are better placed than Europe to compete with the PRC’s economies of scale and low energy costs.”

It is still unclear which way the Commission will proceed when it comes to the EU’s solar reliance on China, but President von der Leyen’s state of the union speech signaled that they are ready to take significant action.

However, the EU executive is under intense pressure from both sides of this debate, with some saying it is too risky to continue reliance on China, while others are saying it is too risky to end reliance on China.

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