Why a concentration of solar panel supply chains threatens energy security

The increasing concentration of solar panel manufacturing capability in China has raised fears over energy security and the global path to net zero, according to a report.

China currently “dominates every single solar PV [photovoltaic] supply chain segment” with the country’s share in all manufacturing stages exceeding 80%, according to the report from the International Energy Agency (IEA).

The report found average annual solar panel installations would need to quadruple over the next decade to meet the IEA’s vision of what net zero will entail. Additionally, it said weak spots in the solar PV supply chain may lead to higher prices or supply constraints that could impede the transition to clean energy sources, or make it more costly.

The report noted the US had already amended solar panel tariffs because of “threats to the availability of sufficient electricity generation capacity to meet customer demand”. 

The IEA assessed several areas of risk exposure for solar panel supply chains, with jurisdictional concentration to be one of the highest vulnerability factors, as it opened up the potential for disruption from domestic policy changes and geopolitical events. Other vulnerability factors included:

  • Geographic concentration, which increased risk from natural hazards and infrastructure failures;

  • Market concentration, which increased risk of collusion, price fixing and dumping;

  • Financial health of the sector, as it could be affected by bankruptcy from volatile prices or changes to subsidies; and

  • Trade restrictions, as new or changing policies could restrict the free flow of solar PV materials.

Over the last decade China has solidified its wafers, cells and modules manufacturing capabilities and tripled its share of global polysilicon production. As much as 42% of the entire solar panel value chain is concentrated in the Xinjiang province in China, and in 2021 up to 14% was concentrated in a single facility. 

In light of these threats, the IEA urged diversification of the supply chain, recommending countries localise manufacturing as much as possible in multiple segments. It warned most investment has been in downstream policies to boost solar panel sales, rather than upstream to improve manufacturing.

The report stated: “Diversifying the solar PV supply chain will also require industrial policy tools beyond government incentives to support demand, and a collaborative effort between the public and private sectors will be needed to secure the solar PV technology supply chain. For instance, China’s role in solar PV manufacturing hinges upon not only its industrial priorities and targets, but the incentives the government has provided continuously for more than a decade.

“Thus, international coordination on subsidy design and financial support to encourage domestic production while avoiding trade restrictions is critical to diversify the solar PV supply chain and improve its resilience.”

It warned however that full self-sufficiency is not usually a practical or economical option, and suggested regional cooperation to secure raw materials, manufacturing investments and trade. Other suggestions included:

  • De-risking investment by tailoring support policies to take into account long-term financial investment;

  • Ensuring environmental and social sustainability by decarbonising power grids and providing equal opportunities for long-term employment; and

  • Fostering innovation through investment in technology, recycling and reusability.

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