A global take on vulnerabilities in solar supply chain
One of the key outcomes of pandemic is that it has brought forward the vulnerabilities of conventional global supply chain across different sectors including transport, hospitality, and energy sector etc. While most of the service-based sectors, like education, found an opportunity to transform into virtual space, the hardware and infrastructure-based businesses were impacted many folds having nowhere to go. Similarly, the renewable energy sector including the solar supply chain witnessed an impact in the forms of delays and even termination of projects. For countries relying completely on imports, like Pakistan, the impact was severe, leading to setbacks and delays for solar projects all over the by several months.
These energy supply chain disruptions by pandemic and current Russia-Ukraine conflict, reinvigorate a key debate and issue for solar energy advocates. How to manage future supply chain disruptions of solar. To answer this question, it is pertinent to understand the current supply chain universe of solar and its vulnerabilities as evident by pandemic – outlined below:
- China dominates the current solar PV supply chain at all stages of manufacturing.
China by far dominates the overall supply chain of solar PVs, owning 80% of overall share in different stages of solar panels including polysilicon, wafers, modules, and cells. On top of that it has already invested USD 50 billion in new PV supply capacity which is 10 times more than whole of Europe. Most of the it shall be exported, as it is more than double its current local demand for investment in PVs. This exorbitantly uneven investment concentration means that the country also houses most of the top suppliers for PV equipment. In fact, China remains home to worlds top 10 suppliers of PV equipment. Only one province of China – Xinjiang accounts for 40% of global polysilicon manufacturing. As per EIA estimates, the world will almost completely rely on China for the supply of key building blocks for solar panel production through 2025.
In 2020-2021, global energy transition projects delayed or were halted due to disrupted supply chain from China. The concentration of global supply chain in one country (China), brings intrinsic risks associated with global supply chain disruptions, whereby impact on supply chain disruption in one country leads to halting of equipment delivery around the globe. The impact of these disruptions is expected to trickle down the years. Estimates by WE forum reveal that the impact of pandemic induced supply chain disruption could delay or cancel 56% of world-wide utility scale projects.
Nevertheless, the highly concentrated global manufacturing also allowed China to considerably bring down the cost of PV over the years, making it more competitive to fossil fuel technologies – a key achievement for accelerating global energy transition.
- The downward trend of PV manufacturing cost has a limit.
Solar PV cost has reduced substantially over last decade, yet it is bound to have a limit, after which the cost may stabilize or increase depending upon multiple constraints. The price floor is achieved as we reach the limitations of technical parameters like process and technological efficiency and, supply-chain limits like availability of raw materials. The external variables and impacts could also lead to increase in manufacturing cost. For instance, Covid-19 supply chain disruptions led to increase in PV manufacturing cost for the first time in last 7 years.
In 2020, the global solar supply chain witnessed Bulpwhip effect i.e., disruptions in retail level leading to large impact on raw material supplier, manufacturing, wholesale, and distributions level. The polysilicon industry had the biggest impact. In 2019, the polysilicon suppliers had an oversupply for running PV manufactures. In late June 2020, countries went into lockdown slamming brakes on polysilicon suppliers resulting in all-time record low cost of $6.75/kg. As the economic activity restarted, supply chain and manufacturing industries resumed operations and the demand for polysilicon came roaring back. The high demand led to polysilicon suppliers to struggling to cope up with demand, which increased the cost of production substantially. Currently, the polysilicon spot price stands at USD/kg 38.14 (As of 20 Sept 2022).
- Pandemic shot up the shipping prices leading to high cost of PV supplies.
Pandemic induced shipping disruptions, not only delayed the projects, but also lead to increase in cost of the projects. Shanghai Freight Index – an index to measure the cost of global shipping from Shanghai, has jumped two-folds in 2020 due to pandemic, as shown in figure below. The index however is projected to come down in 2022, depicting normalizing of supply chain, but it still remains higher than pre-pandemic levels. It is yet not evident that how long these disruptions due to solar PV will last. However, several think tanks foresee that their impact will last for at least couple of years.
Closing vulnerabilities on supply chain leads to strengthen energy transition pathway.
- Induce principles of sustainability, collaboration, and diversification in supply chain. Previously, global supply chains have been focused on financial efficacy only. While it is certainly the metric to determine the shape of future supply chains, it is not enough on its own. Otherwise, we end up in a fragile global value chains like current ecosystem of solar PV manufacturing. The global energy transition industry must brace themselves for future disruptions by developing a resilient supply chain founded on principles of sustainability, collaboration, and diversification.
- Countries must diversify the solar supply chain along different stages of manufacturing. As evident, diversification is a key to resilient supply chain – not just by final product but also along every stage of the manufacturing process whether it be raw materials supply, wafer making, or final PV panel supply. Countries can avoid such disruptions by ensuring that they are not solely reliant on single suppliers. In order to do that policy makers, need to ensure equal playing field for all importers and advance the local manufacturing industries. Additionally, the policy makers must develop enabling environment to provide greater funding for innovations in PV industry paving way next generation PV manufacturing like thin films and ultra-thin film panels.
- Globally, countries need to attract direct investment in local manufacturing. IEA’s estimates reveal that global demand for PV could attract USD 20 billion of investment in manufacturing facilities, by 2030. This means that annual investment levels need to double throughout the global supply chain. Countries must capitalize on this opportunity to invest in critical sectors such as polysilicon, ingots and wafers which would attract the majority of investment to support growing demand.
- Committing on stable demand for grid-tied solar facilities could spur interest of international investors. Demand for PV in medium and long terms is the key driver to generate interest of international investors in solar manufacturing space. Committing to long term procurement of solar PV to meet the national energy demand, along with enabling policy framework for investment in renewable energy space could be a key to unlock the private sector investment in solar manufacturing industries.
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