The opportunity in China’s solar ‘overcapacity’

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US-China trade talks are “a bit stalled”, says Treasury secretary Scott Bessent. The path out of the two nations’ tit-for-tat tariff war remains unclear.

Chinese solar panel producers can’t be too shocked by this situation, having faced targeted US tariffs since 2012. But they face problems of their own, with massive “overcapacity” that’s draining their finances.

Could that seemingly excessive factory investment yet turn out to be a boon for China — and the rest of the world?

RENEWABLE ENERGY

Can China put its solar glut to use?

Over the past few years, Chinese solar manufacturers have undertaken an extraordinary investment surge that’s given a big boost to global green energy deployment and hammered home their dominance of the world market — but also wiped out their profits and trashed their share prices.

The stress in the sector was highlighted this week when billionaire Li Zhenguo stepped down from the day-to-day management of Longi, one of the world’s biggest solar producers.

Over 25 years at the helm, Li had moved aggressively to develop a strong position across much of the solar value chain — from silicon wafers to finished panels — and to exploit cutting-edge developments in solar technology.

On occasion, though, he could sound a cautious note. When businesses reach a certain scale, he said in a 2022 interview, “only a few die of starvation. Most die of expansion. We must not expand too much.”

Some Longi shareholders may wish Li had paid more attention to his own advice. In 2023 and 2024, Longi’s capital investment surged to a total of Rmb17.3bn ($2.4bn), 74 per cent higher than in the previous two-year period.

As its rivals made similarly strong investments in factory expansion, prices fell heavily — and so did Longi’s revenue, which declined 36 per cent last year, sending it to a net loss of Rmb8.6bn ($1.2bn).

Longi’s shares are now down more than three-quarters since the start of 2022, and many of its peers have suffered similarly heavy declines as investors take fright at capacity levels that far exceed current market demand.

Last year, the world installed 452 gigawatts’ worth of solar panels, according to the International Renewable Energy Agency — increasing the total installed base by 32 per cent in a single year. But the world’s solar factories — overwhelmingly in China — now have enough capacity to produce 1,200 gigawatts’ worth, most of which is sitting unused, according to BloombergNEF estimates.

Did these companies simply overestimate the pace of solar installation growth? Not necessarily, according to analysts at Wood Mackenzie. Chinese solar producers, they argue, are fighting each other in an exceptionally fierce battle for market share, which is forcing them to make constant heavy investments in new production lines making the latest generation of technology.

This tussle is set to calm down, Wood Mackenzie’s team reckons. It notes an agreement among dozens of major producers last December to constrain production increases. The Chinese government has also waded in, imposing new efficiency standards for solar producers that will ensure “that only the most technologically advanced and financially robust manufacturers thrive”, according to Wood Mackenzie. That means panel prices are set to tick up slightly this year, it reckons, after years of steady decline.

Other analysts say the situation could prove harder to change. BloombergNEF researchers argue that co-ordinated production restraints in such a fragmented industry will prove impossible. “The ongoing glut” — which is seen to varying extents in other clean tech sectors too — “is so acute that it is likely to persist for years to come”, they wrote last month.

But rather than view this capacity as a problem, what if China and the world moved to take advantage of it? In a policy paper last year, Richard Black and Muyi Yang of the think-tank Ember argued that the problem was not of “overcapacity” but of “underdeployment”. If China’s “spare” solar capacity were put to use, they argued, it would enable the world to meet the goal — agreed at the COP28 summit — of tripling renewable generation capacity by 2030.

By supporting this industry’s continued growth and subsidising solar deployment in developing nations, they argue, China could achieve multiple goals at once. It would avoid a painful contraction in this labour-intensive, economically significant sector, while burnishing its soft power in the global south — and its claim to be a leader in global climate action.

Beijing’s recent efforts to slow the pace of solar investment suggest that it’s not convinced by this logic. But as Xi Jinping’s government prepares its next five-year plan — due for publication later this year — it has an opportunity to take fuller advantage of China’s dominance in clean tech manufacturing.

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