Welcome to our March edition of the Supply Chain Newsletter

Despite the rising global focus on transitioning to low carbon energy sources and advances in renewable energy technologies, the significant solar growth anticipated, for both utility PV and rooftop installations, risks being compromised in the short-term by a range of supply chain constraints.

These supply chain bottlenecks are partly the result of pandemic-related issues around labor and manufacturing capacity, but also escalating energy prices and a shortage of certain raw materials. These factors are hiking costs and limiting growth, which are further compounded by emerging geopolitical uncertainty over the Russia-Ukraine conflict. However, the conflict has also boosted the European nations’ ambition to reduce energy dependence on imported Russian gas and increase investment in renewable energies.

In this month’s newsletter, we dissect the growth of solar PV capacity and expenditure and take a close look at how supply constraints are going to impact it.

Thank you for reading.

Zhenying

Zhenying Wu
Senior Analyst
Energy Service Research

What impact will supply chain constraints have on the growth of solar PV capacity 
and expenditure?

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Since 2019, the world has seen an acceleration in demand for clean energy, leading to a rapid scale up in solar installations. Just seven years ago, solar PV technology required significant subsidies to incentivize installation. Today, it is one of the cheapest sources of electricity, even compared to coal-fired generation and hydropower. Despite rising commodity, energy, shipping, and labor prices boosting the cost of producing and transporting solar PV products worldwide, over 160 gigawatts (GW) of solar power was installed in 2021, among which 78 GW is utility-scale (see Figure 1). Asia and North America installed most of the utility-scale solar capacity last year, equal to around 70% of total utility-scale installations worldwide. Africa and Australia have also seen rapid growth in solar PV, with the number of utility-scale installations rising by 62% and 63%, respectively, last year compared to 2020.

Prior to Russia’s invasion of Ukraine in late-February 2022, above 30 GW of solar PV was expected to be installed in Europe this year. With rising concern over Russian gas supply volumes, European nations are looking to boost installations as they focus on reducing dependence on imported Russian gas. In some nations, this resulted in higher targets for renewable energy and an up-scaling of solar supply chains. For example, Germany announced it will accelerate solar PV installations from 59 GW at present to 200 GW by 2030.

Solar manufacturers reap rewards as world shifts to low emissions energy

Rystad Energy analysis shows that surging demand for solar modules worldwide has led to a three-fold growth in revenue among solar PV manufacturers in the last eight years (see Figure 2). This has been aided by the development and integration of the solar PV value chain, from the supply of polysilicon to finished solar modules. In 2021, five companies (all based in China) were responsible for 50% of revenues in the sector. Almost one-fifth of revenues were generated by LONGi Solar, which sells wafers, PV cells and modules across multiple industries.

While Rystad Energy expects the global solar PV build-out to continue as manufacturing capacity continues to ramp up, prices for solar modules are being challenged by logistical issues and the rising cost and availability of raw materials such as polysilicon. Around 80% of polysilicon and over 70% of module manufacturing capacity is presently located in China, with Tongwei as the global market leader in polysilicon. Since 2017, Tongwei has quadrupled its polysilicon production capacity to reach 180,000 tonnes in 2021, highlighting the importance of this raw material for the solar PV market.

Input costs for solar modules still rising

Alongside the global appetite for solar power and rising revenues among solar manufacturers, the solar module supply chain has faced headwinds since the outbreak of the pandemic in early 2020 with commodity prices continuing their upward trajectory. As a result, module prices have risen from under US$0.20 per watt peak (Wp) in 2020 to $0.23/Wp in the first half (1H) of 2021. In 2021’s second half, prices rose further to between $0.26 and $0.28/Wp. Rystad Energy analysis indicates that module costs will continue to climb to their highest levels yet in 3Q 2022 due to rising costs for module inputs such as polysilicon, silver, aluminum, and copper. The spikes in the cost of energy and shipping are also pushing up end-prices.

The price of polysilicon – one of the core commodities required to manufacture PV cells – has been on the rise since 2020, largely because polysilicon production capacity has failed to keep pace with demand. As shown in Figure 3, global solar module production capacity is around 400 GW while production capacity for polysilicon is about half that at just over 200 GW. This can nearly meet required demand for solar power installations expected in 2022 under Rystad Energy’s 1.5ᵒC scenario. This means that polysilicon prices may peak in 2022 before new supply capacity enters the market, easing the polysilicon supply bottleneck. Prices for other raw materials required for solar manufacturing have been volatile since Covid-19-related restrictions led to supply shortages. For commodities such as silver, aluminum and copper, Rystad Energy expects prices to continue climbing into 2023.

The cost of shipping on module prices has been minimal historically with its total share of module capital expenditure (capex) less than 5%. However, port congestion and rising crude prices has increased the share of shipping costs in total module costs since early 2021 and they are expected to peak at 12% by the end of 2022’s second quarter. While still an input, we expect the impact of shipping costs to decline and to be less volatile from 2023 onwards.

Costly for solar energy developers through 2022

Over 60% of a solar PV project’s total capex is on hardware with modules as the single largest individual cost item, meaning the cost of modules has a significant impact on project economics. Rystad Energy estimates that due to uncertainty over the impact that inflation and the Russia-Ukraine conflict could have on commodity prices, there is a chance that 2022 could be a slow growth year for solar PV.

Longer term, the solar industry must increase capacity and continue to fight cost escalation to meet climate change goals. Rystad Energy estimates that to maintain the global temperature increase below 1.5°C, module production capacity will need to be between 1,200 and 1,400 GW by 2035 to handle the peak installations needed. For solar panel manufactures to achieve this milestone, the aggregated production capacity must ideally grow by 10% annually. Limiting global warming to 1.7°C is achievable even with current supply constraints, though companies would need to expand production capacity to between 1,000 and 1,200 GW by 2045.