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| Author | Richard Chen |
| Updated | November 14, 2023 |
Grid issue emerges as demand grows on falling prices
The significant drop in module prices this year has spurred demand markedly. Many projects that were postponed or cancelled due to high prices last year resumed construction this year after prices fell, while new projects got off the ground smoothly due to high returns. Against these backdrops, this year’s global module demand is expected to reach 412-455 GW, up 53% YoY.
While module shipments increased, markets such as Europe and Brazil are hit by serious inventory pileups this year. Falling prices do benefit projects’ IRR, but factors including labor shortage, policy changes, and project scheduling led to a mismatch between production and real installations. With too much inventory on hand, many manufacturers are forced to cut prices or transfer modules to other countries, causing huge losses to businesses. Real installation demand is likely to grow further in 2024, but the growth still lag behinds that of capacity; oversupply will continue and limit the manufacturing activity of new capacities. After experiencing excess stock, manufacturers shall be more cautious next year regarding production and shipment plans, as well as sales strategy.
On the other hand, demand growth is also subject to grid capacity. As installation grew rapidly, grid capacity challenge started to emerge across regions. Brazil and some European countries saw grids becoming insufficient and even causing delays or cancellation of distributed generation projects. China, where rooftop PV grows rapidly, saw local governments introducing policies to address the grid issue and assessing grid capacity. However, these measures, including suspending the grid connection of distributed generation projects and mandating the installation of energy storage, can only provide a short-term relief to the grid. For the long term, it still requires more investments to upgrade the grid and strengthen grid regulation to ensure steady growth of distributed generation PV.
Although solar growth will slow from this year due to higher base period, grid issue, and localization trend, the market outlook remains positive as module prices plummeted, with module demand projecting to see an increase of 15-20% in 2024.
The squeeze on profits amid surplus capacity and fierce competition
With capacity expansion plans across the supply chain materialized this year, polysilicon supply bottleneck eased, but rapidly growing capacity led to serious surplus. Prices across the supply chain plunged this year – polysilicon prices declined from RMB 300/kg at last year’s end to around RMB 69/kg now, while module prices fell from last year’s USD 0.245/W to USD 0.135/W now. Short-term price movement may occur in the future when supply and demand changes, but as supply will still outstrip installation demand, prices are not likely to bounce back significantly, leaving more bargaining power to end users.
Growing capacity helps the industry development, but it also leads to increasingly fierce competition between companies. Eyeing the rapid market growth, better profits, and high prices across the supply chain in 2022, both existing and new players announced expansion plans one after another, escalating the competition and driving down prices. After prices plummeted, many manufacturers have little room left for profits, forcing them to adjust utilization rates in accordance with demand. Consequently, some older lines were phased out at a faster pace and some new capacity plans are cancelled as they can no longer generate profits. More expansion plans are expected to be cancelled next year. Companies with poor cost control and insufficient sales channels may be forced out of the market.
Supply chain reshoring on the rise
Some countries have introduced protection measures for solar products and tried to build domestic capacity in recent years in pursuit of energy independence. There are already policies like the Inflation Reduction Act (IRA), anti-circumventions investigation into Southeast Asia, and India’s Basic Customs Duty (BCD), ALMM order for modules, and the Production Linked Incentive Scheme (PLI). Europe also evaluates the necessity of limiting solar imports as the market is grappling with an influx of low-priced Chinese modules.
However, solar supply chain is highly concentrated in China, with polysilicon, wafer, cell, and module capacity respectively dominating 93%, 97%, 90%, and 82% of the global total, while existing capacity outside of China is unable to fulfil demand. If the EU restricts solar imports before securing enough supply, unfulfilled potential demand will result in declining installation volume. The U.S. experienced a decrease of 16% in installation last year after the Uyghur Forced Labor Prevention Act restricted import of modules made with polysilicon from Xinjiang.
Driven by incentive policies, this year saw many overseas expansion projects, especially in the U.S. and India, where many new capacities will come online in 2024. InfoLink’s incomplete statistics show that module capacity overseas will increase by at least 78% to 270 GW over the early 2023 to late 2024 period. Some manufacturers are mulling over expanding capacity in Europe and the Middle East, which will change the industry landscape that is dominated by Chinese modules.
It’s worth noting that these overseas expansion projects are mostly for modules given entry barriers such as capex and technical difficulty. There are a few cell expansion plans and scattered polysilicon and wafer projects. For new cell and module players, it’s not likely to wean themselves off Chinese supply chain completely within two to three years of time.
Overall, the solar industry will continue to grow next year despite impact of grid capacity and labor shortage on the installation progress. Capacity expansion and declining prices will drive demand effectively, providing bright prospects for solar developers. Meanwhile, soaring capacity, intense price war, and technology shift will challenge the supply side’s capability of cost control, R&D, and sales strategy. The supply/ demand landscape will become more complex, and industry will change more quickly, as capacities overseas come online in the future.