Overview
Markets breathed a sigh of relief last week after the US and Chinese presidents met in San Francisco to stabilise relations. But it was another bilateral meeting in California that got some investors excited enough to press the ‘buy’ button. Several Chinese solar energy stocks climbed after the two sides’ climate envoys met in nearby - and aptly named - Sunnylands and agreed to triple the world’s renewable energy capacity by 2030 and work together on “at least five” carbon capture, utilisation, and storage (CCUS) projects.
China is responsible for making almost half of the world’s solar panel installations, and investors are betting that these companies will be among the biggest beneficiaries of the energy transition. But the solar bulls could be wrongfooted by China’s solar energy glut, as highlighted in this week’s Chart Room, which we estimate could cause global installation to decelerate sharply next year, from 64 per cent year-on-year growth in 2023 to just 12 per cent.
The rate at which China adds new solar capacity is set to rise for a fourth year this year, taking the installations of solar panels around the world (represented by the green line on the chart) to their highest in over a decade. This has pushed the annual growth rate of total installed capacity - the yellow dots on the chart - to around 25 per cent, a level not seen since 2017, the year that preceded the last supply crunch when China cut new energy subsidies and sapped demand.
This expansion would be helpful in meeting China’s energy needs, if not for the absence of the necessary transmission mechanism for this power to flow smoothly. Unlike centralised thermal or nuclear power, solar energy’s generation is unpredictable (dependent on sunlight) and dispersed (panels scattered across the power network, atop apartment and office towers, instead of in power plants).
In China’s case, for solar to be a viable alternative energy source, additional investment in equipment, wires, and transformers is necessary - more precisely, capital expenditure expanding at 13 per cent compound annual growth rate (CAGR) in the power grid, according to calculations by the ubiquitous State Grid. Right now, that number is closer to 5 per cent.
Oversupply beginning to bite
The result is that China is left with a lot more solar panels than it can use. China’s top-tier producers of ‘vertically integrated’ solar products (that is, the wafer, cell, and module - three of the four major components in a panel) have been suffering net losses on each unit produced since late August. The spot price of polysilicon, another key solar panel component, is down by 65 per cent year to date.
Oversupply carries other risks too. Which brings us back to sunny California. Warmer diplomatic ties might be positive for Chinese solar stocks in the short term, but green energy overcapacity is high up on US Treasury Secretary Janet Yellen’s agenda. European solar companies have also been warning of bankruptcies triggered by Chinese competition.
We are sceptical that the US would give up critical trade barriers, such as anti-dumping and countervailing duties. Even if that were to happen, the US market is unlikely to absorb excess Chinese supply when it accounts for only 8 per cent of global solar panel installations. Besides, there would be no guarantee that US policy wouldn’t U-turn again after next year’s presidential election. More meaningful for solar shareholders would be a solution to China’s power grid inefficiencies, although that could take until 2025. Set against this backdrop of uncertainties, investors may find the sunny outlook for Chinese solar soon becomes overcast.
