The energy crisis shows little sign of loosening its grip and the world feels a long way from the low-carbon, low-cost energy future heralded by governments at COP26.
Just getting close to halving current emissions will require a huge step-up in wind and solar capacity in a very short space of time – and that will be pricey. Hundreds of billions of dollars of additional financing are needed and renewables are attracting the lion’s share of near-term investment.
Solar and wind costs have tumbled over the past decade as manufacturing capacity has exploded, but 2021 quashed any hopes of a continuous decline in renewable costs. Global solar module prices rose by as much as a quarter last year, while wind turbine prices grew 10-15%. Battery costs will rise in 2022 for the first time in a decade.
Record commodity and transport costs, raw-material supply constraints and logistical bottlenecks are the main culprits. Rising prices have led developers to consider project delays or cancellations, tapping the brakes on the growth of renewables just as many countries commit to more ambitious emissions reductions.
Where others have struggled, China’s renewables manufacturers and project developers emerged from 2021 bigger and more competitive than ever before as phenomenal domestic power demand drove investment to record levels. Building more, faster and cheaper than anyone else, China has become the Ikea of the energy transition.
Countries announcing more ambitious 2030 emissions targets on the promise of jobs and prosperity should be cautious. Achieving this without greater dependence on China looks harder than ever as its manufacturers expand capacity and drive down costs.
Partly in response to China’s dominant position, the US and Europe have introduced policy and taxonomy initiatives designed to put the spotlight on the sustainability of clean energy investments and to offer greater support for local manufacturers. In the US, policies are restricting solar module imports from China in particular. But competing with China will require more than tax breaks and stricter market-entry regulations. Technological innovation, improved access to key mineral resources essential to the energy transition and shorter supply chains are also needed.
In this February edition of Horizons, we identify six key themes that will determine how China’s solar and wind manufacturers will impact the course of the global renewables market and how countries and companies can respond.
HORIZONS
Power Play:
How China's boom year is changing the path of the energy transition
February 2022
Alex Whitworth, Head of Asia Pacific Power & Renewables Research
Yanting Zhou, Principal Economist, APAC
Xiaoyang Li, Principal Analyst, Power & Renewables Research
Shirley Zhang, Principal Analyst – APAC Coal Market
Contents
Slowing China’s runaway power demand
China’s manufacturers step up to the plate
China’s competitive advantage and impact on costs
How the rest of the world responds
Technology and diversification could level the playing field
Rebuilding brand China
1.
2.
3.
4.
5.
6.
Slowing China’s runaway power demand
When considering how China’s wind and solar manufacturers are changing the outlook of the global renewables sector, the obvious place to start is with its phenomenal power demand growth in 2021. Driven by stellar economic performance, the country recorded the largest absolute annual increase in power-market demand in history. At around 10% this was twice its average rate than over the preceding decade. For context, China’s annual electricity output is now more than double that of the United States of America.
While this surge in power demand has been critical to the ongoing expansion of China’s renewables manufacturing capacity, it is not expected to continue at such a pace. Chinese economic growth slowed dramatically to 4% in Q4 2021 amid a spate of coronavirus outbreaks and slump in the property market that had knock-on effects on other sectors. We now expect it to average just under 5% over the next five years, down from an average 6.7% in 2015‒19. Power demand growth will be buoyed by a faster pace of energy-system electrification, but will cool nonetheless as economic growth moderates. This will continue to support renewable capacity additions, but stave off the kind of runaway growth seen over the past year.
A more rapid energy transition would have a greater negative impact on China’s near-term economic growth. As discussed in last month’s Horizons, much of the economic impact of faster decarbonisation is front-loaded, as the productivity of clean energy sectors is lower than that of traditional sectors. Our AET-2 and AET-1.5 energy transition scenarios analyse what it will take to contain the average rise in global temperatures to 2 °C and 1.5 °C respectively by the end of this century. We estimate China’s average gross domestic product (GDP) to be 0.9% and 1.4% lower than our base-case scenario, respectively, over the next five years.
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China’s manufacturers step up to the plate
Surging electricity demand is a political headache for the leaders of the world’s largest carbon emitter. And with energy policy decisions increasingly delegated to provincial leaders, China’s local governments are facing increasing pressure to step up support for low-carbon electricity while keeping the country’s factories running.
As power demand has soared, for many, the answer has been more renewables. Since 2020, China’s installations of wind and solar have surpassed 100 GW. We have consequently raised our forecast for Chinese renewable capacity additions in the APAC Power & Renewables Service to more than 500 GW of solar and wind by 2025. Following its pledge to reach peak emissions by 2030, China announced a goal of 1,200 GW of installed wind and solar capacity by the end of the decade. With China’s solar capacity alone now expected to be just shy of 1,000 GW in 2030, this already looks conservative.
Dramatic though it is, exceeding this target will not leave the world short of the hardware it needs from China to decarbonise. China’s production of solar modules is rising faster than forecast global demand, while its wind turbine component and battery manufacturing capacity will grow by 42% and 150%, respectively, over the next two years. Even with more of this output installed domestically, the pace of manufacturing growth will comfortably allow China to deliver much of what the rest of the world needs to accelerate decarbonisation.
China’s position as the world’s dominant supplier of solar modules looks secure with over 70% of global production. And while Chinese manufacturers have not made quite such significant inroads into overseas markets for wind turbines, they still account for 50% of global manufacturing. As with solar panels, it is the scale of local demand that is underwriting production capacity growth and helping Chinese players to increase their competitiveness.
When it comes to lithium-ion battery-market share and export capacity, China’s numbers are off the charts - literally.
Conclusion:
Opportunity knocks
The past 12 months have challenged the orthodoxy of falling renewables costs just as greater investment in clean energy is underway. China is cementing its supply-chain and manufacturing dominance in these sectors with massive ongoing investment. Even with more of the products staying at home, China’s solar and wind manufacturers are increasing their ability to compete globally as the pace of decarbonisation accelerates.
There is no doubt that Chinese renewables manufacturing remains critical to both its own and the rest of the world’s efforts to reduce emissions. But this doesn’t mean others can’t compete. Global manufacturers producing larger and more efficient units with lower lifetime costs and less outages are competing against their Chinese rivals. And with governments increasingly tying clean energy agendas to investment at home, local supply chains are featuring in tenders for renewables, bringing advantages for manufacturers and project developers supporting domestic employment.
Support for continued technological innovation is also critical. A push for lower cost battery alternatives such as lithium iron phosphate (LFP) battery chemistry for example could reduce dependence on Chinese producers. Brain power isn’t in deficit: as leading US battery specialist Susan Babinec told the Wall Street Journal in a recent interview, “we’re bad-ass scientists”. But even bad-assed scientists need investments in raw material supplies and incentives for manufacturers to help drive down costs.
By advancing technology, securing access to key resources, driving up efficiency, incentivising investment through effective policy and taxonomy and, of course, partnering with Chinese companies, opportunities abound.
Get this insight as a PDF
How China’s boom year is changing the path of the energy transition
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August 2021
Impact of our AET-1.5 scenario on China’s base-case GDP
Source: Wood Mackenzie. No pain no gain: The economic consequences of accelerating the energy transition
China’s competitive advantage and impact on costs
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The sheer scale of its production capacity affords China a major competitive advantage. Despite raw-material price increases since 2020, China’s massive expansion in clean energy manufacturing and ability to scale up output has seen its manufacturing costs decrease relative to those of their global competitors. Chinese wind turbine prices fell by 24% on the year in 2021 and will drop by a further 20% in 2022.
The solar sector is more exposed to cost inflation and logistical disruptions. The cost of polysilicon, the energy-intensive material at the heart of solar power generation, nearly quadrupled in 2021, underpinning solar module price increases of 15-25%. It is not lost on the industry that China is by far the world’s dominant producer of polysilicon and, while Chinese production costs rose last year, this increase was below levels seen in the rest of the world. The Biden administration's targeted sanctions on several Chinese companies in the solar supply chain added to input price pressures for US developers in 2021. Chinese solar module prices have already shown some modest price reduction since the start of the year despite polysilicon prices remaining high.
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Alexander Whitworth
Head of Asia Pacific Power & Renewables Research
Alex is responsible for overall power and renewables research strategy in Asia. He supports solar, wind, storage and power analysts to develop insightful and high-impact analysis and reports, building team capabilities and research product strategy. Alex also engages with clients and industry leaders at key events and meetings.
Alex has over 10 years’ experience in the energy industry in China and Asia, including roles at McKinsey, GE and IHS Markit. His work experience includes provincial-level modelling of China’s power, coal and gas markets, policy analysis, power and fuel price forecasting, power project feasibility studies, and product strategy for power equipment.
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Get in touch with Yanting
Yanting Zhou
Principal Economist, APAC
Yanting leads our in-house macroeconomic research for Asian economies, working closely with commodity teams across the company to align macro views and commodity demand. She joined Wood Mackenzie in 2015 as a copper demand analyst and draws on her knowledge and experience of commodity end-use markets in China and major economies in Asia, which extends to the property, electrical network, transportation, machinery and appliance sectors.
Yanting started her career in the natural resource industry in Rio Tinto‘s Economics and Markets team, where she focused on the economic outlook for China and long-term metals demand analysis.
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Xiaoyang Li
Principal Analyst, Power & Renewables Research
Xiaoyang focuses on China’s wind power market, specifically market developments, future scenarios, supply chain dynamics and competitive strategies across the value chain. By closely monitoring industry actors, policy developments, markets and technology trends, Xiaoyang provides clients with insightful and relevant research.
Prior to joining Wood Mackenzie, Xiaoyang worked for a Sino-German solar energy manufacturer, where she accumulated valuable experience in the solar energy industry.
Missed our previous editions of Horizons? Download them here.
Global wind and solar equipment costs compared with China prices
Source: Wood Mackenzie Lens Power
We expect equipment costs to retreat in 2023 as commodity prices recede, logistical bottlenecks ease and supply-chain investments are made. China’s capacity investments and rising output will be a key part of this trend, and while the cost of capital for Chinese companies is currently higher than in the US and Europe, interest rates will rise in these markets while they have recently fallen in China. Just as China’s boom year played its part in pushing up clean energy costs for the rest of the world, China’s manufacturers are already helping to drive them down again.
David Brown, Head of Markets and Transitions, Americas
Ram Chandrasekaran, Head of Road Transport
Brian Mcintosh, Title
Note: more than 90% of the battery capacity will be used in the EV market
Source: Wood Mackenzie APAC Power & Renewables Service
China’s renewables and battery production dominance
Plastic surgery:
Reshaping the profile of the plastics industry
China’s production of solar modules is rising
faster than forecast global demand
It is not lost on the industry that China is by far the
world’s dominant producer of polysilicon
Even as its own demand for its solar and wind production rises, China’s dominance in clean energy manufacturing is causing increasing consternation for those committing to delivering emissions reductions complete with immediate and visible economic benefits.
In the US and Europe, policy and taxonomy initiatives are being rolled out to support sustainable clean energy investments and offer greater support for local manufacturers.
In the US, the current administration has just extended Trump-era tariffs that have effectively limited Chinese made solar modules accessing the US market. In addition, President Biden’s climate agenda includes extending solar investment tax credits for another 10 years and allowing the technology to take advantage of the federal production tax credit and direct payment. If passed by Congress, the tax incentives will more than offset the near-term project cost increase. The EU taxonomy is similarly aimed at helping the bloc scale up sustainable investment and implement the European Green Deal.
How the rest of the world responds
China’s dominance in clean energy manufacturing
is causing increasing consternation
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Technology and diversification could level the playing field
For many companies around the world, reducing clean energy dependence on China may be politically expedient, but is difficult to pull off.
Polysilicon is an obvious example. China has spent billions on new polysilicon production capacity. But with more than 40% of global solar grade polysilicon coming from China’s Xinjiang province, recent US sanctions applied to several Xinjiang-based clean energy companies sent shockwaves through the solar industry.
The massive deployment of clean energy is dependent on the availability of a wide range of raw materials, including aluminium, copper, nickel, lithium, cobalt, rare earths, graphite and silicon. China’s rising equity ownership and share of the production of many of these could challenge the pace of global decarbonisation, while rising compliance issues in the US and elsewhere will force more sophisticated risk assessment along value chains.
Geographical diversification looks essential for import-dependent materials, with rising calls for more action between mining companies, governments, and investors to enable supply to be built in the right way in higher-risk jurisdictions. Companies should also seek to reduce their dependency through continued technological innovation.
It is worth noting that China itself could potentially face supply disruption risks, for example for Australian lithium, as well as to Chinese-owned nickel and cobalt production in less stable regions such as the Democratic Republic of Congo. China’s domestic power shortages in 2021 also forced the temporary closure of polysilicon factories in western China, as well as some solar module plants in Guangdong.
The massive deployment of clean energy is dependent on the availability of a
wide range of raw materials
Source: Wood Mackenzie Base Metal Markets, Steel Markets, Global Coal Markets, Iron ore Markets, Battery Raw Materials Service, Rare Earths Market Service, Global PV supply chain pulse
Supply concentration map for key renewable technology raw materials
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Rising costs through 2021 may have cooled the pace of growth of renewable projects outside of China, but it is important to highlight that both solar and onshore wind projects have retained substantial cost advantages over fossil-fuel projects. As fossil-fuel prices climbed to record levels in 2021, Asia’s average total generation costs for coal and gas plants increased by 32% and 84%, respectively, making renewables cheaper by comparison. And while renewable supply-chain bottlenecks are expected to ease in 2022 and beyond, the levelised cost of electricity (LCOE) of coal power will continue to rise in tandem with carbon prices.
While China’s dominance in renewables is clear, its long-term energy transition strategy is arguably flawed by its over-dependence on wind and solar. For companies looking to compete in clean energy it is important to note that China is far from a global leader in several of the sectors that will be equally critical to reducing emissions, including carbon capture and low-carbon hydrogen. Looking further forwards, emerging technologies such as next-generation fuels offer further opportunities go gain competitive advantage.
Coronavirus, political tensions and rising insecurity over China's dominance of global supply chains have put Beijing on the back foot as it seeks to build its image as a responsible superpower. For China’s clean energy manufacturers, this has led to something of a branding crisis.
For China, the energy transition should be a golden PR opportunity. Accelerating efforts to tackle its own emissions while supporting global decarbonisation sounds like an irresistible proposition. But as China’s share of the global clean energy industry increases, the sector is already a focus of political dispute with strategic competitors. Western politicians promising economic revival and ‘jobs for all’ through clean energy point to China as the major risk.
China is now looking to counter this. Chinese clean energy manufacturers are actively investing overseas to avoid both anti-China sentiment and the barriers to market entry that increasingly come with the ‘Made in China’ label. China is also greening its massive Belt and Road Initiative, ending coal-fired plant investment overseas and channelling more capital into renewables (made by Chinese companies, of course). The rising cost of financing coal plants, carbon price risks and the growing competitiveness of solar and wind may be the economic drivers, but ditching coal brings PR success.
Rebuilding brand China
For China, the energy transition should be a
golden PR opportunity
Back to top
How China’s boom year is changing the path of the energy transition
The energy crisis shows little sign of loosening its grip and the world feels a long way from the low-carbon, low-cost energy future heralded by governments at COP26.
Just getting close to halving current emissions will require a huge step-up in wind and solar capacity in a very short space of time – and that will be pricey. Hundreds of billions of dollars of additional financing are needed and renewables are attracting the lion’s share of near-term investment.
Solar and wind costs have tumbled over the past decade as manufacturing capacity has exploded, but 2021 quashed any hopes of a continuous decline in renewable costs. Global solar module prices rose by as much as a quarter last year, while wind turbine prices grew 10-15%. Battery costs will rise in 2022 for the first time in a decade.
Record commodity and transport costs, raw-material supply constraints and logistical bottlenecks are the culprits, but don’t tell the whole story. For that, we must look to China.
Where others have struggled, China’s renewables manufacturers have emerged from 2021 bigger and more competitive than ever before. Driven by phenomenal growth in power demand, Chinese manufacturers are now operating at warp speed. Building more, faster and cheaper than anyone else, China has become the Ikea of the energy transition.
Countries announcing more ambitious 2030 emissions targets on the promise of jobs and prosperity should be cautious. Achieving this without greater dependence on China looks harder than ever as its manufacturers expand capacity and drive down costs.
Partly in response to China’s dominant position, the US and Europe have introduced policy and taxonomy initiatives designed to put the spotlight on the sustainability of clean energy investments and to offer greater support for local manufacturers. But competing with China will require more than tax breaks and stricter market-entry regulations.
In this February edition of Horizons, we identify six key themes that will determine how China’s solar and wind manufacturers will impact the course of the global renewables market and how countries and companies can respond.
Conclusion:
Opportunity knocks
The past 12 months have challenged the orthodoxy of falling renewables costs just as greater investment in clean energy is underway. China is cementing its supply-chain and manufacturing dominance in these sectors with massive ongoing investment. Even with more of the products staying at home, China’s solar and wind manufacturers are increasing their ability to compete globally as the pace of decarbonisation accelerates.
There is no doubt that Chinese renewables manufacturing remains critical to both its own and the rest of the world’s efforts to reduce emissions. But this doesn’t mean others can’t compete. Global manufacturers producing larger and more efficient units with lower lifetime costs and less outages are competing against their Chinese rivals. And with governments increasingly tying clean energy agendas to investment at home, local supply chains are featuring in tenders for renewables, bringing advantages for manufacturers and project developers supporting domestic employment.
Continued technological innovation is also critical. A push for lower cost battery alternatives such as lithium iron phosphate (LFP battery chemistry for example could reduce dependence on Chinese producers. To paraphrase leading US battery specialist Susan Babinec, “we’re bad ass scientists”.
By advancing technology, securing access to key resources, driving up efficiency, incentivising investment through effective policy and taxonomy and, of course, partnering with Chinese companies, opportunities abound.
Shirley Zhang
Principal Analyst – APAC Coal Market
Shirley is a principal analyst with more than 10 years of experience in metals and mining industry research. She joined Wood Mackenzie in 2012 and is responsible for the Asia Pacific thermal coal markets analysis. Her current research focus is the impact of economic development, energy transition and policy intervention on different coal markets in Asia.
Shirley is a frequent speaker at regional mining conferences and has presented strategic analysis at clients’ board meetings in the region.
Prior to joining Wood Mackenzie, Shirley was an equity research analyst covering Hong Kong/China-listed coal, steel and metal recycling stocks. She also worked for a financial consulting firm based in London.
Join the debate.
Get in touch with Shirley
Join the debate.
Get in touch with Alexander
Alexander Whitworth
Head of Asia Pacific Power & Renewables Research
Alex is responsible for overall power and renewables research strategy in Asia. He supports solar, wind, storage and power analysts to develop insightful and high-impact analysis and reports, building team capabilities and research product strategy. Alex also engages with clients and industry leaders at key events and meetings.
Alex has over 10 years’ experience in the energy industry in China and Asia, including roles at McKinsey, GE and IHS Markit. His work experience includes provincial-level modelling of China’s power, coal and gas markets, policy analysis, power and fuel price forecasting, power project feasibility studies, and product strategy for power equipment.
Join the debate.
Get in touch with Yanting
Yanting Zhou
Principal Economist, APAC
Yanting leads our in-house macroeconomic research for Asian economies, working closely with commodity teams across the company to align macro views and commodity demand. She joined Wood Mackenzie in 2015 as a copper demand analyst and draws on her knowledge and experience of commodity end-use markets in China and major economies in Asia, which extends to the property, electrical network, transportation, machinery and appliance sectors.
Yanting started her career in the natural resource industry in Rio Tinto‘s Economics and Markets team, where she focused on the economic outlook for China and long-term metals demand analysis.
Just getting close to halving current emissions will require a
huge step-up in wind and solar capacity in a very short space of time
- and that will be pricey
Jan 2022
No Pain no gain: The economic consequences of accelerating the energy transition
Dec 2021
Back to the future: the Horizons year in review
Nov 2021
Plastic surgery: reshaping the profile of the plastics industry
Oct 2021
The blue green planet: How hydrogen can transform the global energy trade
Sept 2021
One giant leap: President Biden's vision for repowering America
Aug 2021
Commit and collaborate: squaring the carbon circle for oil & gas
July 2021
Champagne supercycle: taking the fizz out of the commodity boom
Jun 2021
Location, location, location: the key to carbon disposal
May 2021
Swimming upstream: a survivor's guide
April 2021
Reversal of fortune: oil and gas prices in a 2-degree world
Mar 2021
Tectonic shift: China’s world-changing push for energy independence
Feb 2021
Fast and Furious: Europe's race to slash emissions by 2030
Jan 2021
Total eclipse: how falling costs will secure solar’s dominance in power
