China’s bull run keeps it top dog in renewables

China just re-wrote the global energy record book. Driven by the country’s surging economic growth, 2021 saw China record the largest ever absolute annual increase in electricity demand by any country in history. To help supply this, Chinese coal consumption hit an all-time high and China overtook Japan to become the world’s largest LNG importer. And while no other country came close to its renewables capacity additions in 2021, China also saw its annual carbon emissions rise to the highest level yet.

China’s record-breaking year inevitably played its part in the energy crisis. Efforts to meet rising domestic demand contributed to global market tightness and surging prices across all energy and natural resources. But when it comes to China’s impact on the unexpected increase in the cost of renewables in 2021, the story is more nuanced.

After years of decline, global solar module prices rose by as much as a quarter last year, while wind turbine prices grew by up to 15%. This has led to some developers in the US delaying investment as margins weakened. Meanwhile, China’s renewables manufacturers emerged from 2021 bigger and more competitive than ever before, with production levels at (you guessed it) record levels.

What has driven China’s phenomenal investment in renewables manufacturing? How sustainable is this? And can the rest of the world respond? To find out, I spoke to the team behind our latest Horizons report ‘Power play: How China’s boom year changed the course of the energy transition’.

Why has China gone all-in on renewables?

China’s decade-long push for clean energy supply chain and manufacturing dominance is well documented. Nobody does low-cost manufacturing better, and accounting for over 70% of global solar module production and 50% of wind turbine components, China’s position was already assured. But driven by its record-breaking power demand growth last year, China’s clean energy sectors shifted to warp speed.

How sustainable is this?

Soaring power demand in 2021 was undoubtedly a major driver in the accelerated expansion of China’s renewables manufacturing, but the pace of electricity demand growth just faltered. Chinese economic growth slowed dramatically to 4% in Q4 last year and we now expect it to average just under 5% over the next five years. Power demand growth will still benefit from a faster pace of electrification, but we won’t see it back in double digits.

Nonetheless, rising government support for solar and wind has led us to raise our forecast for Chinese solar and wind capacity additions to more than 500 GW by 2025. Official targets already look seriously undercooked.

But the rest of the world needn’t panic. China’s solar module production capacity is rising faster than global demand, while its wind component manufacturing capacity will increase by around 40% over the next two years. If the world wants it, China can supply it.

How has China managed to achieve this?

The sheer scale of its production gives China a major competitive advantage. Even as raw material prices have climbed, China’s massive scaling-up in output has seen its manufacturing costs decrease relative to those of its competitors.

Chinese wind turbine prices fell by 24% on the year in 2021 and will drop by a further 20% in 2022. Solar is more exposed to cost inflation. The cost of polysilicon, critical to solar power generation, nearly quadrupled in 2021 and underpinned solar module price inflation. With over 40% of global solar-grade polysilicon currently coming from China’s Xinjiang province, targeted US sanctions on several companies in that province involved in solar supply chain manufacturing have added to input price pressures for US developers.  

How is the rest of the world responding?

China’s dominance in clean energy manufacturing is a political headache for many western governments. Politicians promising economic revival and ‘jobs for all’ can’t risk seeing most of the economic benefits transferring to China.

In part due to China’s dominant position, Europe and the US have introduced policy and taxonomy initiatives to shine the spotlight on the sustainability of clean energy investments and to offer greater investment support for local manufacturers.  

Can others compete with China?

Tax breaks and stricter market-entry regulations can help, but governments and companies need to go further to compete with China. Greater innovation, improved access to key metals essential to the energy transition and incentives for start-ups are needed.

A degree of pragmatism is also required. Eliminating all China-made components from the supply chain is extremely challenging. And a solar panel or a wind turbine component is just one part of the total package: the benefits of domestic investment in steel and concrete, design, construction, labour and permitting will all remain within the local economy. In addition, faced with something of a brand crisis, Chinese clean energy manufacturers are actively investing overseas to avoid barriers to market entry.

China is clearly cementing its manufacturing dominance in solar and wind through massive ongoing investment, but this doesn’t slam the door on competitors. As lead author Alex Whitworth concludes in this month’s Horizons report, “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.”

APAC Energy Buzz is a weekly blog by Wood Mackenzie Asia Pacific Vice Chair, Gavin Thompson. In his blog, Gavin shares the sights and sounds of what’s trending in the region and what’s weighing on business leaders’ minds.