The European Union wants to ally with the sun to boost energy security and meet climate goals but soaring prices for essential raw materials could thwart those plans.
Keen to cut its dependency on Russian fossil fuel imports, the European Commission, the EU’s executive arm, presented in May a strategy to double the 27-member bloc’s solar generation capacity by 2025 and almost quadruple it by 2030 to reach 600 gigawatts. It described solar energy as “the kingpin” of these efforts.
Inflation and Covid supply disruptions are triggering price increases across the global economy. The solar market acutely illustrates this phenomenon due to rapidly growing demand for solar panels, whose supply chain is largely reliant upon China.
Polysilicon, the main raw material for producing solar cells that mostly comes from China, tripled in price over the last year and a half, according to an analysis from consultancy Wood Mackenzie. The prices for other raw materials needed in solar panels, such as steel or aluminum, have begun decreasing slightly in the last month, but they are still considerably above their 2019 levels.
Source: Wood Mackenzie • Prices do not show dollar values but are indexed from January 2020 with the starting unit 100
The increase in raw material prices is having a ripple effect on other parts of the supply chain like installations, which risks delaying projects, said Theo Theodorou, Wood Mackenzie senior research analyst.
“This is something Europe needs to have in mind,” said Theodorou. “How to navigate this high-cost environment—and it won’t be plain sailing.”
Polysilicon makes up about 4% of the weight of a solar module (the building block of solar panels), but it accounts for about a quarter of the raw materials’ embedded costs, he said. The jump in polysilicon prices also pushed solar module prices up by more than 20%.
Jochen Hauff, director of corporate strategy, energy policy and sustainability at BayWa r.e., a global renewable energy developer, service provider and distributor, said higher electricity prices—a separate but related challenge the EU is facing—have allowed his company to mitigate some of these higher costs by charging corporate customers more through power purchase agreements. PPAs are contracts in which a business agrees to purchase electricity directly from a renewable energy generator.
“So far, the price increases that we need to pass on to our customers [are] well within their willingness to pay,” said Hauff, who is also vice president of the board of directors at SolarPower Europe, the solar industry’s lobby group in Brussels. If prices go unchecked for a longer time, it could slow the industry's growth, he added.
Raw material prices have spiked before, but “now we also have a never-seen-before demand of renewables,” Hauff said.
The EU’s lack of a solar manufacturing chain—a scenario also plaguing the United States—makes this global race for solar panels even more challenging.
Here’s a breakdown of a how a solar panel is made: Polysilicon is melted and then shaped to form ingots, which are cut into wafers and processed to create solar cells. Several dozen solar cells put together form a solar module. One or several modules comprise a solar panel.
The EU has a small and fractured manufacturing capacity across this chain. It can produce 23.2 gigawatts of polysilicon per year, but it has only 1.7 GW capacity to make ingots and wafers, 0.8 GW capacity to make solar cells and 8.1 GW capacity for modules, according to SolarPower Europe.
This means it must export almost all the polysilicon it produces to China, the manufacturing powerhouse, which then processes the polysilicon and provides the EU with 75% to 80% of the modules it needs.
Overall, China’s share in all the key manufacturing stages of solar panels exceeds 80% and is set to rise to more than 95% in the coming years for key elements such as polysilicon. That’s based on current manufacturing capacity under construction, according to a July 7 report from the International Energy Agency. (See our bonus Data Dive below for more.)
This additional polysilicon production capacity, set to come online in 2023, is expected to ease the current upswing in prices.
That’s good for combatting climate change, but it underscores the world’s dependence on China for clean energy materials. Experts worry such dependence is becoming a greater risk as use of clean energy grows—like Europe’s dependence on Russian gas today.
For its part, the United States has fought to stem this tide by placing tariffs on Chinese-made solar materials, but that hasn’t prompted a large domestic manufacturing base.
Setting up a new supply chain is always costly early on, which will make it challenging for the EU to compete with China in module prices, said Theodorou. “But they need to do it.”
Innovation to improve the efficiency of solar cells could help Europe lessen its supply chain challenges, said Christophe Lits, market analyst at SolarPower Europe.
The EU added more than 18 GW of new solar capacity in 2020, but it will need to add about 45 GW per year throughout this decade to meet its ambitious solar power goals. Solar is the fastest growing renewable energy source globally.
To create a domestic supply chain that could meet that demand, the EU would have to produce three times more polysilicon, 20 times more wafers, 42 times more cells and six times more modules, according to the Wood Mackenzie analysis.
The EU solar manufacturing industry, backed by the Commission, wants to scale up its capacity to 20 GW at each step of the value chain by 2025, an initiative estimated to require more than €8 billion in investments.
Amy’s take: A clear take on the basic concept that in climate tech, it’s almost always “and” not “either/or.”
White House weighs in on Lower Snake River dam breaching in unusual power play: The Seattle Times
Amy’s take: This underscores the national importance of this local challenge (and a topic Cipher covered a few weeks ago). The administration was careful not to take an official position, but at some point, it must.
Quitting Oil Income Is Hard, Even for States That Want Climate Action: The New York Times
Amy’s take: Such an important story. I would like to learn more about to what degree the renewable energy industry is embracing taxes to help challenges like this.
Brussels faces lawsuits, investor pushback over green label for gas and nuclear: POLITICO
Anca’s take: This is probably one of the most contentious decisions in the European Union this year. One big question reverberating across Brussels is what impact this will have on green finance taxonomies other parts of the world are developing.
EU lawmakers back mandatory use of green jet fuel from 2025: Reuters
Amy’s take: Mandates like this will be important levers for change. Stay tuned for a story on cleaning up the aviation sector!
Households could get £350 cut to their energy bill if communities agree to wind farm nearby under new plan to boost number of turbines: Daily Mail
Amy’s take: Smart idea given the challenges in this area, but you must make sure it doesn’t look like you’re just buying people’s support—despite it looking just like that!
France to Nationalize Debt-Laden EDF as Energy Crisis Mounts: Bloomberg
Anca’s take: Another example of how energy security is weakening in Europe. “The plan is also a sign that European governments may increasingly be forced to protect their energy companies from the turmoil Russia’s war has caused.”
Amy’s take: This should be a clarion call for more data and technologies aimed at monitoring and reducing potential hydrogen leaks. It shouldn’t be a call to end all exploration of hydrogen. It’s still displacing a more polluting source.
More of what we're reading:
EU Lawmakers Ramp Up Push to Cut Energy Demand This Decade — Bloomberg
Poland's KGHM says small reactors may cost $2 billion to build — Reuters
Major construction firms team up to get the carbon out of concrete — Canary Media
How green steel made with electricity could clean up a dirty industry — MIT Technology Review
Fleetzero begins its search for the first giant ship to convert to battery power — TechCrunch
China has increasingly dominated the market for polysilicon, the essential ingredient in solar panels, over the last dozen years.
Although crediting China with being “instrumental” to bringing down the costs for solar photovoltaics (PV), IEA Executive Director Fatih Birol said other countries also must establish their own manufacturing bases.
“Solar PV’s global supply chains will need to be scaled up in a way that ensures they are resilient, affordable and sustainable.” Birol said about the IEA’s new report on the topic.
AND FINALLY...
Trying to get better at recycling
This is a montage of the dos and don’ts of a recycling service, Ridwell, which I signed up for the other day. The energy angle is subtle but significant: Oil is the primary feedstock for plastic. If we can’t get recycling right, which is waste we touch and deal with daily, how the heck are we going to tackle climate change that’s invisible to the naked eye? I’m excited to learn how to recycle better—not because I think it will (necessarily) make a difference on its own, but because it helps me learn about the systemic and physical reasons holding us back from better waste management.
Each week we feature a photo that is somehow related to energy, the thing we all need but don’t notice until it’s expensive or gone. Email your ideas and photos to news@ciphernews.com.
