By Chen Xi

China has long been the dominant player in the global photovoltaic industry supply pattern. With the ongoing Russia-Ukraine conflict and Europe's swift energy transition, the European Union's reliance on photovoltaic imports from China has been on the rise. This development has sparked a growing demand within the EU to expedite the establishment of a domestic photovoltaic industry chain.

In May 2022, the European Commission unveiled the "EU Solar Strategy", aiming to achieve a cumulative solar photovoltaic installed capacity of 320GW by 2025 and 600GW by 2030. Subsequently, in December 2022, the European Commission launched the European Solar PV Industry Alliance, providing support for renewable energy permits and financing to establish a comprehensive solar photovoltaic industry and value chain within the EU, reducing reliance on external sources. On March 14, 2023, the European Commission introduced the " Net Zero Industry Act", emphasizing the significance of developing the European photovoltaic industry. The Act sets a target for the EU's solar photovoltaic manufacturing capacity to meet at least 40% of the annual deployment demand for solar photovoltaic within the union by 2030.

The recent series of incentive programs launched by the European Union indicates its unwavering commitment to promoting the reshoring of photovoltaic manufacturing to Europe. The EU is determined to shift from being a net importer of clean energy technologies to becoming self-reliant and even a net exporter in this sector. Undoubtedly, this will significantly affect the currently dominant Chinese solar photovoltaic and battery industries in the global market. As a result, we must closely monitor the potential impact of the EU's "Independent Plan" on China's photovoltaic industry and its economy. It is crucial to proactively devise response measures concerning policy tools, technological standards, trade, and investment regulations well in advance.

The future growth of China's photovoltaic trade exports may face suppression

Constructing a complete domestic solar photovoltaic industry chain is a time-consuming process. In the near term, with the implementation of the European Union's "Independent Plan," there will be a gradual elevation of "green thresholds" between China and the EU. Consequently, this will raise the export costs of Chinese photovoltaic products, aiming to dampen the future export growth of China's photovoltaic trade.

Chinese photovoltaic products dominate the global market with a share of over 80%, making them a crucial component of China's exports. By the end of 2022, the total export value of Chinese photovoltaic products exceeded $51.25 billion, exhibiting an impressive year-on-year growth rate of 80.3%, the second highest in history after the remarkable performance in 2021. Notably, Europe remains the primary export destination, accounting for approximately 54.8% of China's annual photovoltaic component exports, with a growth rate that has doubled compared to the previous year. This trend has solidified China's photovoltaic exports to Europe as a vital pillar supporting stable foreign trade and stimulating economic growth over the past two years.

However, to promote the development of the domestic photovoltaic industry chain, the European Union has moved beyond traditional trade policies like tariffs. They have established various "green thresholds" for Chinese photovoltaic export products, encompassing eco-design, energy efficiency labels, carbon footprint labels, and green public procurement, among others. According to a report by Solar Energy, in May 2023, researchers from the European Commission have devised a novel method to quantify the carbon footprint of photovoltaic modules. This method will be incorporated into the EU's ecological environmental impact regulatory rules, such as the "EU Ecodesign Directive." If the European Commission's plan is successfully executed, it will require certain Chinese products to meet the EU's prescribed standards for entry into the European market.

China's photovoltaic industry chain is confronted with more significant challenges in its efforts for upgrading and development

The complexity and stringent technical standards of the "green thresholds" implemented/planned by the European Commission present significant challenges to the advancement and growth of China's photovoltaic industry chain.

For instance, the primary sources of carbon emissions in the lifecycle of photovoltaic components are the energy-intensive production processes involving silicon materials, wafers, and solar cells. Within the photovoltaic industry, electricity consumption plays a significant role as the leading carbon emission factor. Currently, certain EU member states like France, Italy, and Spain require the provision of product carbon footprint information in public procurement of photovoltaic components. However, due to the delay in updating China's electricity emission factors, accurately assessing the grid emission factors for carbon emissions of Chinese photovoltaic products becomes challenging in international bid calculations. Consequently, under comparable conditions, Chinese photovoltaic products may appear to have higher carbon emission figures, even though their overall carbon footprint is typically lower. This impact extends beyond primary photovoltaic manufacturers and affects auxiliary material suppliers producing solar aluminium frames, backboards, glass, and related products. Moreover, it is essential to note that while some Chinese photovoltaic industry-related companies have started focusing on product carbon footprint information and obtained relevant certifications from third-party entities, the presence of diverse certification agencies hampers the recognition of such certifications as authoritative in the European market. As a result, they face challenges in obtaining a green passport for market access.

Emerging challenges in the overseas expansion of Chinese photovoltaic companies

In the long term, with the European Union's increasing demand for localized production in the photovoltaic industry and the rise of industry subsidies, there might be a surge of investments and construction of factories by Chinese clean technology companies in Europe. However, the recent release of the "Notice on Seeking Public Opinions on the Revision of 'China's Export Prohibition and Restriction of Export Technology Catalog'" (referred to as the "Catalog" (draft for public opinions)) by the Ministry of Commerce could potentially affect the overseas expansion strategies of Chinese photovoltaic companies.

In recent years, geopolitical factors such as the Russia-Ukraine conflict have led to a shift in global economic integration towards "restructuring supply chains based on values," and the photovoltaic industry chain is experiencing this transformation as well. The European Union's recent efforts to localize the photovoltaic industry will undoubtedly create barriers for Chinese photovoltaic products seeking access to the European market. To maintain its global leadership and high market share, China's photovoltaic processing industry must transition from global product trade to global product processing.

However, on December 30, 2022, the Chinese Ministry of Commerce and other departments released the "Catalogue" (draft for public opinions), which proposes to prohibit 24 technology exports and restrict 115 technology exports, including photovoltaic technologies for the first time. This includes technologies related to large-sized silicon wafers, black silicon preparation, ultra-efficient casting of monocrystalline/polycrystalline wafers, and other photovoltaic silicon wafer preparation technologies. The objective of this measure is to safeguard China's photovoltaic technology, and while it may have a relatively minor impact on the domestic photovoltaic industry, it could potentially affect China's leading photovoltaic companies and component manufacturers that have plans to establish factories overseas (in Europe) in the future, thus influencing the global layout of China's photovoltaic product processing.

Recommendations regarding the potential impacts mentioned above

Firstly, the government could proactively encourage and support China's leading photovoltaic enterprises to prepare in advance for the European Union's "green thresholds," with the aim of minimising the impact of green barriers on China's photovoltaic trade. This can be achieved by maximizing the domestic retention of raw materials (such as aluminium and industrial silicon) to provide the photovoltaic industry with access to relatively affordable raw materials. In addition, it is crucial for China to urgently establish an internationally recognized and standardized database, ensuring the prompt and accurate update of electricity emission factors. By coordinating the entire industry chain, China can accurately calculate the carbon emissions of photovoltaic products throughout their lifecycle, thereby gaining control over vital carbon emissions data related to photovoltaic products.

Secondly, proactive efforts should be made to develop a robust method for calculating the carbon footprint of photovoltaic products and enhance the database. Promote collaboration and alignment between China and the European Union on the methodology and mutual recognition of carbon footprint standards for photovoltaic products. To achieve this, it is essential to commence at the national level by organizing the establishment of domestic standards for assessing and certifying the carbon footprint of photovoltaic products. This should involve setting unified calculation standards for products of the same type, defining the objects and scope boundaries, and implementing efficient data collection, processing, calculation, and reporting procedures for product carbon footprints. Moreover, standardizing the certification process is imperative. Open and active communication channels with the EU and its member states are crucial to foster mutual recognition of domestic product accounting methods and databases. Regular updates and timely notifications of database factors should be shared to ensure transparency and reliability. China should take the lead in calculating the carbon footprint of its export products to maintain a proactive stance in this area.

Thirdly, China should capitalize on its current global leadership in the photovoltaic industry and take the initiative in establishing global industry directions and regulations. A strategic global expansion is essential to maintain a competitive edge in the global market. While addressing the challenges posed by the European Union's "Independent Plan," the Chinese photovoltaic industry must also navigate obstacles presented by the United States' "Inflation Reduction Act." In light of this situation, Chinese photovoltaic companies should consider early expansion into Europe. Under the "Inflation Reduction Act," the United States will not retrospectively investigate the registration location of parent companies. As a result, having factories (production capacity) in Europe or Southeast Asia enables these companies to bypass the restrictions outlined in the "Net Zero Industry Act," which limit the market share of products from a specific country in the European market to no more than 65%.

Last but not least, China should carefully consider the timing of implementing the " China's Export Prohibition and Restriction of Export Technology Catalog", especially regarding the "restriction on the export of photovoltaic silicon wafer preparation technology." Since the notification was issued by the Ministry of Commerce and the Ministry of Science and Technology, several international companies have already started exploring alternative solutions to replace Chinese technology. These companies are collaborating with well-established European and American counterparts to investigate resuming equipment manufacturing for wafer slicing and expanding photovoltaic rod and wafer production capacity. Therefore, China needs to find a balance between safeguarding its photovoltaic technology and expanding its presence in global markets. Strengthening control over the global photovoltaic industry chain and enhancing domestic manufacturing capabilities will be crucial to achieving this equilibrium.

Currently, China's photovoltaic industry has already established the most comprehensive supporting environment and supply chain system worldwide. However, the European Union's growing focus on its own green industries is leading to heightened international competition in photovoltaic manufacturing. As the global photovoltaic supply chain diversifies in the future, it will undoubtedly have a significant impact and present challenges to China's photovoltaic industry. It is essential to proactively formulate response measures in terms of policy instruments, technical standards, trade, and investment rules to strengthen China's global competitiveness in the photovoltaic field and prepare for potential challenges.

Chen Xi is a Research Fellow at CEIBS Lujiazui International Institute of Finance (CLIIF).