The world’s race to net-zero emissions has ignited an unparalleled opportunity for growth and innovation in the solar Photovoltaics (PV) market. By 2030, the world will need a staggering 5,000 GW of installed PV capacity, a sixfold increase from today’s capacity of 850 GW.
This vast market potential necessitates bold action on the part of businesses, governments, and investors. We anticipate that the United States, equipped with the Inflation Reduction Act (IRA), will challenge existing Chinese market dominance and spearhead a significant market share grab to satisfy unsatiated US and global demand for best-in-class PV panels. For dedicated stakeholders, this offers an unparalleled opportunity to achieve attractive returns on investment. We also expect to see many western countries and regions following suit (such as Canada and the European Union), many of which have recently announced support plans to shore up the domestic production of solar PV.
The global PV manufacturing landscape today
The current worldwide installed solar PV capacity stands at around 850 GW, with the vast majority of production led by Chinese manufacturers who control 80% of global module production.[1] 8 out of the top 10 PV manufacturers in the world are based in China, including companies such as LONGi, JA Solar, Trina Solar, Jinko Solar, and Suntech.[2]Just in the US, for example, of the 20 GW installed in 2022, over 75% of solar panels were imported from China.[3]
While the dominance of Chinese manufacturers has been instrumental in driving down prices and making solar energy more accessible, the heavy reliance on a single country for PV manufacturing has raised concerns about supply chain dependency, quality and market concentration.[4]
In response, countries like the United States are exploring new strategies, exemplified by the Biden Administration’s Inflation Reduction Act 2022. The Inflation Reduction Act (IRA) essentially doubles the cash-generative capacity of a PV plant (pushing EBITDA to up to 50% vs. typical 20-25%). Add to this off-takers pre-booking capacity (i.e., pre-selling years of production capacity ahead of time), and high capex projects are very much de-risked.
Key market trends & future needs
To achieve net zero, the world needs an astonishing 5,000 GW of installed capacity, resulting in a significant demand-supply gap of around 4,200 GW that must be filled by the year 2030. Based on industry benchmarks of selling price per watt, this 4,200 GW gap translates into an astonishing c.$1.5tr market opportunity.
Existing industry players will address some of this gap. Still, new entrants will have to supply the majority because the current annual production capacity can only produce about 200 GW per year, which means that by 2030, the world will only be able to meet half of its PV needs.[5]
This presents an opportunity for committed stakeholders and public-private partnerships (PPPs) to participate in the energy transition by engaging in viable, proven projects that offer attractive returns.
The US is well-positioned to lead the challenge against Chinese dominance in solar PV manufacturing
The United States is in a prime position to capitalise on the robust and unmet demand for superior solar panels across the US, North America, and Europe. The US boasts a supportive political and regulatory framework that promotes the growth and advancement of the industry.[6] [7] US-based manufacturers also have a competitive edge due to their strict adherence to quality control regulations and environmental standards, resulting in the production of higher-quality panels that have an extended lifespan.
In addition, relatively few dominant American players in the global solar market exist. Only First Solar, the largest PV manufacturer in the US, ranks among the top 10 global PV manufacturers. Even then, their current annual production capacity of 8-10GW is insufficient to garner a significant market share. It represents only a fraction of the demand-supply gap needed to achieve net zero.[8]
There is a significant opportunity for domestic production in the US, driven by industry trends such as the need to reduce dependence on international supply chains and the growing demand for solar installations. Yet, in 2022, the USA only saw an increase of 20 GW in solar installations, far below the 100 GW annual production capacity required by 2028. Assuming manufacturers produced approximately 75% of the 20 GW, this implies an almost 20-fold growth in domestic production capacity by 2028.
Incumbents like First Solar will fulfil some of this production, but a large portion of the market share will still be available for new entrants. And this is based on supplying the US domestic market only. If we expand the addressable market to include North America and Europe, a much larger market is available for new entrants.
End-to-end PV-integrated solar manufacturing will shift to the US
We’ve touched on the looming move of PV manufacturing onto the shores of the US. However, to be more specific, we anticipate a shift of end-to-end integrated PV solar manufacturing to the US due to unit economics that make more sense with the Inflation Reduction Act (2022).
Solar PV manufacturing involves several key stages: Polysilicon, Ingots, Wafers, Cells, and the final PV Panel/Module. With an end-to-end integrated PV solar manufacturing plant, all value chain segments are produced in-house, removing the need to import semi-finished goods like Ingots and Wafers from external sources. As a result, dependence on external supply chains for work-in-progress goods is significantly reduced, with the only potential dependency on basic raw materials like Quartz and Silver if they are unavailable locally.
According to our understanding and internal estimates (which do not constitute professional legal advice), the Inflation Reduction Act (IRA) provides tax incentives to solar manufacturing companies based on their production volumes in Watts, proportional to the value chain manufactured in the US. Therefore, a fully integrated PV manufacturing plant that produces the entire value chain from Polysilicon to the solar module will be eligible for the highest tax incentives available, resulting in improved unit economics compared to a non-integrated plant.
According to our internal estimates, a fully integrated PV manufacturing plant could receive tax incentives of up to $0.15-0.16 per watt. Here’s a rough breakdown of the unit economics (based on comparables – First Solar)
- Investment: $300-$400m per GW[9]
- Revenues: $0.35-$0.40 per watt[10]
- EBITDA margins of 20-25% (pre-IRA)
- The possible tax incentive amounts to roughly 40% of the selling price of a solar panel watt.
With First Solar’s $1bn investment commitment into a new vertically integrated, 3GW solar panel factory in Alabama, we are already starting to see corporations and manufacturers tap into the Inflation Reduction Act. Even so, the market potential is vast, and there’s still significant room for new entrants to capture market share. This will be music to the ears of state governments throughout the US as it will create numerous jobs in sunrise industries like this one.
Another advantage of favourable unit economics is the potential for pre-selling years of production capacity to PV off-takers, which can translate into guaranteed revenues for investors and financial sponsors. This primarily results from the vast demand-supply gap that makes it impossible for current production capacities alone to help meet the 2030 net zero goals.
We are already seeing this happen in real time. For example, a newly formed solar consortium of PV project developers, including AES, Clearway Energy Group, Cypress Creek Renewables, and D.E. Shaw Renewable Investments, has committed to purchasing 7GW of USA-made solar panels annually.[11] They have launched a competitive Request for Proposal (RfP) for qualified manufacturers that can commit to a long-term partnership to supply up to 7GW solar modules per year starting in 2024.
With the high demand for solar PV panels, we anticipate more of these types of developments, leading to the pre-selling of years of production for PV manufacturing.
Expect Canada and the European Union to join the mix
The USA took the lead with a massive support programme that will strengthen manufacturing in USA, but also promote the role of western players in the global PV manufacturing landscape. Will other Western governments join the dance? Recent policy developments suggest so.
In response to the Inflation Reduction Act, we recently saw votes of large economic support programmes in Canada, in particular the $80bn Canada Clean Energy Plan announced by Chrystia Freeland, Canada’s deputy prime minister and minister of finance.
This would see $60bn in clean energy tax credits, and $20bn in sustainable infrastructure investments. The budget proposes a 15% refundable tax credit for investments including non-emitting electricity generation systems, such as solar.[12]
On the other side of the pond (Atlantic), there are indications of an ‘EU IRA’ in the works. In her speech to the World Economic Forum in Davos in January this year, President Ursula von der Leyen and the European Commission proposed the EU Green Deal Industrial Plan (GDIP)[13] , aimed at enhancing the competitiveness of Europe’s net-zero industry transition.
Currently, specific details have yet to be released, and while it does not quite mention tax incentives like its US and Canadian counterparts, it seems to be heading towards the same direction. The GDIP comprises a series of legislative frameworks including a Net-Zero Industry Act that will be complemented by the Critical Raw materials Act aimed at supporting manufacturing of key clean tech technologies. There are also plans to reform the electricity market design, as well as facilitating the use of existing EU funds for financing clean tech innovation, manufacturing and deployment to meet the bloc’s climate targets.
While the USA has taken the lead, Canada and Europe are not too far away.
Investing in solar manufacturing is a win-win for governments and private investors
With the shift towards renewables and net zero becoming ever more urgent, the solar manufacturing industry presents an invaluable opportunity for governments and private investors to participate in the energy transition and positively impact local economies by creating jobs and fostering climate tech hubs – all while realising attractive returns.
Although the investment required for a new PV manufacturing plant is more significant than many other investments (e.g., a Series B round for a growth company), the benefits for stakeholders able to look past this ‘hurdle’ are significant and long-lasting.
To meet the world’s net-zero targets by 2030, there will be a growing need and demand for solar panels that grossly outstrips the current production supply. There is a window of opportunity, bolstered by government support programs in the West that investors and stakeholders should and must take advantage of. The time to do that is now.
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