Asia-Pacific

In the Court of the ‘King of Electricity’

Nicole Vettise, Institutional Portfolio Manager, Franklin Templeton Emerging Markets Equity, highlights the challenges and opportunities of solar energy in China.

Technological disruptions continue to transform society around the world and in a multitude of ways. Emerging markets (EM) have embraced such technological innovations and in certain industries, leapfrogging developed markets in some instances. In doing so, they are driving economic growth and present compelling new investment opportunities for asset owners. One such opportunity sits right above our heads – solar.

The sun is a remarkable source of energy. Every 90 minutes it produces enough energy to power all of humanity’s needs for an entire year. However, cost and conversion inefficiencies – the amount of power generated from a given amount of sunlight – mean that, until now, only a fraction of sunlight has been effectively harnessed and distributed.

However, advancements in technology and innovation are allowing more sunlight to be converted into energy, and the scope for future growth is considerable. That being said, there are challenges for the implementation of solar energy, namely geopolitical risks and energy consumption levels during the production process.

Two key challenges

One aspect of solar that has deterred investors in the past is policy risk. For example, the Biden administration imposed trade bans on five Chinese entities over forced labour allegations in Xinjiang, including a ban on imports from a key solar panel material from Chinese-based Hoshine Silicon Industry Co. Cutting off access to some imports could make it harder or more expensive for the United States to expand solar use domestically.

Furthermore, whilst solar energy is green and renewable, it’s still associated with some levels of CO2 production during solar panels production. For example, in polysilicon segment, electricity is the key energy used to produce ingot and extracting silicon powder. In solar glass segment, natural gas/oil is used, which could produce carbon emissions. However, these carbon emissions are relatively low comparing with the emissions saved through using solar panels.

Whilst innovative research and development is currently underway, there are some further questions for the solar industry to address, including:

  • Supply and demand imbalance: Supply demand mismatch for different subsegment along the supply chain, which could be bottleneck of the short-term demand growth;
  • Intermittence: Solar power generation only works during daytime, and energy storage technology is not mature enough yet. Hence, this could lead to instability and volatility of the power grid;
  • Recycling of solar panels: recycling of solar panel in the future can be a challenge since solar panel waste can include heavy metal such as silver, lead and cadmium which can be considered as hazardous waste.

A tailwind for solar

The case for solar is helped by the fact that the environment and concerns about global warming are top of global leaders’ agendas. In China, President Xi has set a target for the country to be carbon-neutral by 2060 and for 25% of the energy mix to be from renewables by 2030. This is testament to China’s long-term commitment to ‘go green’, as well as its ambitions to foster a global champion industry.

Even the International Energy Agency (IEA) has referred to solar as the “king of electricity” and expects it to account for 80% of the growth in global electricity generation in the next decade. With high level support behind and the supportive political narrative from the world’s largest powers, the future does indeed appear bright for solar.

As investors consider global comparisons, it is worth noting that China is a world leader in solar production. In 2019, 71% of solar modules were produced in China versus just 3% in the United States, according to data from the IEA.

Furthermore, thanks to innovation, solar is now the cheapest source of energy in many countries. Solar’s levelized cost of energy (LCOE) has dropped more than 90% during the past decade as a result of continuous technological improvement. Compared to other renewable energy sources such as wind, natural gas and nuclear power, solar also has the largest room for cost decline. This has the potential to reduce the electricity price for end-users.

For investors looking to tap into the opportunities that solar presents, China is home to the two largest players in what is a highly concentrated solar market: the world’s largest solar photovoltaic (PV) glass producer as well as the second largest global solar glass producer.

The PV producer also has a solar farm subsidiary which has experienced impressive growth, expanding from two to 32 solar farms across China in just six years, and is also selling its power generation into the immense Chinese electric grid. This is notable as Chinese electricity generators race to grid-parity with coal, independent of state assistance, solar is forecasted to jump from about 2% of China’s energy mix to 6% by 2023, according to the World Economic Forum.

Therefore, when it comes to exploring the global opportunity solar presents, the element of emerging markets leapfrogging developed markets in innovation and technology is worth remembering. Within EM, China looks to offer an opportune investment hunting ground for identifying global leaders that are disrupting the market.

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