China shines at solar power

As the shift away from fossil fuels gathers pace, China is leading the way in solar energy – not only is it the largest market in the world, it also produces more than 70% of all photovoltaic panels. We take a look at some of the investment opportunities emerging from this commitment to renewable energy

Words / Andrew Patrick, Portfolio Manager, Aberdeen Standard Capital 

Photo / Alamy

Remove the row

Column: 1

One of the lasting memories of Covid-19 lockdowns will be the media images of major cities free from the usual shroud of smog. None more so than Beijing, whose inhabitants could see the mountains west of the city surrounded by blue skies clearly every day – a rare occurrence normally.

With just a handful of essential vehicles on the roads and factories shut, lockdown provided a glimpse of what a zero-emissions world might look like. Uplifting though these images may have been, most observers realised that this was a temporary reprieve rather than a long-term readjustment. The Chinese populace in cities are long-used to wearing masks to provide some protection against dangerously high air pollution from fossil fuels.

China remains one of the world’s biggest emitters of greenhouse gases, and how it limits (and reduces) its use of fossil fuels is pivotal to the global fight in tackling climate change. While the country has justifiably attracted bad press over the years for its heavy use of coal and other fossil fuels, more recently a positive ‘cleaner’ energy story is gaining traction in China.

In addition to Beijing banning coal heating in favour of natural gas (a small step forward), the country has promoted the use of clean energy nationwide and plans to expand its domestic market for green energy technology. China has seen other countries such as the UK cease burning coal to produce electricity (since 2020), with renewables edging out fossil fuels as the primary source of energy.

China and the solar value chain

If China is to achieve its zero carbon target by 2060 then it will need to achieve similar milestones along the way. Solar power is likely to play a leading role here.

China is by far the largest solar market globally, accounting for one third of global solar demand. If China is to achieve its zero carbon target by 2060 then solar and wind power will no doubt be deciding factors. Given the strong level of support from central government, it is little surprise that the solar value chain is heavily concentrated in China.

But it has not always been plain sailing. China is a closed economy; the government exerts a great deal of influence over how companies operate in this space. In 2018, the Chinese government halted its solar subsidy in the country – thankfully it was reinstated the next year.

There are also different obstacles to investment, for instance issues around supply chains and workers’ rights. These are challenges for investors like Aberdeen Standard Capital, so engagement and due diligence are key before the company invests.

Falling costs of solar

Assuming ESG factors are satisfied, there are strong reasons to invest. For the large part, the solar photovoltaic system (PV) market is now competitive without having to rely heavily on government subsidies. While solar power is not in any way a new phenomenon, pricing has often prevented it gaining momentum as a viable and primary energy source.

That looks to be changing now, evidenced by the rapidly falling costs of solar PVs, which transform the energy from the sun into electricity. Green tech manufacturing in general is experiencing a rampant period of growth and China is at the centre of this. There have been shrewd strategic moves along the way such as China Molybdenum, buying the Tenke Fungurume copper and cobalt mine in the Democratic Republic of Congo back in 2016.

The significance of this is that copper is essential for electric cables and wind turbines, while cobalt is used in electric vehicle batteries. China Molybdenum now controls more than one-tenth of the world’s cobalt. Not only is this good for China’s manufacturing of electric vehicles but a reliable supply of cobalt will be essential for global car makers too.

China produces more than 70% of all solar PVs, half of the world’s electric vehicles and a third of its wind power. It is also the biggest battery producer and controls many of the materials crucial for clean-tech supply chains, not just cobalt but polysilicon, a key ingredient in solar panels.

How do I benefit from stewardship as your client?

It’s well documented that companies that go bankrupt have poor environmental and social scores in the years leading to the event. By truly understanding the risks of a company, including those related to ESG factors, we can aim to avoid investments that put your capital at unnecessary risk. Instead, we invest your money in companies that aim to generate a strong but sustainable return over the long term. Even if an investment idea scores highly from a financial and growth perspective, we still may not go ahead if governance is weak or the company scores poorly on environmental and societal practices. We believe it is important to be active stewards of our clients’ investments and advocate for positive change on their behalf.

Green tech innovation

Solar panels in vast hot spaces in the Nevada desert are no longer the only viable proposition for mass energy production.

Innovation is coming through in the form of high-quality polysilicon, bigger wafer sizes, more efficient cells and bifacial modules that gather more light. These new technologies support the harnessing of solar energy in cooler regions such as China and Northern Europe.

PV has entered a phase of structural growth that will continue for many years to come. The International Renewable Energy Agency (IRENA) expects solar installations to grow at an estimated 12% per annum CAGR over the next ten years. 

Leaders in wind and solar supplies

China has become a leading equipment supplier in both the wind and solar industries. Chinese companies are leaders throughout the PV value chain, namely in polysilicon, wafers, cells and modules. Chinese companies such as Goldwind, Envision, MingYang and CSIC are some of the leading players in the market.

China and US remain the world’s largest onshore wind markets. According to the Global Wind Energy Council (GWEC), in 2020, China broke the world record for most wind power capacity installed in a single year with 52 GW of new capacity – double the country’s annual installations compared to the previous year.

China looks ideally placed to benefit from major clean energy installation in its domestic market, as well as being a crucial supplier for the roll out of similar projects across the world. And its role could prove pivotal, as the GWEC has warned that global wind power growth must triple over the next decade to avoid the worst impact of climate change.

Rather than being viewed by environmentalists as the rogue nation, China may yet reinvent itself. It may prove its sceptics wrong by leading the world out of climate catastrophe and at the same time reach its goal of zero emissions by 2060 – comfortably ahead of time.

LONGi: A major solar player

LONGi Green Energy Technology was founded in 2000 and is headquartered in Xi’an, Shaanxi Province. From 2000 to 2005, the company focused on the production of semiconductor materials and equipment. At the end of 2006, a subsidiary was established to develop and manufacture monocrystalline silicon ingots.

Since 2014, the company has expanded to the downstream end of the solar supply chain and now engages in the manufacturing of cells, modules and the construction of PV stations. It is now the biggest player in solar PV wafer markets. It is set to overtake Jinko as the largest solar module producer, and remains the leader in monocrystalline silicon solar technology, where it is the largest producer in terms of sales volumes.

Prior to 2015, LONGi sold most of its wafers externally, but now uses them internally for the production of cells and modules.