China’s renewables deployment continues to outpace coal and gas

Insights — July 2023

China installed nearly 80GW of solar electricity generation capacity during the first half of 2023, an increase of 154% year-over-year

During the first half of 2023, China (which accounts for over 80% of the world’s solar manufacturing capacity) installed nearly 80 gigawatts (GW) of solar electricity generation capacity (photovoltaic; alternating current1), according to China’s National Bureau of Statistics. This was an increase of 154% year-over-year and accounted for over one third of all new electricity capacity installed during the period (in equivalent capacity factor terms).

China is on track to install c.150GW during 2023 (or nearly half the c.350GW forecast global total) and to achieve the target set in its last five-year plan to add 457GW between 2021 and 2025. Putting this in context, at the end of 2022 global installed capacity was c.1000GW (which generates 3-4% of global electricity).

Chinese exports of solar technology continue apace

China is also a considerable exporter of solar equipment. During the first five months of this year China’s solar module exports totalled 88GW, exceeding the same period last year by 39% according to consultancy InfoLink. Europe is the key destination accounting for 52GW, an increase of 56% over the same period last year.

Deployment of renewables outpacing coal and gas

Solar accounted for c.35% of all new electricity capacity installed during the period (in equivalent capacity factor terms). Together with other technologies (such as wind, hydroelectric, biomass, waste-to-energy and nuclear), zero greenhouse gas emission electricity sources accounted for c.65% of new capacity additions during the period (in equivalent capacity factor terms).

With hydroelectric more mature in terms of penetration and technology (and also more susceptible to climate change impacts such as drought), solar and wind (China is forecast to account for more than half of the wind power commissioned globally between now and 2030) are expected to be the key growth areas in China’s electricity generation capacity. Hydroelectric capacity (c.11% of total power generation in China) additions were 43% lower year-over-year and only 4% of additions.

While China’s performance on zero emission electricity is extraordinary, it continues to build coal and natural gas-fired power plants, adding 26GW of capacity during the period. Notwithstanding a year-over-year increase of 97%, the volume of solar and wind installations materially exceeded new coal and natural gas-fired power plants (by c.35% in equivalent capacity factor terms).

In terms of total electricity being generated, a very weak contribution from hydroelectricity (which declined 23% relative to the same period in 2022, due to a very serious drought) resulted in coal and natural gas-fired electricity increasing 8% year-over-year to fill the gap. Coal and natural gas-fired electricity accounted for 71% of total electricity generated (in line with the 70% estimated by China’s National Bureau of Statistics for 2022).

Outlook implies the best is yet to come from solar

In terms of outlook, we believe key issue is understanding the trajectory and potential of each competing technology. Solar and wind (13% of generation and c.50% of additions on an equivalent basis) are dependent on manufacturing whereas coal and gas-fired electricity is dependent on construction. We believe manufacturing has considerably greater scope for improvement than construction. Further, our research indicates that solar has extraordinary scope for its economics to improve, driven by technological innovation and manufacturing scale (the solar industry is likely to produce ever more effective panels, in greater volume and at a lower unit cost). On the other hand, coal and gas-fired electricity appears to be mature technology.

In terms China’s intentions, it continues to rapidly expand its solar manufacturing capacity across all key segments including polysilicon, wafers, cells and modules. The first half of 2023 saw capacity across these segments grow by over 60% year-over-year, according to the China Photovoltaic Industry Association. The trend looks set to continue with research firm BNEF forecasting China’s solar module manufacturing capacity to expand to c.1000GW by 2025 (relative to c.500GW today) which is expected to drive down the cost of solar modules through economies of scale (BNEF estimates that every doubling of solar manufacturing capacity reduces module prices by 28.5%).

Further, the industry is making considerable investments in research and development (R&D) which will drive improvements in solar technology. The largest 5 solar companies are reinvesting an average of 8% of revenue in R&D (by comparison the world’s largest 5 auto manufacturers reinvest an average of 4%).

So by the year 2025, not only will China have the ability to manufacture 2022’s global cumulative installed solar electricity generation capacity (which was manufactured and installed over many decades), but the cost of manufacturing this capacity is likely to be considerably less than today (driven by the extraordinary increase in manufacturing scale as well as considerable technological innovation).

We believe that these data points continue to validate our thesis that the mass adoption of solar technology is underway. T8 Energy Vision has unique exposures to various solar technologies and their supply chains on the basis that we believe they represent an extraordinary investment opportunity at this relatively early stage of their evolution.

1 The capacity of a photovoltaic solar system can be reported in either direct current (DC) or alternating current (AC) terms. A system’s capacity in DC terms relates to the system’s panel capacity, while its operating capacity is reported as its capacity to deliver electricity to the grid as AC (once it has passed through the inverter). Capacity values reported in DC are typically 10-30% higher than the reported AC capacity. The ratio is referred to as the inverter loading ratio.