NREL Report: Cheaper Chinese Solar Panels Not Due to Low-Cost Labor, Subsidies

China’s historical solar photovoltaic (PV) price advantage is driven by economies of scale and supply chain development—not direct government subsidies or low labor costs, as is the prevailing belief—suggests a new study from the Department of Energy’s National Renewable Energy Laboratory (NREL) and the Massachusetts Institute of Technology (MIT).

The study recently published in the Royal Society of Chemistry journal Energy & Environmental Science uses a bottom-up model for wafer-based silicon PV to identify conditions that affect China’s price advantage and whether they can be reproduced elsewhere.

Using industry-validated figures from the first half of 2012, the study estimates the price disparity of producing solar panels in China versus the U.S. is substantial. Even when using modern technology, it suggests, a 2-GW Chinese factory enjoys a “minimum sustainable price (MSP)”—the minimum price at which a company can sell its products while providing an adequate return for the company—of $0.91/W compared to $1.19/W for a 500-MW U.S factory. That represents a price advantage of 23% for the China-based manufacturer.

But the root of this difference is not the sum of indigenous factors such as labor, inflation, or equity country-risk premium, the study concludes. “Instead, the major differentiators are scale and supply-chain advantages. Regional incentives including provincial subsidies, tax holidays, and low-cost debt may be key enablers for rapid scaling, but they affect MSP less directly.”

China’s low-cost labor provides an MSP advantage of $0.07/W for a vertically integrated Chinese factory. However, this advantage is offset by higher inflation and country-specific risk adjustment. Those factors actually provide Chinese factories with a $0.01/W disadvantage relative to a U.S. factory, the study notes.

Provincial and state subsidies—to include low-cost land-use rights, free factory space, and subsidized electricity—provide a more significant MSP advantage of $0.04 to Chinese manufacturers (and the authors note this benefit could be replicated in the U.S. through federal and state subsidies and loan guarantees). If tax holidays and low-cost debt are also considered, regional incentives provide Chinese factories with a total MSP advantage of $0.05/W relative to a U.S. factory.

However, the bulk of cost benefits are garnered through manufacturing scale: China’s factories have a capacity of 2 GW or more, while U.S. factories have just 500 MW. Regional supply chain advantages also apply massively independent of scale. Finally, equipment discounts for Chinese manufacturers from domestic vendors of production machines only available in China allow them to be 90% less expensive than competing machines available globally. In total, scale and supply chain advantages provide a Chinese PV factory with a significant MSP advantage of $0.22/W compared to a U.S. factory.

Those advantages, however, are not indigenous to China and can be replicated by manufacturers based in other countries if comparable scale could be achieved, the study concludes. “But for solar power, there’s a chicken and egg problem: consistent demand is needed to provide manufacturers with access to the capital required to achieve large scale production, but large-scale production will be necessary for solar power to compete as an energy source without subsidies,” explained Al Goodrich, a senior analyst at NREL and lead author of the study.

“Future innovations in silicon solar panels—which may be most quickly and effectively realized through global collaborative effort—have the potential to reduce key investment risks for manufacturers. This would enable manufacturing on an equivalent scale across most regions, bringing the benefits of high volume production to them all.”

For Professor Tonio Buonassisi, associate professor at MIT and co-author of the study, the “holy grail” could be “a photovoltaic module that gives the biggest bang for its buck—with high efficiency, lower materials costs, streamlined and scalable manufacturing and unquestionable reliability. The photovoltaic modules you can buy today have a few of these attributes, but not all of them together.”

Buonassisi foresees an evolution for solar panel manufacturing that mirrors the glass industry’s between the 1880s and 1950s, when it underwent innovations that “streamlined the process to one integrated tool, where you put feedstock in one end and get one product out at the other end,” he said.

Sources: POWER, NREL, Royal Society of Chemistry

—Sonal Patel, associate editor (@POWERmagazine, @sonalcpatel)