An Opec for solar energy is a bad idea: This Chinese idea is best dropped

More than 30 Chinese solar power producers signed up to an Opec-style agreement at their industry association’s annual meeting last week, with manufacturers given quotas based on their existing capacity and forecasts of market demand.

That would provide some relief from a glut over the past year that drove prices for panels and their raw materials well below costs. The crisis has pushed the big four Chinese panel-makers into losses of an expected $1.06 billion this year.

Also read: Solar power has the potential to grow 8x. This company could benefit the most.

The parallels are intriguing. China’s solar power industry is offering a flow of useful energy to the global economy on par with the biggest oil producers. But it’s also approaching an inflection point of the kind that Opec hit about a decade after its founding. From 1900 up to the oil crisis of 1973, crude production grew at an average 7.2% a year.

Since then, it has slowed to 0.9% a year. Solar faces a similar slowdown, though from far higher starting rates. In the five years to 2013, generation from photovoltaic panels rose at about 62% a year. In the past five years, it has declined to 23%, and even bullish scenarios that put the industry well ahead of what’s needed to hit net zero will see that slow further to about 10% over the rest of this decade.

Further, for all the criticism lobbed at it, there’s a decent argument to be made that Opec, once weaponized by the 1973 crisis, worked. In the century between 1874 and 1974, oil hardly ever cost more than $40 a barrel on a sustained basis, after you adjust inflation to 2023 prices.

In the 50 years since, it has hardly ever cost less than that. We saw a permanent shift in the price of oil that enriched Opec’s members. What’s not to like if you’re a solar manufacturer?

The problem for Longi Green Energy Technology, Trina Solar, Tongwei and the like is that there are fundamental differences between oil and photovoltaic panels, which will make an Opec-style cartel much harder to sustain.

One factor is the element of fate in the mix. Energy transition advocates sighed with frustration last month when Azerbaijan’s President Ilham Aliyev told CoP-29 that petroleum was a “gift of God." He wasn’t exactly wrong, though.

Mineral reserves are a natural geological endowment that humanity’s innovative genius can’t fix. No amount of knowhow will allow Japan to produce crude as cheaply as Saudi Arabia. Even the US shale boom has only succeeded in unlocking relatively high-cost reserves.

Also read: OPEC further trims oil-demand outlook

That geological fate imposes some discipline on the cartel. Every Opec member knows that Saudi Arabia’s production costs are the world’s lowest, so it could flood the market and destroy the competition at any moment.

Similarly, though, everyone knows that Riyadh’s bloated budget means its total costs can’t survive such brinksmanship for long. You may only need $3.2 a barrel to get Saudi crude out of the ground, but it costs another $93 to pay for the lavish expenditure of the Saudi state. That mix imposes a degree of discipline on Opec’s principal member.

Manufacturing is different, because innovation is decisive. One reason there is so much production capacity out there right now is that we’re in the middle of a shift between two solar panel standards, known as PERC and TopCON—and possibly on the brink of a further revolution toward another, known at HJT.

Geological advantages are perpetual, but technological advantages can be eroded in a few years as research and development makes last decade’s state-of-the-art products obsolete.

Solar panels are ultimately semiconductors, and you only need to take one look at the changing fortunes of Intel, Nvidia and Taiwan Semiconductor Manufacturing Company to see that there are few permanent defensive moats in that industry.

Finally, you have the fact that Opec is a diplomatic alliance balanced by the competing national interests of its members, whereas solar manufacturing in 2024 is almost entirely Chinese.

If Beijing wants a solar industry that is stable and profitable, it will allow companies to form a cartel (this is pretty much what it did to the domestic coal market in 2015 after years of over-expansion).

Also read: Why Nithin Kamath-funded SundayGrids shouldn't be seen as an investment

If it wants more growth in clean energy, however, it will squash any attempt to rein in an indiscipline which has been terrible for solar power companies—but great for solar power as a whole. ©Bloomberg