The evolution of industries is often a rollercoaster ride marked by both towering peaks of success and daunting valleys of lossThe renewable energy sector, especially in China, finds itself at such a critical juncture todayAfter enjoying unprecedented financial gains in recent years, the first half of 2024 has brought on a wave of losses across the entire photovoltaic (PV) supply chain, affecting even the once-thriving giants of the industry who are struggling to maintain their footing.

This downward spiral can primarily be attributed to a dramatic plunge in prices throughout the solar energy supply chainAccording to data compiled by the China Photovoltaic Industry Association, the prices of key components such as silicon materials, silicon wafers, solar cells, and modules fell significantly compared to the beginning of the year, with decreases reported at 40%, 48%, 36%, and 15% respectively

At present, the prices for domestic polysilicon, wafers, cells, and modules have dwindled to approximately 40,000 yuan per ton, 1.25 yuan each, 0.28 yuan per watt, and 0.70 yuan per watt.

In an attempt to navigate away from this troubling trend and to emerge from the chaos of price wars, industry powerhouses like LONGi Green Energy and TCL Zhonghuan raised silicon wafer prices as of August 27. While the effectiveness of this "price strategy" remains uncertain, it signals an important realization among manufacturers: that relentless cost-cutting and underpricing strategies ultimately harm all players in the market.

Yet, while some companies attempt to stabilize prices, the market continues to witness unprecedented lows, with module prices reportedly dropping below 0.7 yuan per watt—a development perceived as further "disrupting" the already fragile market structure.

This raises an essential question: despite the industry's newfound awareness of the pitfalls of aggressive low-price competition, why does the trend of falling prices persist?

The reality is that beneath the tumult of plummeting prices and widespread losses, an unavoidable force is at play—the looming bubble of the renewable energy sector

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If left unchecked and allowed to fester, this bubble will only grow larger, leading to potential catastrophes reminiscent of the real estate crisis that left the economy reelingChinese renewable energy must evade such a fate by learning from the past.

Supply Overloads and Weak Demand

With both China and the world advancing toward dual carbon goals, the demand for solar, wind, and storage installations has surged dramaticallyHowever, it is the abundant production capacities in China that create a stark contrast, as they easily outpace the actual demand for renewable energy solutions.

Take the solar manufacturing landscape as an exampleEstimates suggest that China's annual solar production capacity exceeds 1,000 gigawattsBut how much new installation is realistically occurring? In 2023, China set a remarkable national record with 216.88 gigawatts of newly installed solar power

Projections for the first half of 2024 indicate that the country will add around 102.48 gigawatts, with expectations for the year aligning closely with the previous oneAlthough significant solar products are also exported, the global total of new solar installations hovers around 500 gigawatts.

Industry analysis firm Guojin Securities projects a 2024 global increase of roughly 520 gigawatts, a rise of about 30% year-on-year, calling for module demands between 650 gigawatts and 700 gigawattsConversely, the China Photovoltaic Association is more conservative, anticipating global installations would fall between 390 gigawatts and 430 gigawatts, translating to a component demand between 470 gigawatts and 520 gigawatts.

Specialized consultancy Infolink concurs with the association, predicting a component demand of approximately 469 gigawatts to 527 gigawatts, potentially facing a worst-case scenario of stagnation, while under optimistic conditions, a modest 12% increase is projected

Such data underlines a chilling reality: with demand approximately at 500 gigawatts and supply exceeding 1,000 gigawatts, the issue of excess capacity is glaring.

Let us not overlook the fiercely competitive energy storage sectorHere, too, China boasts the largest production capacity globally, with research indicating that in 2023, around 200 gigawatt-hours of energy storage batteries were shipped from ChinaHowever, the total global installations in power storage barely grazed 100 gigawatt-hours for the same year.

Unlike the solar segment, energy storage has a different demand profileRoughly 50% of Chinese solar products are sold abroad, while around 75% of storage products find their markets overseas, primarily in Western markets where clients often accept higher pricesSuch dynamics have allowed leaders like Sungrow Power Supply to capitalize, netting an impressive 5 billion yuan from its storage segment in the first half of 2024.

However, as most global energy storage producers are located within China, those lacking orders from Western buyers have been struggling with a starkly different reality

These firms are ensnared in a fierce price war—prices for storage cells have plummeted, descending from a range of 0.9-1.0 yuan per watt-hour at the start of 2023 to 0.3-0.4 yuan per watt-hour by mid-2024. Correspondingly, the average price for storage systems has fallen beneath 0.5-0.6 yuan per watt-hour, indicating a loss of over 50% within the same timeframe.

By August of this year, the escalated pricing conflict saw lithium energy storage systems hitting an alarming low of 0.47 yuan per watt-hour, marking a new low for the industry.

Under these severe conditions of oversupply, emotions are running high across renewable energy companies.

Learning from Real Estate's Painful Lessons

Given the evident overcapacity, a pressing question arises: how can the current bubble be deflated before it metastasizes beyond control? The renewable energy industry would be wise to draw valuable lessons from the mistakes witnessed within the real estate sector.

At a recent real estate forum, economist Fan Gang pointed out, “For over thirty years, thanks to a plethora of local government support, poorly performing real estate firms have managed to avoid bankruptcy, illustrating a lack of significant real estate bubble bursts in decades.”

In response, renowned real estate mogul Chen Qizong noted two methods of adjusting market bubbles: one involves puncturing small bubbles incrementally while the other seeks to prevent any from bursting

While government intervention can shield against such collapses, it tends to congeal during times of growth, leading to bulging larger bubbles that one day erupt, causing catastrophic economic fallout.

Similarly, the real estate crises spiraled into serious issues marked by excess capacityThis led to a multitude of predicaments including debt crises among real estate firms, issues related to home completion, plummeting property prices, and ramifications for banks.

At the height of its success, China's real estate sector boasted an annual sales volume of 1.8 billion square metersThis has sharply declined to an expected 800 million square meters by 2024, notably lower than the industry’s potential annual sales capacity of between 1 billion to 1.2 billion square meters.

The existing inventory in the property sector remains alarmingly high, estimated at around 700 to 800 million units, leaving regions to contend with the pressure of new completions added each year

Housing prices have fallen annually by about 20%-30% over the last few years.

Notably, despite the challenges, the realtime real estate achievements must not go unrecognized, as it yielded groundbreaking benefits across local government revenue and provided homes for a significant percentage of the population.

According to Chen Qizong, “No other market in the world has managed to create so many homes for civilians in such a short span of time.” Approximately 85%-90% of urban dwellers live in homes they have purchasedYet, there is no denying that these lessons reflect a severe lack of capacity handling.

Long after sales touched 18 billion square meters, real estate firms continued to pursue additional properties in reckless fashion, oblivious to the demographic shifts and declining job-seeking populationsUrbanization in China saw a substantial climb from 18% to over 64%, marking a turning point where rapid expansion was no longer feasible.

With the industry at its peak, one would have expected the real estate sector to proactively alleviate pressures by cutting production and addressing the growing bubble

Instead, unsustainable debts spiraled to unfathomable sums, with Evergrande's liabilities exceeding 2.58 trillion yuan, Country Garden at 1.7 trillion yuan, Greenland at 1.2 trillion yuan, and Sunac reaching 1 trillion yuanIt’s not the debt itself that spells doom, but rather the point where assets fail to cover liabilities, creating an unsolvable problem when significant losses loom.

Looking back, perhaps if actions had been taken in 2019-2020 when issues like Evergrande's distress were just surfacing, such as addressing emerging problems through consolidation and even bankruptcy measures, today’s chaos could have been mitigated.

This reflection on real estate experiences serves as a cautionary tale for the renewable energy industry to heed—and ensure that its trajectory does not mirror these past misjudgments.

Puncturing the Renewable Energy Bubble

Today, the imbalance in supply and demand within the renewable energy sector is undebatable

Encouragingly, companies are beginning to initiate mergers and consolidations.

For instance, in August, reports regarding Tongwei's proposed acquisition of Runyang for 5 billion yuan were seen as a significant early step towards industry consolidationSoon after, additional reports emerged of CATL seeking to acquire another firm, along with news of terminated acquisitions and bankruptcies among subsidiaries.

When the market was flourishing, competition led companies to intensify production, making it unappealing for firms to consider being absorbed by othersOnly when times turn bleak, do struggling companies find themselves turning to the option of sellingCurrently, the photovoltaic and energy storage sectors stand on the precipice where mergers and consolidations could prove advantageous.

Nonetheless, spontaneous mergers alone will not suffice to rectify the issue of excess capacity

Addressing the renewable energy bubble inherently requires supportive industry policies.

Regulatory oversight particularly demands stronger governmental action, especially regarding project approvalsIn light of recent delays for major projects, it becomes imperative that governmental policies restrict reckless expansions for polysilicon projects to forestall oversupply crises.

In fact, relevant authorities have already issued access conditions for the polysilicon industry, definitively stating that new projects should not be approved until a fresh directory for investment project approvals is launchedSpecific stipulations have been placed on capacity expansions regarding minimum investment, location restrictions, and strict energy cost standards.

However, within market economies, such administrative measures often prove ineffective, with loopholes allowing companies to circumvent restrictions

Therefore, a multifaceted approach incorporating precise economic tools is essential.

As for investment strategies, capital perceptions of the renewable sector's potential have shiftedAs a result, firms face stringent requirements when seeking first-stage market financing, drawing attention to the reality that investors prioritize profitability.

Here, regulatory bodies like banks hold considerable weight in moderating renewable energy expansionsBy demanding higher self-funding thresholds for renewable projects and limiting bank financing, firms will be compelled to reassess their expansion ambitions.

In situations where financing remains curtailed, it becomes essential for companies to prudently allocate their resourcesBorrowing against future prospects will no longer be feasible, fostering a culture of responsible growth.

Fiscal policies also yield substantial impacts, especially as local governments navigate the investment landscape amidst renewable manufacturing ambitions