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ESG in Green Power – A Revolution is Underway

A sustainable, endless source of ecologically clean power is a top choice for ESG portfolios

As environmental, social and governance (ESG) mandates increasingly form key investment components for retail and institutional portfolios, one of the brightest spots is in the potential of alternative energy. In particular, ESG portfolios are more and more looking to solar power, and by extension, the companies that manufacture components to harness it, as crucial parts of their investment strategy.

Solar installation activity in many countries reached high single-digit growth by the end of September of last year, missing expectations set at the beginning of 2020, but posting much better numbers overall since the covid-19 pandemic began (chart 1). Looking ahead, on the demand side, China, the largest solar market in the world, is proactively taking on more responsibility in reduction of carbon emissions, though it will cancel subsidies for utility-scale solar projects later this year. The US can harness substantial solar resources and can expect to see increased demand for solar throughout the term of the Biden presidency. India, formerly the third-largest solar market, has been significantly affected by covid-19 outbreaks in 2020 and again this year. The virus also impacted other major markets to one degree or another, including Europe, the Middle East, and South America. We expect to see a moderate recovery in these regions when the public health situation improves (chart 2).

Trends in the supply side are more visible than in the demand side. The graphs below show the growth of solar demand and cell capacity along the major solar supply chains through 2021. The supply and demand balance in the polysilicon sector is likely to improve (chart 3), with the top five producers potentially holding more than two-thirds of total market share.

Consolidation in wafer use is now decelerating (chart 4), with the top five producers’ total market share expected to reach nearly 80% by the end of this year. Wafer oversupply likely will occur this year, while the realized price will depend on demand as well as how much effective capacity is put into operation each quarter. Further capacity from second-tier wafer manufacturers, module makers, and wafer equipment producers should appear by the end of 2021. These new capacities are mainly for M10 (182mm x 182mm) and M12 (210mm x 210mm) silicon wafers, although the latter will require more time to show its true efficiency gain.

A solar cell is less profitable in the solar supply chain (chart 4). Technology plays a crucial role in competitive landscape dynamics, but we see it as a stable factor in a medium-term cycle. Thus, both wafer (chart 4) and module makers (chart 6) are increasing cell production now to improve supply chain stability as well as margins. We can see in the graph below that Longi has added over 15GW of solar cell capacity in the last two years and ranked No.3 by 2021, followed by integrated solar materials makers like Jinko Solar and JA solar. TA solar cell is an intermediate part, driven by downstream demand. That is, module makers and their sales channels to some extent determine solar cell competitive advantages within the context of a technology cycle.

Consolidation on the module end is accelerating, with the top 10 makers’ total market share increasing from 57% (2020E) to 64% (2021E) as chart 6 illustrates. Most of the leading module players are adding capacities and building up sales channels for the future. This sector will significantly impact global demand for cells and even certain wafers.

There are several advantages that come to mind for investors evaluating the solar power sector, and, as noted at the beginning of this article, especially so for those with or considering ESG mandates. Solar power is increasingly seen worldwide as an essential form of energy going forward, and a far less costly one that that afforded by fossil fuels and other environmentally damaging means. The sector itself is rapidly growing and a magnet for skilled workers and innovative technologies. In addition, the sum emits no hydrocarbons or other pollutants, and is a potentially endless source of inexpensive energy.

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