Renewable energies: China’s overcapacity is good for the climate

“I’m mostly worried about them global impact of the overcapacity we are seeing in China« said US Treasury Secretary Janet Yellen recently at the opening of a solar module factory in the USA. In the past, Beijing’s support led to significant overinvestment in industries such as steel and aluminum. “Excess capacity is now being built up in ‘new’ industries such as solar, electric vehicles and lithium-ion batteries.”

In fact, Chinese battery production capacity was already more than twice as large as demand last year. And by 2025, capacity is likely to be three times as large as demand, as figures from the British industry service CRU Group show. The situation is similar for solar panels: China had enough capacity for modules with a nominal output of 861 gigawatts of electricity in 2023, while 390 gigawatts were installed globally. And that was already a record, exceeding the global installations of the previous year by almost 40 percent. Even that wasn’t enough to even come close to utilizing manufacturing capacity in China. And these will continue to grow: 500 to 600 gigawatts are expected to be added this year alone.

This is also reflected in the prices: solar cells have become two-thirds cheaper in the past twelve months. The situation is similar with batteries – their price has halved over this period. The price of lithium helped: it rose massively from mid-2021, reached a historic high at the end of 2022 and has since fallen by more than 80 percent. Although lithium is unlikely to become cheaper any further, the price slide for batteries continues. CATL, the Chinese global market leader, expects prices to halve again this year. The second largest battery producer, Chinese automaker BYD, is also aggressively cutting costs in order to survive.

There is definitely a method to the excess capacity: China’s government is curbing overall economic consumption in favor of investments. These make up 42 percent of the People’s Republic’s gross domestic product (GDP). In Germany the rate is just half. The investments created a real estate boom, but it is over. “In contrast to other economies that have undergone a drastic adjustment of their real estate market, the investment rate in China is not declining,” says Frederic Neumann from the British bank HSBC. “Instead, investments are shifting towards infrastructure and, above all, into the manufacturing industry.”

And within the industry there are preferred sectors. The “Made in China 2025” strategy, which was adopted by the State Council in 2015 and is part of the 13th and 14th five-year plans, highlights ten sectors that should be developed as a priority. In addition to robotics, space technology, information technology and medicine, this also includes renewable energies and electric cars. The aim is to dominate the entire value chain, from raw materials to machines to the end product. In this way, Chinese companies are gradually securing all important patents. The strategy appears to be quite successful when it comes to “green technologies”: 80 percent of all solar cells are now manufactured in China.

This is a big problem for western industrialized countries like Germany, because they also want to build up production capacity for batteries and solar panels or have already done so, but the manufacturers are suffering from the extremely low prices of the Chinese competition. The excess capacity is positive for other countries, says Gary Hufbauer from the Peterson Institute for International Economics in Washington: “Low prices will be welcome in many developing countries in Latin America, Africa and Asia.”

It is illusory for these countries to support the construction of gigafactories with billions in subsidies. And so China’s overcapacity could ultimately lead to a division of the global market for products such as batteries and solar modules: The industrialized countries are sealing off their markets, for example with anti-dumping tariffs, and build their own industries. All other countries gratefully buy the dirt-cheap Chinese products. If this accelerates the global energy transition towards renewables, there would be at least one clear winner from China’s economic policy: the climate.