INTERVIEW - Selectivity is key to Europe's competitiveness in renewables

The EU is taking steps to address the crisis facing the bloc's solar manufacturing sector. Through the implementation of new regulations designed to promote local clean tech production, the EU aims to combat Chinese competition while also securing local manufacturing capacity to support its climate targets.

Renewables Now recently had a discussion with Pavlos Trichakis, an energy expert and partner at Baringa, to explore Europe's prospects of competing with Chinese solar manufacturers. Additionally, we delved into which industries Europe should prioritise for enhancing competitiveness and strategies for bridging the funding gap.

Q: Given the current landscape, can the EU realistically implement strategies to regain competitiveness in solar manufacturing and effectively challenge China's dominance in the industry?

Starting with solar panels, it is evident that the EU has lost competitiveness over the past years. IEA data for example showed that in 2022, over 95% of Europe’s solar panels came from China. While we may aim to sever this reliance, the question remains: at what cost? Additionally, the issue of scale arises. Can we realistically build a large enough supply chain here in Europe to meet our 2030 and 2050 targets? Specifically focusing on solar, the numbers appear dubious. Solar is now by far the most important technology when it comes to new build power generation capacity in Europe. Therefore, if solar is to remain the primary source of new capacity, it seems impractical to manufacture it solely within Europe.

Thus, we must carefully consider which components are strategically vital for meeting our targets and which ones are better left to market forces. For example, the EU has agreed in principle a non-binding 40% self-sufficiency benchmark for solar panels (and other strategic technologies), to be approached or achieved by 2030. However, for solar panels specifically, there is no strong economic justification for mass-scale manufacturing here in Europe to replace Chinese imports. Such a strategy risks increasing costs for consumers, slowing deployment and creating an industry that is over-reliant on subsidies. In my view, subsidies should only be justified on innovation grounds, by supporting new solar products that have a real chance to develop into sustainable industries that contribute to sustainable economic growth and alleviate decarbonisation bottlenecks.

At Baringa, we have carried out a detailed, bottom-up analysis of supply chain constraints for the key renewable energy technologies in Europe (onshore wind, offshore wind, solar PV). Our research shows that supply chain constraints for solar PV appear to be less severe than for other key technologies (e.g. offshore wind) and are generally overshadowed by greater constraints around securing grid connections and planning consent.

Nevertheless, the most significant supply chain constraints for solar PV are the increasing lead times for securing transformers and switchgear. And although there is expected to be sufficient module supply to meet rising demand, there is uncertainty regarding any impacts of potential forced labour in the polysilicon supply chain. Availability of design and installation labour is also a constraint.

Over the next few years, we would therefore recommend that the EU should focus on the above-mentioned components of the solar PV supply chain facing the greatest capacity constraints (transformers, switchgear, availability of design and installation labour), particularly given that we expect there will be sufficient non-Xinjiang polysilicon production to meet module demand in North America and Europe.

Q: Outside the solar sector, in which other industries should Europe aim to enhance its competitiveness?

The Net Zero Industry Act, an initiative stemming from the Green Deal Industrial Plan, is the key mechanism in the EU for scaling up the manufacturing of clean technologies in the EU. The aim is that the EU's overall strategic Net Zero technologies manufacturing capacity approaches or reaches at least 40% of annual deployment needs by 2030.

In addition to solar power, other strategic Net Zero technologies covered by the Net Zero Industry Act include onshore and offshore wind, battery and storage technologies, heat pumps and geothermal energy, electrolysers and fuel cells, sustainable biogas/biomethane, carbon capture and storage, and grid technologies.

As things stand, these technologies have a better chance of being produced here in Europe compared to solar PV where the supply chain is already dominated by China (and the vast majority of new manufacturing capacity coming online is also in China).

However, in order for this to take place, the Net Zero Act must succeed in (1) simplifying the regulatory framework surrounding clean-energy projects; (2) lowering administrative burdens and streamlining permitting processes; (3) increasing funding opportunities and broadening access to R&D; (4) stimulating consumer demand; and (5) facilitating the growth of a skilled workforce.

There is an additional policy that is worth mentioning here which is the EU’s Carbon Border Adjustment Mechanism (CBAM). CBAM will be a vital mechanism to ensure there is a fair price on the carbon emitted during the production of carbon-intensive goods that are entering the EU, and to encourage cleaner industrial production in non-EU countries.

Finally, it is also worth noting that [the former head of the European Central Bank] Mario Draghi has been tasked by EU leaders to look at how to improve Europe’s industrial competitiveness, with a particular focus on the period 2024-2029. It is difficult to think of someone better qualified than Mario Draghi for this task, and I am particularly looking forward to reading his report, which based on recent media articles is expected to come out end of June 2024. One thing is clear though, Europe will need to take bold actions to boost competitiveness and address the investment funding gap that we have relative to the 2030 and 2050 climate goals.

Q: You mentioned that there is an investment funding gap. How can we mobilise investments and mitigate the funding gap?

Just to give you some numbers to understand the scale of the problem, in order to meet the EU’s 2030 climate goals, there is a funding gap of somewhere between EUR 400 billion-500 billion per year. Practically speaking, this means we need to double green investments in the EU compared to historical investment rates.

How can this be achieved? I think we have to be more innovative and explore all available funding options. What is clear though is that public money will not be enough, particularly when you take also into account stretched Government budgets post-Covid and the war in Ukraine.

Therefore, we need to channel private savings to complement public funding, and we will need all stakeholders to step up – including international entities (such as EIB and EBRD) that can provide blended financial solutions by increased public funding and mobilised private capital flows. What we need to remember here is that, by their nature, some sectors will depend on public funding more than others, some sectors will depend on a degree of EU-level funding and increased international collaboration (such as interconnection), while others may rely largely on private finance and there we need to ensure that the right investment framework exists.

Two recent moves by the EU are worth highlighting here: the Green Taxonomy which attempts to classify economic activities according to their sustainability and is intended to influence the way private capital is allocated by driving private investments into green infrastructure; and the adoption in October 2023 of a regulation creating a European green bond standard (EuGB) for bonds that are environmentally sustainable.

These are steps in the right direction, but they are unlikely to be enough. Other options that are explored by EU leaders to achieve greater common financing at EU level include the creation of a new common cash facility (such as extension of joint borrowing), the use of private partnerships where the European Investment Bank plays an enhanced role, or the creation of a second Next Generation EU fund (which expires in December 2026). The European Commission has also proposed a European Sovereignty Fund to preserve a European edge on critical and emerging technologies, including Net Zero.

Finally, it is worth looking at the EU budget and potentially redirecting some of the spending to areas such as Net Zero technologies, R&D and innovation. Currently, about 70% of the EU budget does not go into these future-oriented sectors. Hence, the problem we have is not just about insufficient spending; it is also about the allocation of funds to the most critical areas, the ones that drive growth and productivity improvements in the long term, and boost our competitiveness.

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