Solar Power Sector: Would the COVID-19 Pandemic Restrict Growth?

Prior to the spread of the COVID-19 pandemic, the solar energy sector had been witnessing an upward trend and growth across various geographies owing to project launches and increase in capacities. However, the pandemic has drastically changed the scenario; companies are currently witnessing decline in demand and disruptions in supply chains and will have to bear the long-term effect even after the risk of the pandemic is mitigated. How will the solar power sector respond to this impending threat?

Strong pre-COVID-19 solar growth
Solar power capacity increased 20% year-on-year to 586.4 GW in 2019 with more than 60% capacity additions located in Asia. Solar power accounted for over half of the investments in the global renewable energy sector during the past decade.

Factors such as grid-connected solar auctions, subsidies (for rooftop solar systems, etc.), and technology improvements (increased solar efficiency, solar energy storage, etc.) increased the industry’s attractiveness among investors, including oil and gas players. Moreover, the adoption rate of solar power in the primary energy mix increased. These trends clearly indicated a worldwide shift toward solar energy and provided opportunities for solar developers to expand their portfolios across various regional markets.

However, following a decade of significant growth, the solar power industry is now faced with a nemesis in the form of COVID-19.

Impact of COVID-19 on demand
Asia accounted for over half of the solar capacity additions in 2019. However, in early 2020, with the spread of the COVID -19 pandemic and its repercussions on China’s raw material market, challenges emerged due to delays in delivery of modules and components. Disrupted supply chains resulted in project overruns, the cascading effect of which is expected to be long term. Developers would be required to substitute this shortage of supplies through local brands, which, being more expensive than Chinese products, would affect profit margins.

Countries such as Taiwan and India announced plans to increase local production of solar power to meet demand in March 2020. However, the COVID-19 outbreak spread rapidly to Asia, Europe, and the Americas. As the number of infected cases increased across the globe and the death toll surged in Europe and the US, many countries adopted stricter lockdown measures in early April 2020, that can subsequently delay action plans for increasing local production in the short term.

More than 100 countries have implemented stringent containment rules to enforce lockdown of several economic sectors. The affected countries are now diverting resources to implement lockdown guidelines, track the COVID-19 spread, and address safety concerns. This would delay or hamper investments aimed at achieving renewable energy targets over the next year. Furthermore, drop in electricity demand due to shutdown of commercial and industrial (C&I) areas is impacting revenue generated from electricity sales by renewable energy companies.

Governments have temporarily diverted their focus away from the renewable sector. C&I companies are also expected to revise their FY 2020−21 budget and plan operations post-lockdown, which would reduce rooftop solar demand in 2020. Due to the decline in sales of PV units, demand for services such as assistance in self-assessment, shortlisting of installers, and handling of warranty claims, is expected to increase, as these services can be administered online even during lockdown.

COVID-19 impact on supply of solar modules
China accounts for 80% of the global PV module production capacity; therefore, factory shutdowns across the country during Q1 2020 disrupted supply chains across all target markets. Although some factories resumed production of solar wafers toward the end of the first quarter, factors such as delays in transportation of raw material, manpower crunch, and cancellations of corporate meetings are affecting business transactions across the country and are expected to impact module pricing in the short term.

These trends are, in turn, impacting downstream sectors in Asian countries such as India, Taiwan, and Malaysia, which depend on component and material supplies from China for local production and exports. Moreover, lockdown in these countries are adding to the supply chain bottlenecks.

Possibility of consolidation as a result of COVID-19
COVID-19 has created a seismic shift in the entire industry landscape, and manufacturers, developers, as well as end users are strategizing on how to deal with it. China, the leading supplier of solar panels, has witnessed a decline in domestic solar PV demand over the past three years, making solar PV cell manufacturers highly reliant on exports. Due to the COVID-19 outbreak, PV panel exports from China declined 12% year-on-year in Q1 2020. Chinese manufacturers increased panel production in March 2020 to address order backlogs. However, the country is expected to witness an increase in inventory build-up due to lockdown in various target markets such as Europe, the Americas, and the rest of Asia Pacific.

The midstream and downstream of the solar power sector are expected to witness consolidation if stringent lockdown continue toward late 2020. Large and experienced solar energy developers (in terms of the MW capacity installed) that are financially stable would be able to manage expenses such as salaries and allowances during the low turnover period. Small and medium-sized companies will be the worst hit, as they would struggle to find new customers. This may result in consolidation through mergers and acquisitions in the near future.

Short to mid-term outlook
The solar power industry, along with all other sectors, is experiencing an unprecedented situation. The industry may also face ripple effects from industrial sectors, such as potential decline in petroleum prices and strengthening of the US dollar, which could further postpone the development of solar projects to 2021. However, the COVID-19 outbreak could offer opportunities to local manufacturers, provided the governments of the respective countries enable a favorable business environment through incentives, fast-track establishment of manufacturing facilities, and efficient transportation infrastructure.

The future of solar energy is bright. Governments across the globe are committed to significantly increasing the share of renewable energy in their energy mix. While the renewable energy sector would be impacted in the short to medium term, it is expected to ride through these tough times and eventually sustain growth in the long term. The resilience and business continuity of organizations in the face of the current adverse scenario would help attain these goals.