Can European PV Manufacturing Be Cost Competitive At Scale?

• European PV manufacturers are likely to continue to face disadvantages when it comes to cost of locally produced solar modules in the future
• McKinsey sees structural disadvantages as higher labor, material, utilities and capital costs, against current lowest cost levels even at scale, as playing spoilsport
• They'd need to most fast in adopting newer technologies, scale up quickly, and collaborate extensively across the value chain and beyond to build a feasible solar supply chain

European solar PV manufacturers can hope to become cost competitive only when they grow fast to achieve scale, get early-mover advantage for new technologies and customers are willing to pay a premium for Made-in-Europe panels, as their costs at scale for full value chain will be at a 20% to 25% disadvantage against current lowest cost levels.

A new report from international consulting group McKinsey & Company believes Europe will be structurally disadvantaged by higher labor, material, utilities and capital costs, against current lowest cost levels even at scale.

"This is based on the cost of power before the price hikes that European industrial players have experienced over the past year—this means that the current power prices in Europe further lower their cost competitiveness, especially in the energy-intensive upstream parts of the value chain," they explain.

Currently, Europe is mostly dependent on Chinese supply of panels but for it to become free of geopolitical stresses, meet climate ambitions and become energy self-sufficient, it needs to develop its own PV manufacturing capacity—30 GW annually by 2025 (see European Solar PV Industry Alliance Formally Established).

Supportive nudge from the regulators is prompting European companies to expand their PV manufacturing, and may also bring Chinese players setting up shop here in the future, the policy and financial framework is not as certain and robust as the Inflation Reduction Act (IRA) in the US. This single most important tool has prompted more than 30 GW of new capacity across the value chain since its passing, as per the report.

"The EU is developing measures such as a CO₂ tax and eco-labeling that are expected to be favorable for European-based companies. To trigger broad and large-scale investments, however, further targeted market design measures may be required to entice investments," the report reads.

However, there is a way out. In order for Europe to build a feasible, long-term competitive position in global PV supply chain, the success formula will comprise the following, which the report writers' term the '6 potential unlocks':

1. Willingness to move first and deploy risk capital at pace, using best available technology across the value chain and with long term global ambitions to succeed. Higher efficient cells will lower the structural cost disadvantages that European companies face. Enel and Meyer Burger are investing in heterojunction (HJT) and tandem technologies but ramp-up is required ta a short notice hence next-generation technologies alone won't close the gap (see Meyer Burger Strikes Strategic Partnerships For Tandem Technologies).
2. Laser-sharp focus on cost-out performance through accelerated scale-up with a compelling customer value proposition in terms of cost, quality and sustainability. According to the analysis, around half the initial cost gap of about $0.04 per W to Chinese companies will depend on reaching sufficient scale.
3. Sophisticated industrial approach to continually implement new technologies to enable and build competitive leadership, working closely with technology companies, equipment providers and technical research institutes. It won't be an easy journey though since local supply of raw materials isn't enough and fast scaling will require close collaboration with global suppliers.
4. Leading downstream customers need to be prepared to de-risk upstream investments (and unlock financing) by committing demand at the right price signal to spur investments across the value chain.
5. Systematically build a competitive ecosystem of sub-suppliers and equipment partners to support new investments to extract cost synergies and drive down input costs for a viable industry.
6. Market design framework by regulators at national and EU level to encourage and de-risk early investments in Europe, especially until minimum scale thresholds are achieved, and with a scale and scope that attracts the necessary investments in a global context.

To sum up, the writers state the obvious, "European companies will need to build an entire industry ecosystem to be truly viable in the global market in the long term—as Chinese companies have done. This will require major efforts by industry leaders, supported by customers, end users, and policy makers." It remains to be seen if the early December 2022 launched EU Solar PV Industry Alliance (ESIA) will be powerful and quick enough to provide the needs for such efforts needed in Europe (see European Solar PV Industry Alliance Formally Established).