Securing Europe’s Solar Future: The Case For Building Domestic Manufacturing Capacity

In a recent report to the European Parliament, Mario Draghi emphasized the importance of protecting strategic industries by keeping essential know-how and manufacturing capacity within Europe, promoting local investment, and preserving technological sovereignty. However, Draghi also suggested that it might be unrealistic for Europe to pursue solar panel manufacturing on a large scale, noting that foreign producers, particularly China, are far ahead in solar technology. He argued that focusing on European production could delay decarbonization due to potentially higher costs and slower production rates.

Despite Draghi’s perspective, many in Europe view solar manufacturing as a strategically critical industry that should be cultivated to strengthen the EU’s energy independence. Although traditional economic theories suggest relying on comparative advantage and sourcing products from the most cost-effective suppliers, recent events, such as the COVID-19 pandemic and the Ukraine war, have underscored vulnerabilities in Europe’s energy security due to global dependencies on certain nations.

The reliance on imported solar panels is sometimes seen as less risky than dependency on fossil fuels, as solar power does not require a continuous supply chain once systems are installed. However, this oversimplifies the issue, as dependency on China for solar panels has its strategic risks. Chinese companies currently dominate the global solar market, maintaining low prices through extensive production capacity and government support. This control could lead to significant issues for Europe in the future.

China’s solar panel prices have dropped considerably in recent years, falling from a sustainable level of around $0.30 per watt for European manufacturers to around $0.10 per watt. Financial reports from Chinese companies indicate that these prices may even be below production costs. This pricing strategy is not necessarily due to a major efficiency advantage but is a result of China’s government-backed push to keep manufacturing capacity high, partially as a counterbalance to its struggling real estate sector. China’s low prices for solar panels, as well as electric vehicles and batteries, could signal a risk of a bubble, as China attempts to redirect focus and investment toward green technologies.

If China’s solar panel market collapses due to an economic bubble, Europe would face a significant challenge if it has already surrendered its domestic manufacturing capacity. Without sufficient local production capabilities, Europe’s energy transition would be vulnerable, potentially derailed by sudden shortages or price hikes in imported solar technology. European-made solar panels, while currently more costly, impact the overall cost of solar systems only marginally, adding about 0.05–0.25 euro cents per kilowatt-hour to solar power production costs, including capital, maintenance, and operation expenses.

Beyond cost concerns, another layer of vulnerability involves control over the operation of solar technology in Europe. Although Europe might assume that Beijing can’t block the sun, Chinese control over solar inverters could, theoretically, disrupt Europe’s grid. Inverters are crucial for managing the energy produced by solar panels, and many Chinese companies lead the market in supplying these devices to Europe. China’s National Intelligence Law mandates that Chinese companies cooperate with government directives, which raises concerns about the potential for remote interference, such as shutdowns or frequency changes, that could destabilize Europe’s electricity supply.

Chinese manufacturers currently hold over 80% of the solar inverter market in Europe, outpacing a capable but sidelined European industry. This concentration of market share mirrors China’s strategy in batteries and electric vehicles, raising concerns about Europe’s dependence on imported technology for critical infrastructure. For Europe to secure its energy future, building up substantial domestic manufacturing capacity for solar technology is essential.

While Europe may not need to manufacture all solar panels or inverters domestically, a stronger local industry and regulations to address the control over inverter operations are necessary. This approach would help Europe maintain its energy independence and avoid over-reliance on potentially adversarial foreign powers.