SHANGHAI: Visitors to the world’s biggest showcase of solar power could be forgiven for not realising just how dismal conditions are in China’s flagship clean energy industry.

Hundreds of thousands of people descended on Shanghai’s largest convention centre last week for the city’s annual solar gathering, where a carnival mood prevailed.

They were met by company mascots dressed as pandas and astronauts, and presenters in ball gowns hosting wheels of fortune. There were boothes serving popcorn, ice cream and cocktails, and video game competitions on massive screens rising toward cavernous ceilings.

Behind the scenes, executives were fretting over the crisis engulfing the sector. At home, prices have collapsed after a breakneck expansion created far too much capacity, forcing many firms to sell at a loss.

Abroad, China’s dominance of the world’s supply chains is being tested by an explosion in protectionism. And the rapid uptake of solar power, the best story going in the fight against climate change, is now facing resistance as electricity grids chafe at handling a flood of energy available in the day that then disappears at night.

“We’re entering into a deep down-cycle,” Amy Song, vice-president at solar material maker GCL Technology Holdings Ltd, said in an interview last Friday with Bloomberg TV. “Barely anyone is making money right now.”

Solar’s rise over the past two decades has been meteoric. The industry has grown from a niche sector for environmentalists to the planet’s dominant source of new energy. The world added 445 gigawatts of solar panels last year, more than all other power sources combined in any year of human history. Most of them were made in China.

That’s propelled the growth of multi-billion dollar companies, which are now comparable to the giants of oil and gas. But it’s also created the conditions that have bedeviled commodities markets through the ages.

China’s solar companies have boomed, and now they’re heading for a bust that could eclipse earlier downturns in the industry’s fortunes.

A surge in demand that began three years ago boosted prices, unlocking ambitious expansion plans that have resulted in too much supply.

Chinese companies ended 2023 with the ability to produce 1,154 gigawatts of solar modules - more than double the capacity at the close of 2021. Projected demand this year is just 585 gigawatts, according to BloombergNEF.

The rapid build-out is a typical tragedy of the commons.

Companies looked out for their own interests without considering the overall impact if all their rivals acted the same way, said Gao Jifan, chairman of Trina Solar Co, the world’s third-largest manufacturer of panels. They were helped along by local governments eager to meet their growth targets and banks hungry to make loans, he said.

Gao was one of several executives who called last week on the central government to intervene to help the industry get back on its feet. The menu of options presented included regulating which new factories can be built, cracking down on less-efficient facilities, capping price cuts, and promoting consolidation.

In the meantime, too many factories are bidding to supply too few projects, which has driven down prices to record lows. Recovery isn’t likely until 2025 or 2026, said BNEF analyst Youru Tan. Industry executives have warned that bankruptcies are in the offing.

Solar’s biggest backer is Beijing. The industry is one of the government’s new productive forces that it hopes will allow the economy to pivot from decades of growth driven by the property market, low-end manufacturing and state-led investment. Other clean energy sectors like batteries and electric vehicles are in the same stable.

The government’s support, which in years past included generous subsidies, has helped deliver a world-beating industry.

Chinese companies control more than 80% of capacity along every step of the supply chain.

That’s rankled foreign governments, which don’t want to rely on a geopolitical rival for energy, and crave some of the industry’s jobs for their own people.

US President Joe Biden last month toughened trade measures against solar equipment from China, and his administration is now targeting operations in South-East Asia, which are viewed as fronts that have allowed Chinese firms to bypass tariffs.

India has also imposed import duties, and there have been calls in Europe to follow suit.

It’s left Chinese companies looking to invest overseas and win customers in nations that have put up trade barriers. That includes the United States, after the Biden administration’s 2022 bill to provide incentives to boost domestic clean energy manufacturing.

Despite the dire outlook, there are reasons for optimism in the industry. Demand will continue to grow through the next decade.

 - Bloomberg