Rebuilding Europe’s solar supply chain

Europe has committed to being a climate-neutral society by 2050.1"2050 long-term strategy," European Commission website. This is an ambitious target, which has been complicated by the energy crisis and the Ukraine conflict, as well as efforts to replace the import of Russian gas.

This article is a collaborative effort by Alberto Bettoli, Tomas Nauclér, Thomas Nyheim, Andreas Schlosser, and Christian Staudt representing views from McKinsey's Electric Power and Natural Gas Practice.

Europe is planning a major ramp-up of solar-photovoltaic (PV)-based electricity to address its energy challenges, which include meeting its climate ambitions, managing a large part of its electrification, decarbonizing the electricity grid, and becoming less reliant on others. As part of its "EU solar energy strategy," the region has announced a 750 GWDC target of installed solar-PV capacity by 2030—up from 224 GW of installed capacity in 2022 (Exhibit 1). This represents a considerable step up in annual installations, going from some 26 GW in 2021 to around 70 GW a year in the second half of this decade. Germany alone aims to install 215 GW by 2030, adding 160 GW of new capacity on top of the current 58 GW, almost scaling the market by a factor of four.2Global market outlook for solar power 2022–2026, SolarPower Europe, May 2022.

With these ambitions in place, Europe would maintain its position as one of the major solar-PV markets in the world, alongside China, India, and the United States.

This ambition faces a potential supply resilience risk: Europe currently relies almost entirely on imports from one country for the solar PV panels it needs. China dominates the solar-PV supply chain with almost 95 percent of the world's wafer production (Exhibit 2). It is home to the top five companies across each step of the value chain, except Germany's Wacker Chemie EG in PV grade polysilicon.3Max Hall, "Wacker falls to fourth in global polysilicon ranking," PV Magazine, April 27, 2022.

China's solar-PV industry's scale-up has been rapid—from zero to 300 GW capacity in some 15 years.4Global market outlook for solar power 2022–2026, SolarPower Europe, May 2022. While European companies initially led the industry, Chinese solar-PV companies, in many regards, today dominate both manufacturing at scale and deploying new technologies, supporting major solar-PV ecosystems built around industry hubs. Specialized companies deliver everything from ingot pullers to diamond wire saws and solar PV glass to aluminum frames. In this way, the Chinese solar-PV industry has made the technology the cheapest renewable energy source in many markets.5"Levelized cost of energy, levelized cost of storage, and levelized cost of hydrogen," Lazard, October 28, 2021. Prior to recent price increases (due to the effects of the COVID-19 pandemic and supply-chain bottlenecks), the price of solar PV only went one way—down. The levelized cost of energy (LCOE), a measure for the lifetime cost of solar PV including both capital and operating expenditure, has fallen some 80 percent since 2010.6Renewable power generation costs in 2019, International Renewable Energy Agency, 2020.

While European markets have enjoyed the benefits of falling solar-PV costs, the geopolitical context is evolving. The Ukraine conflict has exposed the risk of relying on imports for critical energy, and Europe is becoming increasingly sensitive to the potential supply-chain risks for solar-PV products. Labor concerns in the production of polysilicon have created additional worries for European customers, particularly with regard to ESG and human rights’ issues.

In response to these rising challenges, the EU has begun its solar-PV strategy to reestablish a viable PV manufacturing industry, with the EU's Energy Commissioner stating that the EU will do "whatever it takes" to succeed.7"Keynote speech by Commissioner for Energy Kadri Simson at Solar Power Summit," European Commission, March 31, 2022. In light of this, the Commission formally launched the Solar Photovoltaic Industry Alliance in December 2022 to develop a European solar-PV ecosystem that will secure and diversify supplies of solar PV products. The EU has already defined a target of 30 GW a year of PV manufacturing across the entire supply chain by 2025.8"Commission kicks off work on a European solar photovoltaic industry alliance," European Commission, October 11, 2022.

But, in reality, what will this take—and can European companies really be competitive with the industry leaders?

Although it is currently small, the European solar PV industry does not have to start entirely from scratch (Exhibit 3). Europe has some 6 to 8 GW of module capacity, and approximately 1 GW of cell and 2 GW of wafer capacity—however, this is still less than 1 percent of global capacity.9"EU solar manufacturing map," SolarPower EU, November 2022. Wacker in Germany is the only European top-five global company with approximately 20 GW of polysilicon production in Europe.10Neil Ford, "EU solar suppliers call for help as US piles on domestic aid," Reuters, November 17, 2022.

Many European companies have started ramping up or have expansion plans in motion. In Turkey, Kalyon PV has boosted its 1.2 GW integrated ingot-to-module facility.11Innovation focused on manufacturing for sustainability, Kalyon PV, 2022. In Sicily, Enel's 3Sun is building a 3 GW facility that will produce heterojunction (HJT) cell technology modules and, over time, tandem cells (traditional polysilicon-based PV cells coupled with so-called perovskite solar-PV cells), with a roadmap to more than 30 percent cell efficiency.12"3Sun gigafactory," Enel. Similarly, Meyer Burger in Switzerland, the former equipment manufacturer, is aiming for 4.2 GW by 2025 (also using HJT cell technology), and Norwegian ingot and wafer producers, NorSun and Norwegian Crystals, plan around 4 GW new capacity.13"Meyer Burger scaling solar manufacturing: Corporate presentation," Meyer Burger, November 2021; "NorSun-wafers first in the world to receive environmental product declaration certifying its low CO2 footprint," NorSun, February 4, 2021; Emiliano Bellini, "Norwegian Crystals proceeds with 6 GW PV ingot plans," PV Magazine, September 7, 2022. New technology companies like Nexwafe and Oxford PV also aim to have GW-sized capacities by 2024 to 2025.

So far there are few current Chinese solar PV companies that have decided to establish manufacturing in Europe—Chinese leading companies would likely consider doing so if it supported their market positions. These companies would bring both capabilities and already-scaled production systems. However, given the strong platforms in China, they may enter with a minimal approach, limiting European production to modules, or cells and modules, and source as much as possible from their existing Chinese-supplier networks. Further, given their limited experience in building and operating factories in Europe, they may look for European partners and also face many of the same scaling and ramp-up challenges as European companies do.

Our analysis suggests that the costs of solar-PV manufacturing in Europe at scale for the full value chain will be at a 20 to 25 percent disadvantage against current lowest cost levels—if scale and excellence effects have been achieved. When assuming that large scale is achieved, European companies will still be structurally disadvantaged by higher labor, material, utilities, and capital costs. 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.

However, there are several factors that point to a potential path to competitiveness for leading European solar-PV companies (Exhibit 4).

Scale and excellence: European companies (or companies that are setting up manufacturing capacity in Europe) will only succeed if they are able to grow fast to reach large scale, while at the same time being highly stringent in capital and operational excellence. While pinpointing exact scale thresholds is difficult, on plant level we observe that leading players typically have 3 to 5 GW at cell and module level, and around 10 GW for ingot and wafer, and polysilicon.14Solar module supply chain service database, Wood MacKenzie, March 2022. The scale levels have consistently increased over time as the industry has matured. Further, the leading players have production systems consisting of close to 100 GW capacity on company level, and operate more than ten plants across their production systems.15Solar module supply chain service database, Wood MacKenzie, March 2022. In short, without large scale, European players will have a hard time to succeed in being competitive. Our analysis show that around half the initial cost gap (about 4 c/W) to Chinese companies will depend on reaching sufficient scale.

A key factor in scaling the industry is also to build a viable ecosystem of suppliers and equipment providers. Without sufficient scale, the industry will not spur the necessary investments and competition among sub-suppliers and technology partners.

Similarly, leading players will need to have laser-sharp focus to ensure cost out and implement continual improvements to build viable long-term competitiveness. This includes higher levels of automation and building a competitive supplier network that shares the same commitment to aggressive scaling and cost competitiveness.

Deployment of leading technology: European players could enhance their competitiveness by being early adopters of new technologies. Most importantly, higher cell efficiencies and more power per module could drive down the cost per watt correspondingly. And, as many cost drivers are linked to units produced, higher efficient cells will lower the structural cost disadvantages that European companies face—Enel and Meyer Burger are already leading the way to implement HJT and also develop tandem cell technologies.16Emiliano Bellini, "Enel unveils 680 W n-type heterojunction solar panel for utility-scale application," PV Magazine, September 26, 2022; Sandra Enkhardt, "Meyer Burger secures $225.2 million to scale up production capacity to 3 GW," PV Magazine, October 5, 2022. In addition, European companies have the opportunity to be leaders in implementing new production processes and product technologies and, in this way, will likely build long-term competitiveness. However, as the ramp-up is needed on relatively short notice, it is unlikely that next generation technologies alone will close the gap.

Consumers’ willingness to pay: European customers will, to some degree, likely be prepared to pay a premium for European-made panels. From interviews conducted over the last six months and from comparing prices, customers show a willingness to pay 10 to 20 percent premiums for European-made products with full traceability. Statements from industry leaders include, "There is a premium for better ESG. We have seen players pay 2 to 3 c/Wp." And, "If European players can offer PV modules with good warranties, a lower carbon footprint, and delivery security, I think that utilities would pay about a $2 c/Wp premium."

In future, this trend is likely only to strengthen. As one expert put it, "The importance of ESG is picking up, especially when banks are involved. There is a cost difference in complete ESG transparency of 1.3 to 1.5 c/Wp." Successful European companies will need to build quality products with strong brand positions for which customers are willing to pay premium prices. These companies could develop compelling value propositions that include sustainability and low-carbon footprint, full value-chain traceability, as well as excellent product quality, output performance, and bankability. Further, as the costs of solar PV have come down as far as they have, the marginal extra cost of paying a premium will, for many customers, be secondary to other purchasing factors. However, energy-intensive players, especially large ones, will still potentially be sensitive to these smaller differences, which emphasizes the need to close the structural gap as much as possible.

The cost of carbon: European companies can achieve a lower embedded carbon footprint than the current supply chain—around 40 percent lower in the EU compared to modules produced in China.17Lorenz Friedrich et al., "A comparative life cycle assessment of silicon PV modules: Impact of module design, manufacturing location and inventory," Solar Energy Materials and Solar Cells, September 2021, Volume 230. Europe is in the process of implementing carbon border mechanisms to avoid carbon leakage, as well as considering carbon contracts for difference. Assuming a carbon price range of $60-90 per ton and 330kg CO2 equivalent per kilowatt peak lower emissions for an EU made panel, the impact would be 2.0 to 3.0 c/W, with potential higher range impact in markets with CO2-linked incentives like France.

These levers point to a potential pathway toward competitiveness for European businesses with the right approach and mindset. Yet, while the direction of the pathway is clear, there are multiple challenges to overcome. Rebuilding an end-to-end European supply chain including material suppliers and equipment providers will not be easy (Exhibit 5). Module manufacturers will likely be hard pressed to find capable and cost-competitive regional suppliers of glass, backsheets, junction boxes, and frames—at least in the near term. Similarly, finding European manufacturing equipment suppliers and technology partners is possible but will require additional effort to scale and higher initial costs as the industry is currently sub-scale. For ingot and wafer, the dependency on non-European supply is even more pronounced, and key components such as ingot pullers and suppliers of crucibles, hot zones, and diamond wire saws are today entirely sourced from Asia. Any fast scaling of a European industry, by necessity, requires close collaboration with global suppliers.

As European companies look to invest in rebuilding solar-PV manufacturing, the market design and framework within which it can operate is vital. Indeed, the market design is evolving fast in other regions. There are significant structural differences between the key solar-PV regions—China, Europe, India, and the United States. In particular, the United States recently passed the Inflation Reduction Act (IRA) in August 2022, which includes tax incentives for solar-panel manufacturers.18"H.R. 5376: Inflation Reduction Act of 2022," Congress.gov website, US Government.

This United States support scheme is focused on encouraging investment in new solar-PV manufacturing capacity. On a fully localized basis (the IRA plus other local incentive programs), the direct production support is around 12 to 20 c/W until 2030, after which it reduces by 25 percent per year—in other words, federal government covers a large share of the cost, and will hypothetically make the US the cheapest cost region for solar PV in the world. In addition, the United States already puts import tariffs on cells and modules made in China, and partially extended these in December 2022 to manufacturing hubs in Cambodia, Malaysia, Thailand, and Vietnam to select suppliers. The United States is also considering extending these tariffs to put special duties on the import of Chinese wafers—alongside the existing rules that ban the import of Chinese forced-labor products, which are already creating high barriers for Chinese solar-PV companies to sell in the United States.

The overall effect of these measures has been immediate, with more than 30 GW of new capacity revealed across more than ten new announcements in the short time since the IRA was passed.19Dr. Paul Basore, Dr. Becca Jones, and Dr. Krysta Dummit, "Reaching for the solar future: How the IRA impacts solar deployment and expands manufacturing," Office of Energy Efficiency and Renewable Energy, US Department of Energy.

In Europe, the EU Innovation Fund and regional programs can provide grants and recently reopened for bids to allocate €25 billion toward 2030 to low-carbon projects. Traditionally the fund focuses on innovative projects at pre-commercial scale, which are not entirely fit for the purpose of stimulating scaling of a relatively mature solar-PV industry.20"Innovation Fund," Climate Action, European Commission website. However, flagship projects, like Enel's 3Sun, have so far received €118 million in EU grants (in addition to national grants), covering some 20 percent of the overall capital cost.21"Enel Green Power signs grant agreement with the EU for solar panel gigafactory in Italy," Enel, April 1, 2022. Still, the impact of such upfront grants is relatively modest, especially when compared to the IRA, since depreciation costs for cell and module plants are less than 10 percent of unit costs (Exhibit 6).

Creating a level playing field is challenging under these shifting circumstances. 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. Indeed, there are already indications of solar-PV companies refocusing investments from Europe to other regions—REC Solar recently announced it is canceling its plans for a 4 GW French plant, despite being selected in July to receive an EU grant.22Sandra Enkhardt, "REC scraps plan to build a new 4 GW solar module factory in France," PV Magazine, December 5, 2022.

For European-based companies to succeed in building feasible, long-term competitive positions in the global solar-PV supply chain and enable a viable European industry, the success formula will likely combine highly ambitious and cost-competitive players, supported by the right market design especially in the critical scale-up phase. With this in mind, we have identified six potential unlocks:

European solar-PV companies have been through a solar-PV boom and bust before that makes many stakeholders wary. While there is a potential pathway to competitiveness, companies producing solar-PV products in the region will need bold aspirations and to turn every stone to become competitive. 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.

Alberto Bettoli is a senior partner in McKinsey's Rome office, Tomas Nauclér is a senior partner in the Stockholm office, Thomas Nyheim is a partner in the Oslo office, Andreas Schlosser is a partner in the Munich office, and Christian Staudt is an associate partner in the Washington office.

The authors wish to thank Kevin Anneken, Rogier Buck, Stefan Burghardt, Bas Dijkstra, Aman Gupta, Lawrence Heath, Humayun Tai, Bram van der Horst, and Shivaji Yadav for their contributions to this article.