Chinese factory workers manufacture solar power panels at the plant of Astronergy Solar Energy Technology Co., Ltd. Photo by Imaginechina: AP

Nothing is more indicative of the disconnect between the rhetoric and the reality of solar energy applications than the Chinese photovoltaic (PV) industry.

China now leads the world in PV production, with about 26% of global production. Last year, China produced about 1.8 gigawatts of solar panels. And it appears that the vast majority of those panels are being exported. Suntech Power Holdings, China’s biggest solar panel producer, exports about 98% of the panels it produces. If that percentage is true for the entirety of China’s solar panel sector, then only about 40 megawatts (MW) of solar power was actually installed in China in 2008 (0.73% of the world total). And that solar capacity is miniscule when compared to the coal-fired power generation that was added last year: Some 65,750 megawatts of coal plants were brought online in China in 2008, or about 1,600 times as much capacity as was gained from solar.

Prior to 2008, China was importing about 90% of the raw material, polycrystalline silicon, or polysilicon, from Japan and US to make its PV panels. Even in 2008, China imported 12,000 tons of the 16,000 tons of the polysilicon it needed. With most of the raw material imported and most of the products exported, China had been merely a manufacturer that was happy to gain a relatively small profit. As the global solar energy became hotter, the price of polysilicon rose. By mid-2008, the price of polysilicon was as high as $500 per kilogram, up from $200 per kilo in 2007. Nevertheless, more and more businesses jumped on the bandwagon to meet the international demand for PV. This situation lasted until September 2008, when the global economy tanked.

To get enough polysilicon, China invested heavily to improve the techniques and upgrade equipment. Since mid-2008, China has been self-sufficient in polysilicon, with local prices averaging about $75 per kg, three times as high as the international average of $25 to $30 per kg. But the raw materials issue is only one aspect. The industry also has other big costs. The production process involves a number of toxic gases and it produces significant quantities of waste water.

In the wake of the global financial crisis, global demand for PV panels tanked. Major markets like Germany and Spain decreased their solar subsidies. International polysilicon prices dropped from $360 per kg in October to $180 per kg in November 2008. In 2009, the price slid further to $120 per kg in February, $100 in March, and as low as $50 in July. Many predict that the price of polysilicon may fall to $30 by next year.

Many manufacturers have large stockpiles of polysilicon with few orders. With the current production capacity of over 60,000 tons and the expected capacity of 140,000 tons in 2010, a glut is in the making. Global demand for polysilicon in 2010 is expected to be just 80,000 tons. The whipsaws in the market have left many Chinese PV producers in bad shape. More than half of the manufacturers have begun limiting production and some have gone bankrupt.

It appears that a major PV bubble is forming. Many local governments in China have been pushing for more PV production and that has continued despite the excess capacity. Last month, the China National Energy Bureau took the unusual step of suggesting that the development of PV production capacity be decreased. At the State Council working meeting on August 26, 2009, Premier Wen Jiabao pointed out that it is time for “the redundancy in production capacity of wind energy and solar energy be controlled.” This makes it certain that the PV business in China will cool down considerably.

Even if that happens, it appears that Chinese PV producers will continue to push their panels onto the world market. And they will do so at prices that undercut PV producers in the US and Europe. Last month, the New York Times quoted Thomas M. Zarrella, the chief executive of GT Solar International, a New Hampshire-based company that sells equipment to solar panel makers about the looming shift in global PV production. “I don’t see Europe or the United States becoming major producers of solar products — they’ll be consumers,” he said.

For now, Suntech and some of the other Chinese PV makers appear willing to sell their goods for less than their cost of production. How long that will last, no one can possibly guess. But it’s interesting to note that China, a country filled with pragmatic people particularly when it comes to energy, is choosing to export nearly all of the PV panels that it produces rather than use them at home. Do the Chinese know something we don’t?