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How cheap is too cheap for solar power? Renewable electricity has never been more crucial for the global energy transition, but the world’s most important clean energy technology is in crisis. China’s solar sector, which dominates global production, is suffering one of the deepest and longest downturns in the industry’s history.

In the first half of this year China installed 256 gigawatts of solar capacity — more than twice the rest of the world combined, according to energy think-tank Ember. Chinese factories, however, produced more than double that capacity. Small wonder the four largest local solar groups posted a combined loss of $1.5bn in the first half of this year.

In part, that reflects the fact that, amid a production glut, exporting Chinese-made panels has become more difficult. Xinjiang accounts for about 40 per cent of global manufacturing capacity of polysilicon, the material needed to make solar wafers and cells. That makes exports to the US complicated under the Uyghur Forced Labour Prevention Act, which bars entry for any goods made with materials sourced from the region.

Selling to India and Europe, two of the world’s largest and fastest-growing markets for solar power, is also becoming harder. While India does continue to import from China, it has been moving to raise tariffs. In Europe, meanwhile, the rollout of solar energy has slowed this year as some countries start to hit grid connection limits and installers draw down existing inventories. Investigations into Chinese makers of solar panels suspected of benefiting from state subsidies have added uncertainty and further tariff risk, discouraging buyers from committing to new purchases.

Shares of local solar groups have fallen this year as module prices drop. Gross margins at JinkoSolar, for instance, fell to 3.1 per cent in the year to September, down from 16 per cent in 2024. The outlook remains bleak, too. Adding to existing challenges is a rapid shift to newer solar technology, for which manufacturers have to invest heavily in upgraded production lines. That means a further increase in costs just as selling prices decline.

The woes of Chinese panel manufacturers are to some extent good news for the world. Halving panel prices over the past two years have led to rising solar adoption. Generation from solar means emissions equivalent to about 1.6bn tonnes of CO₂ were avoided last year, roughly on a par with US power sector emissions, according to Ember.

But there is nonetheless a less obvious cost. Today’s ultra-low prices leave companies with little incentive to invest in environmentally sustainable practices, resulting in more manufacturing waste and limited recycling of discarded panels. The sector’s greatest achievement has been making solar affordable. That now undermines the economics required to keep it going.

june.yoon@ft.com