Chinese suppliers are currently dominant in the PV as well as the battery markets, while European suppliers have a lead in wind turbines. Looking at the current construction projects for adding battery production capacities, we see that the battery market is quiet agile, with the EU likely to gain 5% market share by 2022, and China likely to lose 10%.
But size matters for success: a large local market is needed to realize the necessary economies of scale and vertical integration opportunities to remain competitive. We see a doubling of the cumulative produced global capacity resulting in cost reductions of 10%-25% for wind, 30%-38% for PV components, 36% for EV batteries, 28% for electrolysis and 25% for fuel cells. These cost reductions translate directly to price reductions, for instance in the electricity costs – the so called levelized costs of electricity (LCOE) – of the associated technologies.
What explains these cost reductions? Producing more offers the opportunity to learn how to improve the process. The resulting price decrease leads to additional demand that leads to additional production that leads to additional learning. This learning-by-doing is part of the innovation process that, along with directed research and development, most visibly is documented through patenting activities. Other drivers of cost reduction include economies of scale, innovation incentives and spillovers due to a larger market size and growth-driven vertical integration opportunities. The resulting learning curves or experience curves are historically well documented for widely differentiated goods, with the classical example being Ford’s Model T production that revolutionized the car market. The best known case is probably the computer industry and the corresponding ‘Moore’s Law’ that predicts a doubling of the transistors in a CPU (and a corresponding increase in computing power) every two years.
Governments are also essential. For instance, bringing solar PV from the laboratory to the market required substantial research funding as well the stimulation of early adoption through subsidies to foster the innovation process. While the technology was at first only applied for satellites, it found further niche applications throughout the 1980s. The government feed-in tariff in Germany in the 1990s was particularly important to build a market and with increasing potential, more countries and companies increased R&D funding, patent numbers accelerated and costs fell.