Investing in solar module production in emerging markets can lead to massive social and economic benefits. But before committing to a renewable energy project, there are some unique risks and costs that must be taken into account.
In this article, we discuss the challenges and opportunities involved in investing in solar production in emerging markets.
Challenges of Solar Module Production in Emerging Markets
Emerging markets can benefit the most from investment. There are, however, certain obstacles that need to be overcome.
Financing
Financing in emerging markets is typically more expensive. Funding is the process of obtaining capital to pay for the production of solar modules. It is the capital that will cover the expenses of machinery, material, labor, and all the associated costs of solar panel manufacturing technology.
Financing can come from a variety of sources, including venture capital, government grants, and private investors. Financing is usually more expensive in emerging markets for several reasons.
First, the risk of default is typically higher in these countries due to less developed financial systems. This leads to higher interest rates to compensate lenders for the risk.
Second, capital is more scarce in these countries, which means there is more competition for it. Scarcity and competition drive up the cost of capital.
Third, the majority of financing in emerging markets is bank-based rather than market-based, making it more expensive to obtain.
Lastly, currencies in these countries are often weaker than the US dollar, meaning the cost of borrowing in US dollars can be much higher. All of these factors combine to make financing for solar technology more expensive.
Greater Market Volatility
Emerging markets are often characterized by higher levels of volatility. They are very often subject to sudden and unexpected changes in economic conditions. This can cause financing costs to fluctuate and increase the risk of default.
Additionally, it can be difficult to predict future market conditions, making it difficult to accurately assess the risks associated with a project.
Higher Supply Chain Vulnerability
Emerging markets often have weaker supply chains and less reliable sources of materials and components. This can lead to delays in production, higher costs, and supply shortages. Additionally, it can be difficult to find reliable suppliers of sophisticated machinery or materials in emerging markets, further increasing the risk of supply chain disruptions.
Poor Access to Skilled Labor
Oftentimes emerging markets have lower education levels which creates a shortage of skilled labor. The lack of skilled labor can make it difficult to find qualified and experienced personnel to work on projects.
Additionally, wages in emerging markets are often lower than in developed countries. This makes it harder to attract the necessary skilled labor. This can lead to lower productivity and lower-quality products.
Poor Distribution Channels Due to Limited Infrastructure
Emerging markets typically have poor distribution channels due to limited infrastructure. Poor infrastructure can make it difficult to access markets. Additionally, poor infrastructure can lead to higher transportation costs, delays in delivery, and other logistical issues that affect the supply chain.
Opportunities in Solar Module Production in Emerging Countries
While investing in emerging economies has many challenges, it also comes with some unique opportunities.
Lower Costs Due to Cheaper Labor and Land Costs
Despite the risks associated with solar module production in emerging markets, there are also a number of potential benefits. One of the primary benefits is lower costs due to cheaper labor and land costs. Wages and land costs in emerging markets are often lower than in developed countries. This can lead to lower production costs of solar manufacturing and higher profit margins in the business.
Favorable Exchange Rates
Another benefit of investing in solar module production in emerging markets is favorable exchange rates. Exchange rates between currencies in emerging markets can be more favorable than in developed countries.
This can be useful when financing is obtained in foreign currency. A favorable exchange rate can make it cheaper to operate when the foreign currency is converted to local currency. This however only comes into play if the costs of operating (suppliers, energy tariffs, etc.) are in the local currency.
Favorable Investment Policies
Finally, favorable investment policies in emerging markets can lead to lower costs and higher profits. Governments in emerging markets often provide incentives for investments in renewable energy technology, such as tax breaks and subsidies. These incentives can lead to lower costs and higher returns on investments.
Economic and Social Impact
Opening a solar module production business in an emerging economy would have a bigger impact than it would in a more developed economy. Not only would it help create jobs and attract much-needed capital into the country, but it would also reduce the cost of solar power through domestic production.
Conclusion
To sum up, there are many risks and benefits associated with investing in solar module production in emerging markets. Every individual market will have context-specific factors that need to be carefully weighed. This underscores the need to conduct detailed research to understand the specifics of the market.