(Oct. 1, 2009 - James Rickman) China has announced it plans to generate 10 gigawatts of energy from solar cells by 2020. The first incentive program announced by the Chinese government earlier this year would subsidize the costs of installing solar energy systems on building. Most analyst point out the main risk for the solar industry was a price war, sparked by Chinese producers such as Yingli Green Energy (NYSE:YGE), obliterating the margins of higher-cost German producers. The Chinese government has proposed offering up to 20 RMB ($2.93) per watt for solar-panel installations that are 50-kilowatt or larger. That amount could pay for 50% to 60% of a system's installation costs.
The second program, called the Golden Sun, would see the government paying for 50% of the costs of building grid-connected a solar power projects and up to 70% for off-grid projects in remote areas. The fund for 2009 is estimated at $1.06 billion, and it could reach $1.45 billion in 2013.
The government also is expected to announce a feed-in tariff program for setting solar electricity prices. The pricing would be higher than what's paid for conventional power in order to spur solar power plant development. In 2006, China began imposing a surcharge to generate money for renewable energy development, and the fund could support 5 gigawatts of solar projects from 2009 to 2013. But that much development would happen only if the government doesn't use the money for wind, biomass or other renewable energy projects. Given the dynamics of China's power industry, power plant projects developers could see thin profit margins. The government hasn't set a solar feed-in tariff, but it could be as low as 1.09 yuan per kilowatt hour ($0.16). Some other solar companies are hoping to a higher tariff.
The 1.09-yuan figure was the winning bid for a 10-megawatt project that just began construction in Dunhuang City, Gansu province. The China Guandong Nuclear Power Holdings, LDK Solar (NYSE:LDK) and Enfinity are heading the project. Although the government is keen on expanding renewable energy generation aggressively, it also is inclined to keep electricity pricing low to keep boosting the country's economic growth. The National Reform and Development Commission (NDRC) sets wholesale and retail electricity prices and often has to deal with strong resistance from local officials and businesses when it considers rate increases.
This dynamic makes it "unlikely that any company outside of a government-owned or affiliated developer will be a major player in domestic project development. For foreign developers or joint ventures, it is likely that the only way to make project economics work at current and proposed tariff rates would by selling" carbon offset credits.
But solar panel makers and their suppliers wouldn't face a similar squeeze, given that a major goal of these government programs is to help boost their growth. China should have the capacity to produce about 7 gigawatts of solar cells in 2010 and 8.1 gigawatts in 2012. While the government invests in adding solar energy to the country's power mix, it also is looking at better coordinating the expansion of its solar energy equipment manufacturing industry. The government issued a statement saying that "overcapacity and redundant projects" are now plaguing steel, cement, wind, and silicon businesses. It could restrict these industries' access to financing and markets and toughens environmental and land-use regulations to rein in these sectors.
James Rickman
Founding principal partner of SVS, LLC (Hillsboro, Oregon USA);
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