China's Solar Expectations Likely to Fall Short
Great expectations are being placed on China¡¯s solar power market, for PV in particular. Some Chinese authorities expect China¡¯s own uptake of PV solar power to compensate for the continuing decrease in PV panel exports by China¡¯s PV panel industry, which accounts for over 50% of global capacity. And a recent report by the Pew Charitable Funds projects that China¡¯s installed solar capacity will reach 50 GW by 2020, up from 3 GW in 2011- and expects China to take the lead in solar, even surpassing Germany, which as of 2011 accounted for over 40% world capacity- compared to 5% for China.
Without a doubt the Chinese are much more serious about solar than before, quadrupling the country¡¯s installed capacity in a single year, and making serious plans for the rise of solar as a significant form of alternative energy. But how feasible are these plans? Is China truly on the verge of becoming the first major economy to be driven to a significant measure by solar power?
We believe that while China¡¯s upswing in solar usage will certainly continue, expectations are likely to fall short. There are several reasons for this. One is the potential problems on the road to 50 GW, another is connectivity, and the final issue is solar in the total China electric power mix. Let¡¯s examine each of these in turn, as well as the ability of China¡¯s domestic demand to absorb PV production capacity.
Solar on the Rise
Figure: China Installed Capacity - PV
While wind has been the main focus of alternative energy installation in China over the past ten years, the most recent Five Year Plan reveals strong ambitions for solar. Indeed just in 2011 China added 2,000 MW of solar on top of the existing 800 MW- thus over two-thirds of capacity coming in a single year. According to Pew report, to reach its goals for 2015, an average of 3 GW each year will need to be added from 2011 to 2015 and to reach the goal of 2020, this figure stands at 7 GW from 2015 to 2020.
Figure: China Projected Electric Power Capacity
Source: Statistic Bureau, GCiS, Pew Charitable Trusts
Assuming this goal is met - by 2020 this will still only account for less than 5% of China¡¯s total electric power generating capacity. Solar would be relatively more important in China as compared to today, though grid-connected solar will continue to remain a small component of China¡¯s total energy mix through 12th Five Year Plan and beyond. Not to mention, attaining this 50 GW goal presents a distinct challenge in and of itself.
Profitability a Hurdle
If China can add 2 GW of PV capacity in one year, then why not every year? If government is willing to stick to this goal and push these projects through, then it is hard to question their ability to make this happen. However, there is reason to view this goal with skepticism. In short, this is because many solar projects are not profitable, smaller projects in Eastern China especially, and the government will not be able to rely much on private funding for these projects. Potential investors also face connectivity risk. ?
Expected return on projects, to attract private investment, have improved, though are still less attractive. Resulting from a more stable FiT schedule than originally expected, coupled with drops in PV module price points and overcapacity in China¡¯s solar industry, investment return on one particular PV project in Qinghai (where sufficient levels of DNI exists with 1,500-2,000 hours of utilization) is around 8-10%, an improvement from 5% in 2009. When taking into account the fact that real GDP is growing at 8% per year in China, this type of return may be less lucrative than expectations. Solar plants in Eastern China with only 1,000-1,500 hours of utilization would be even less profitable. As a comparison, after tax, solar projects are making returns of about 10-15% in the US, according to Stanford University¡¯s Center for Energy Policy and Finance. If projects in China are not able to attract significant private funding, state owned enterprises are more likely to step up as the primary force behind PV investment.
Before the new feed-in tariff scheme, there are two national programs to promote solar energy deployment: solar concession bidding and ¡°golden sun projects¡±. As concession bidding is set to be below new FiT benchmark, it is expected to fade out. Golden Sun projects are expected to continue, but will not be entitled to the new FiT scheme. Its electricity production is accepted at much lower local tariff from desulfurized coal-fired power plants (for example, Shandong 0.4219RMB/kWh, Zhejiang 0.482 RMB/kWh, Gansu 0.3343 RMB/kWh). As available FiT are less attractive, investment return on Golden Sun projects is less focused on electricity sales and more on the lump sum subsidy awarded after project completion. As a result, Golden Sun projects are usually small scale PV projects installed on the rooftops of public buildings or factories in Eastern and Central China. With most of the investment recovery occurring after plant construction, rigorous product selection as well as on-going operation and maintenance of the station will possibly be neglected.
Grid Connectivity Problems
A solar power station may be constructed, though if not connected and delivering power to the grid then its benefits are severely limited. In the case of wind power, an estimated 30% of installed capacity is not grid-connected, and similar problems are foreseen for solar.
The State Grid Corporation of China (SGCC) and China Southern Power Grid Corporation (CSG) are responsible for evaluating power plants and granting approval for connectivity. These groups have cited a lack of standardization which has resulted in varying equipment quality and unstable electricity supplies as the underlying factor to their increased strictness in approving grid-connections. In order to realize the ambitious plans for domestic PV deployment as well as guide the development of China¡¯s PV producers, efforts are being focused on establishing standards for PV grid connection and testing.
Scale and location of PV plants also play a large role as complementary infrastructure must be in place for plants to obtain approval and link up. In reviewing the 700 MW of PV projects approved under the ¡®Golden Sun¡¯ program in 2011, issues are apparent on both fronts of project investors and power grid. In regard to project owners and investors, larger projects of ¡°Golden Sun¡± fall between 10 - 20 MW and most are planned for either Eastern or Central China where direct normal irradiance (DNI) is less optimal. Lack of grid infrastructure and additional investment in supply stabilization equipment pose obstacles to smaller scale PV plants, as ROIs become less attractive. On the receiving end, smaller, less efficient plants located in Eastern China are less appealing to the State Grid, as these sources are less dependable and profitable. A similar situation has played out recently in China¡¯s wind power market where smaller-scale or less accessible wind farms faced tremendous difficulties to connecting to the grid. Following significant strides of improvement over the past year, grid-connected wind power has reached 45 GW, with an additional 30% not yet grid connected. With its current infrastructural reach and approval criteria, the state grid does not appear to be particularly receptive to a large influx of distributed PV plants under a certain size.
Figure: China Direct Normal Solar Radiation Map
China Consumption to Absorb Excess PV Capacity?
Assuming the difficulties of adding 2 GW of grid-connected capacity per year are overcome, China will still not be able to absorb the drop in export capacity. It¡¯s a turbulent time for China¡¯s photovoltaic (PV) panel manufacturers as several leading importing countries have taken actions which are expected to curb global demand. According to a recent report by the EPIA (European Photovoltaic Industry Association), Germany, the U.S. and Spain were shown as three of the leading markets for PV installations, with 2011 newly-added capacities of 7,500 MW, 1,600 MW, and 400 MW, respectively. Cumulatively, these three countries comprise roughly one third of the world¡¯s newly connected PV capacity. Germany and Spain plan to cut subsidies on solar projects and US Commerce Department is ruling several leading Chinese solar panel suppliers to pay tariff for dumping products to the States. This is disastrous news for the Chinese PV industry which has faced persisting downward pressure on solar panel prices.
Figure: World and China Solar Cell Production (Annual)
Source: JRC European Commission
The five leading PV suppliers in China (Suntech, JA Solar, Yingli, Trina, and Canadian Solar) produced a combined output of roughly 8.2 GW in 2011 - over 50% of total China output and three times the expected annual installations in China. Based on released financial information, top solar module suppliers are experiencing varying degrees of overcapacity. JA solar only utilizes 60% of its current capacity while TSL operates at 80%. There have been official announcements of another 500 MW of PV cell production capacity added by TSL and 750MW by Yingli in 2012 - 1.2 GW in total.
Assuming enthusiastic ¡®encouragement¡¯ from the government completely nullifies the issue of grid-connectivity, the figures cannot be ignored. China is home to a large number of established PV cell manufacturers, a huge amount of production capacity, and only a modest level of annual PV installations. This makes for a potentially threatening export gap which must be filled. Currently nearly half of world solar cell capacity is located in China. Suppose 15 GW of installed capacity is added by 2015. China¡¯s 3 GW of additional grid-connected PV per year would only account for 27% of its 2011 production capacity. In other words, the vast majority of PV panel production is exported and it is highly doubtful that local demand, in its current state, will be able to absorb any significant shock to export demand. Assuming local capacity remains constant, the remaining 8 GW of capacity will either have to be exported or go unutilized. China¡¯s domestic market is not positioned to immediately absorb any significant portion of its export volume.
Near term effects
It is clear that PV cell and module suppliers will have to shift their focus towards the domestic market. With oversupply, PV power station owners (both large SOE power groups and private project owners) have more bargaining power over solar products suppliers. Price wars and preference for higher quality products may be expected. Yingli recently bid a new low of 5.18 RMB / W on the Ningxia Zhongwei 30MW PV project. This is the first notable instance of a per watt price in a domestic bid under 6 RMB; export prices are now below one dollar per watt. This will further lead to fiercer competition and price compression.
This environment has certainly increased pressure on mid to small scale PV cell suppliers. Preference will be given to major suppliers who are able to offer higher efficiencies and better quality guarantees. Holding capabilities in silicon ingot production and system integration, larger suppliers who have the luxury of expanding vertically and higher profit margins which can withstand further cuts will squeeze out a number of smaller players. Others will be forced to step up their performance. A reshuffling of the China PV industry is unavoidable.
Options Going Forward
In order for China to become a substantial consumer of their own solar panels, they would ultimately need to build large-scale plants in Western and Northern China where DNI levels are comparatively better. This means domestic capabilities in producing and servicing auxiliary equipment needs to be improved, grid infrastructure must continue to be expanded and eventual moderating of the FiT. Continuing down the current path of current more distributed PV installation, another option would call for a separate FiT schedule based on varying radiation condition. That is, higher FiTs and/or direct subsidies from provincial level bodies would compensate for smaller-scale, less efficient, and distributed plants in Eastern and Southern China.
There is little doubt that the Chinese government could achieve solar energy deployment targets if they pursue practical efforts to really push it through. However, in light of the current global environment as well as the status of PV usage and production in China, the scale of domestic market does not look large enough to pick up the slack in global PV demand. Having developed as an export-oriented market, China¡¯s PV suppliers now need to face the inherent, however harsh, realities of dependency.
Real benefits could be derived from expansive PV generation capacity, however plans for development should be made practically and not as a race to resolve issues with exports. If, at this time, the Chinese government wants to pull ahead as the global leader in PV, they will also need to accept their place as the main driver behind domestic demand. In order for China to support its own PV industry through consumption, there is still quite some ground to be covered.
About GCiS China Strategic Research
GCiS (www.GCiS.com.cn) is a China-based market research and advisory firm focused on business to business markets. Since 1997, GCiS has been working with leading multinationals in sectors ranging from technology to industrial markets, medical, chemicals, resources, building and constructions and a few others.