Decentralizing

On September 25, 2012, China’s National Energy Administration (NEA) announced a new program to promote distributed photovoltaic installations in China. As is often the case in this country, the dimensions are impressive: each province is requested to submit a proposal to the NEA for up to 500 MW of distributed PV, located in up to three “demonstration zones” per province. Since China has 31 provinces and other areas with provincial status, including autonomous regions and some large municipalities, this amounts to about 15 GW of installed PV power during the current 12th Five Year Plan (2011-2015). This exceeds the 10 GW of distributed PV stipulated in China’s current PV Development Five Year Plan, which takes the general renewable energy and solar goals set forth in the country’s overall Five Year Plan and provides detailed plans for the rollout of solar PV in this period. Given the fact that this more detailed plan was released on September 12, it is remarkable that less than two weeks later the NEA is already topping these goals with the 500 MW program.
What caused this rapid ramp-up in distributed PV targets? Clearly, overcapacity in China’s PV manufacturing industry coupled with trade tensions with the U.S. and Europe prompted China’s government to boost support for the domestic PV industry. According to Professor Wang Sicheng, now an advisor to the China General Certification Center (CGC), a key PV regulator charged with setting standards for the industry, China’s PV production capacity stands at 29 GW, just shy of worldwide demand for PV panels. Worldwide PV production capacity is at about 40 GW according to Wang, who used to work at the Energy Research Institute, like the NEA part of the National Development and Reform Commission (NDRC), China’s top economic planning authority. At Solarpraxis AG’s and TÜV Rheinland’s PV Module and PV Power Plant Workshop – China 2012 in Shanghai on October 30 and 31, Wang sketched the current price levels for Chinese modules: prices are as low as RMB 3/W (US$0.48/W) for ordinary panel producers and RMB 3.77/W (US$0.60/W) for leading manufacturers.
At the event Trina Solar’s chief scientist Pierre Verlinden provided historical price data and trends in other young industries to demonstrate that further price declines were unlikely, since gross margins had all but evaporated even at top-tier manufacturers like Trina Solar. But even if this might provide some solace to market participants, existing and looming trade disputes with both the U.S. and European Union are causing concern among Chinese panel manufacturers that demand might be throttled in two very important PV markets. While the U.S. has already imposed antidumping and countervailing duties, the European Commission is still holding out with its verdict.

Problems with centralized PV

In this environment the late September move by the NEA to boost the domestic PV market came as very welcome news to Chinese players in the industry. But why didn’t the NDRC and the NEA favor large-scale centralized installations previously with China’s PV feed-in tariff (FIT) in the summer of 2011, which is based on the wholesale supply of power? Indeed, most of China’s installed PV capacity is in this category, which mainly includes projects in western China, where irradiation levels are the best in China for PV electricity generation. But as the Solarpraxis AG/TÜV Rheinland workshop in Shanghai made clear, these projects in western China have to cope with a relatively undeveloped electricity grid in these poor and remote parts of China. Add to that the need to transmit this power to China’s coastal areas, where most of the electricity is consumed, and the market segment of large-scale ground-mounted PV power plants looks less attractive than it first appears. The Shanghai workshop also revealed another potential threat to large-scale installations in China’s desert areas (much of western China is desert or close to being so): as Richard Qian of TÜV Rheinland pointed out in his presentation entitled “Performance Degradation of PV Power Plants in Desert Climactic Conditions”, analysis of the performance of PV power plants in the Phoenix, Arizona area carried out by Arizona State University and TÜV Rheinland showed up to 2.5% annual performance degradation in these plants built over ten years ago. Although this is a dramatic example of performance degradation and probably indicative of poor module design and composition, Wang of CGC sees above average degradation as a potential issue for large-scale plants in China’s desert areas as well, so this uncertainty might be another factor to favor distributed over large-scale ground-mounted PV.

Breathtaking ramp-up

We can only speculate what drove the NDRC and the NEA to boost their targets for distributed PV from 10 GW to 15 GW within China’s 12th Five Year Plan. The September 25 NEA “Notice on Applying for the Large Scale Application Representative Area of the Distributed Photovoltaic Power Generation” does not mention a cumulative target of 15 GW, but simply the per province target of 500 MW. It is also important to note that this 500 MW goal is not mandatory. Chinese provinces, municipalities and autonomous regions had until October 15 to submit their proposals for up to three demonstration zones for up to 500 MW in total. Even the 10 GW of distributed PV power stipulated in the September 12 PV Development Five Year Plan is not mandatory; nor is the overall 20 GW target stipulated in this plan for PV installations in general. (This target is often given as 21 GW, but 1 GW of this total is earmarked for concentrated solar power, so it is not relevant to the PV industry.) Mandatory or not, the Chinese PV ramp-up has been (and continues to be) breathtaking. Early last year the country’s PV target for 2015 stood at five gigawatts. But according to the latest analysis of IMS Research in its third quarter “China PV Market – Supply and Demand Quarterly,” published on October 9, full year installations are forecast to hit five gigawatts this year already.
At the Solarpraxis AG/TÜV Rheinland workshop, Qin Haiyan, General Director CGC, recounted his experience in the wind power industry, where his predictions that China would quickly become the world’s number one wind market were not taken seriously by most observers. He sees the same thing happening in the PV market, boldly predicting China to be a bigger PV market than Germany in the next few years.

Distributed PV subsidy programs

Despite the dominance of large-scale ground-mounted PV so far, China actually started its PV development with distributed PV in 2009. Its first two subsidy programs comprised a program to support building-integrated PV (BIPV) and building-attached PV (BAPV) under the Ministry of Housing and Urban-Rural Development, and the Golden Sun program under the Ministry of Finance. While the BIPV/BAPV program will support up to 500 MW of PV installations this year according to CGC’s Wang (after 150 to 200 MW last year), the more important (and lucrative) program is the Golden Sun program. Wang expects up to 2,870 MW in Golden Sun installations this year after only 690 MW in 2011.
What makes Golden Sun particularly attractive for PV developers in China is the up-front subsidy of RMB 5.5/W (US$0.88/W). Unlike the PV feed-in tariff, which pays RMB 1/kWh (US$0.16/kWh), under the Golden Sun program developers can pocket the subsidy before any power is dispatched to the grid. And with module prices having fallen precipitously in 2012, the return on such projects is safely in the double-digit range.
Given its popularity, Golden Sun applications have overwhelmed the allotted 3 GW cap for this year. According to one market participant interviewed at the Solarpraxis AG/TÜV Rheinland workshop, only about 20% of Golden Sun applications are accepted by China’s Ministry of Finance. Another hurdle are China’s grid companies, which can take three to five years to approve grid connections in the case of large-scale centralized installations according to CGC’s Wang. While most Golden Sun projects are grid-connected rooftop projects, grid connection has also become a problem for these projects, not least because China’s two state-owned grid companies are not satisfied with the balance of power instituted by the Golden Sun program, where the Ministry of Finance approves projects and doles out subsidies, but where operational issues need to be handled by the grid companies and/or the NEA.

NEA’s 500 MW program

This intra-ministerial jockeying for power is one important driver for the NEA’s 500 MW program. (For all intents and purposes China’s two grid companies, State Grid and Southern Grid, have the status of ministries in China’s public sector.) While the NEA has not yet specified subsidy rates, Wang sees a shift from an up-front subsidy (the Golden Sun subsidy model) to a FIT-like subsidy based on the power generated. Such a FIT regime would give the NEA (and NDRC) more control than a one-time subsidy payment administered by the Ministry of Finance. Frank Xie, Senior Analyst for the PV industry at IMS Research, sees two other notable features of the NEA’s 500 MW program: “First, China is considering subsidizing the power generation and consumption of distributed PV power, instead of subsidizing the installation capacity. Both self-consumption and grid-going PV power have the same subsidy level. Second, to ease the financial burden of the central government, China is encouraging local governments to share the cost of distributed PV power stations. Take Shanghai for example: on September 15 the municipal government issued 2012-2014 measures to promote building energy savings. A RMB 5/watt (US$0.80/W) subsidy is now available for PV power demonstration projects on buildings in Shanghai.” At the same time the Chinese government is pushing the country’s grid companies to expedite the integration of renewable energy sources into their power grids. For example, for distributed PV projects below 6 MW in demonstration zones, such as those specified in the NEA’s 500 MW program, the grid companies now have 45 days to connect such systems to the grid. Regarding subsidy levels, the feed-in and consumption tariff under the NEA’s 500 MW program is estimated to be about RMB 0.4/kWh (US$0.06/kWh). As highlighted by Xie of IMS Research, the consumption part is a novel twist when compared to the country’s PV FIT program, which pays out RMB 1/kWh (US$0.16/kWh). This single Renminbi actually consists of two parts: the regular RMB 0.3 to 0.4/kWh (US$0.05 to 0.06/kWh) electricity wholesale rate and the actual subsidy to reach RMB 1 in total. For the 500 MW program the guiding electricity rate will not be the wholesale rate, but the retail rate paid by commercial and industrial users. This is in the range of RMB 0.9 to RMB 1 per kWh (US$0.14 to 0.16/kWh), much higher than the wholesale rate. (The residential rate is substantially lower at RMB 0.5/kWh (US$.08/kWh) or below according to Wang.)

Challenges

In fact, in some commercial and industrial zones in China’s coastal provinces, electricity rates are even higher with “PV grid parity” pockets emerging in the Yangtze and Pearl River deltas, where even without any subsidy distributed PV plants can compete with conventional forms of power generation. So fairly quickly these eastern regions are emerging as promising markets for PV in China. One Chinese PV manufacturer to see this potential is Phono Solar in Nanjing. Being part of the state-owned Sumec Group, Phono Solar has deep pockets and a strong track record in various industries to pursue this potential. Eric Yuan, Marketing Manager at Phono Solar, describes the opportunity as follows: “We believe some provinces located along the China southeast coastal area could be the promising regions, which are developed regions. The power demand there is high, the local governments are relatively rich and they already had advanced the power grid together with existing commercial, governmental and even residential roof-tops, which are all perfect resources for PV distributed generation.” When asked about the challenges facing distributed PV in China, Yuan points to the following: “The challenges are first of all legislation and regulation, second, technology, and third, finance. We need clear and practical legislation and regulation, and we also a need market-oriented power trading and accessing system.” At the Solarpraxis AG/TÜV Rheinland workshop Hu Gao of the NDRC made a similar point about “building up the market mechanism as well as the power administration” to allow distributed renewable energy to flourish. Accelerated grid access for demonstration zone PV projects is just one instance of a broader push to deepen market reform in the country’s energy sector. In the State Council’s 2012 Energy Policy White Paper published on October 25, 2012, the following achievements and challenges are summed up: “In the electric power industry, government administrative functions and enterprise management have been separated, as has power production from power transmission, and a supervisory system has taken shape. The energy pricing reform has been deepening, and the pricing mechanism is gradually improving.” So distributed PV is part of a wider reform process in China and the further development of smart grids will also play a decisive role in allowing China to emerge as one of the world’s leading markets for distributed solar. In the end trade tensions and over-supply might prove a blessing in disguise in forcing the rapid development of China’s PV market and with it a bold move away from the country’s reliance on fossil fuels. With 70% of the country’s electricity coming from coal, this is a very long-term process, but one which has to be started soon, even if only for environmental reasons.