More private enterprise

When China’s president Xi Jinping gave his televised New Year’s address to the Chinese people he was standing in the wide open plains of Xilin Gol, home to the largest open-pit coal mine in Inner Mongolia, one of the regions with the most abundant coal resources in China. It symbolized both the central importance of coal in the country’s energy mix and the key role coal-fired power generation plays in China’s escalating pollution problem.
Restructuring the country’s massive coal-burning energy complex must form the core of any serious attempt to curb the country’s pollution, that this winter also engulfed cities like Shanghai, which so far were spared the heavy pollution that has beset cities like Beijing.
According to the China Electricity Council (CEC), 64.8% of China’s electricity generation is based on coal, followed by hydropower at only 22%. These figures are for the year 2011 and in that year solar contributed a miniscule 0.2% to the total 4,693 terawatt hours (TWh) consumed in China.
Given the country’s continued rapid growth at an annual clip of at least 7% since 1990, the challenge is not only to replace or retrofit existing power generation capacity but also to build new capacity to reach a total capacity of 1,968 gigawatts (GW) in 2020 to serve an annual power consumption forecast at over 8,000 TWh. The 4,693 TWh consumed in 2011 were supported by a power plant capacity of 1,073 GW, almost half the capacity required by the end of this decade.

Coal action plan

While part of the restructuring effort will require the use of cleaner coal and the retrofitting of existing coal-burning power plants, another policy move will take coal-fired generating capacity away from the big cities on the eastern seaboard and put new capacity closer to locations like Xilin Gol with its abundant coal resources. Accordingly, the Atmospheric Pollution Prevention Action Plan issued by the State Council, the country’s cabinet, in September 2013 requires that the regions of Beijing-Tianjin-Hebei, the Yangtze River Delta around Shanghai and the Pearl River Delta around Guangzhou strive to bring about reduced coal consumption; that those regions forbid the building of new coal-burning power plants; and that coal reduction substitution be implemented in existing coal-burning facilities.
Overall, this action plan demands that by 2017 coal account for 65% or less of national power generation, which would be well below coal’s current share of 71.5% of total power generation at the end of 2012, according to China’s National Energy Administration.

Increased importance of solar

While coal is both the main culprit behind China’s pollution and the main source of electricity generation, renewables are rapidly gaining in importance. And within the renewables camp solar stands out, as China is blessed with both abundant sunshine in many areas and an established technology and production base, which has gone from being solely export-focused a few years ago to being more balanced with both a strong export market and an increasingly vibrant domestic market. Clearly, solar can play a key role in tackling the country’s environmental problems. It can also play a key role in delivering the additional one thousand gigawatts China requires in new generation capacity by the end of this decade.
The fact that the Chinese government quadrupled its 2015 target for solar installations to 35 GW last July reveals the importance the Chinese leadership attaches to the contribution solar can make both on the pollution front and on the power generation front.
Of course the Chinese government was motivated by various factors to boost this national installation target. One key fact was the decline in module prices to levels well below US$1 per watt. As the market research firm NPD Solarbuzz points out in its latest Module Tracker Quarterly report, “there was a staggering 35% annual decline” in the average selling price (ASP) of top-tier modules from the fourth quarter 2011 to the fourth quarter 2012. Since then the ASP in this group of 20 leading module manufacturers has declined by only 3% (according to NPD Solarbuzz for the 12 month period ending in the fourth quarter of 2013).
This sharp decline in panel prices to US$0.72 per watt at the end of 2013 provided a big boost to PV’s competitiveness in the Chinese market. The ugly flip side of this increased competitiveness was the lack of profits for most Chinese PV manufacturers, since the cost base was rarely low enough to withstand this drop in prices. As NPD Solarbuzz points out in its latest report, the situation has improved markedly for top-tier Chinese manufacturers with Jinko Solar being the first of these manufacturers to break through the US$0.50 per watt production cost barrier during the last quarter of 2013.
From the Chinese manufacturers’ point of view the whole mess started when China’s rush to build PV manufacturing capacity, almost only to serve overseas markets, resulted in severe overcapacity and, as a result, depressed prices and eroded margins. Trade sanctions and reduced PV subsidies in key export markets worsened the situation and all of this was not lost to China’s leadership. By boosting the country’s solar installation target to 35 GW in 2015, Beijing was also responding to the severe imbalance between supply and demand, the bloated production capacity at home and weakened export markets overseas.

PV market reform

Just as importantly, the right policy framework was needed to provide the foundation for a much more rapid and sustainable development of the solar PV industry. This policy framework required measures to overhaul the downstream market and measures to consolidate and streamline the upstream PV manufacturing sector. This critical policy reform was spearheaded by China’s cabinet, which on July 15, 2013, announced the “Relevant Opinion of the State Council in Improving the Healthy Development of Solar PV Industry.” Turning first to the downstream side, the pivotal step was to move from a capacity-based subsidy system to a performance-based system. This historic shift occurred last summer when China phased out the Golden Sun Program, which had provided an up-front subsidy of RMB 5.5 per watt in its latest iteration to cover the investment in a solar PV project. This subsidy regime created little incentive to build PV power plants with a high level of output for a long period of time, since the entire subsidy was paid up-front and not tied to the actual output during the life of the plant. Having pocketed the up-front subsidy the owners of the plant did not receive any solar feed-in tariff but rather the standard wholesale rate for electricity, i.e. the same rate coal-fired generators were getting for their electricity. This rate is also referred to as the benchmark feed-in tariff for desulfurized coal-fired power plants, which is set by provincial authorities and not at the national level.

Solar FIT takes center stage

This is not the case with China’s solar FIT, which is established at the national level and was first rolled out in the summer of 2011. We can describe the first two years of China’s solar FIT program as more or less a trial run, since most solar investments in this period still flowed to the Golden Sun Program, where the returns were highest and available in a very short time frame. With the phasing out of Golden Sun last July, the solar FIT program has become the central subsidy program to support the rapid deployment of solar in China. The program is strictly performance-based and as long as the plant produces electricity the payout of the subsidy is guaranteed for twenty years. Three irradiation regions have been defined for all of China and each region is given a specified FIT, ranging from RMB 0.90/kWh in high irradiation areas (2,000 to 2,200 kWh/m² annually) to RMB 1.00 in low irradiation areas (1,100 to 1,400 kWh/m² ).
FITs for medium (RMB 0.95) and high irradiation regions are higher than what some market analysts predicted last spring as discussion drafts of the new FIT regime were being circulated among market participants in China. The more favorable conditions for these regions has prompted an investment boom in this part of China, with a slew of major PV projects being announced in the second half of last year and early this year.

Shunfeng’s ambitious plans

One company rushing into this market is Shunfeng Photovoltaic International Ltd., a Chinese PV manufacturer and developer listed on the Hong Kong stock exchange. Shunfeng has risen to prominence in the past half year by coming to the rescue of Suntech Power Holding’s PV manufacturing unit in Wuxi in Jiangsu province. Suntech had been the star of China’s PV industry for many years, but its fortune turned to bankruptcy as the steep decline in module prices resulted in ballooning losses for the one-time global leader in solar manufacturing. While the acquisition of the Wuxi unit has not yet cleared all hurdles, most likely later this year the Wuxi entity will emerge debt-free to supply Shunfeng with a large part of the modules it needs to build a very impressive 10 GW of PV power plant capacity in the above-mentioned regions by the end of 2016. Three GW are already set to be installed this year according to a report by the news agency Bloomberg on January 16, 2014. The price tag for these 3 GW is RMB 25 billion (US$4.1 billion) with RMB 6 to 7 billion coming from Shunfeng and the balance from Chinese bank loans. According to the Bloomberg report, “The company currently has about 890 megawatts in operation. Most of the new projects will be ground-mounted in northwestern areas including Xinjiang, Qinghai, Gansu and Inner Mongolia.”

Promoting distributed PV

China is projected to install as much as 14 GW of solar power this year after adding 10 GW in 2013. According to a report by the Chinese news agency Xinhua on December 5, 2013, 70% of these 10 GW were ground-mounted PV plants and 30% distributed PV power projects. In the same report Xinhua cites Liang Zhipeng, an official with the National Energy Administration (NEA), with the comment that “distributed PV is likely to account for about 60% of next year’s new solar capacity target.” This is quite a reversal from previous years, where ground-mounted PV dominated photovoltaic installations in China.
The new policy framework established last summer set the stage for the flourishing of the rooftop segment. Unlike the U.S. and Europe, where residential rooftop is the application of choice, commercial and industrial rooftop will form the mainstay of Chinese distributed PV, at least for the foreseeable future. The new subsidy regime for distributed PV is a mix of national FIT and Golden Sun provincialism. Unlike the latter, the subsidy is clearly performance-based, providing a national subsidy of RMB 0.42/kWh on top of the local electricity rate.
Where the “provincialism” or even “localism” comes in is the pricing of both the local electricity rate and of any excess power sold to the grid. While the former is determined where the power is consumed, the latter is determined by the provincial wholesale electricity rate, which also forms the recurring revenue stream for the old Golden Sun projects. So while the power pricing for ground-mounted power plants is very straightforward (only three FIT rates covering all of China), it is far more complex for distributed PV projects.
It remains to be seen whether the bullish prediction by NEA’s Liang will turn out to be true in light of the pricing complexity inherent in the distributed PV subsidy model.

Gaining an edge with projects

On the other hand, if the local and provincial power rates are attractive, distributed PV projects promise to provide a better return than the 8 – 10% afforded by large-scale projects. China’s PV manufacturers are certainly jumping on the PV development bandwagon, be it the large-scale segment or rooftop installations. Depressed margins on the wafer, cell and module side of the business provided sufficient incentive to go further downstream and capture greater profits in the projects business. In the case of Shunfeng, its projects business actually forms the core of its business with PV manufacturing providing a reliable and low cost supply of panels to the company’s extensive project pipeline. China’s thin film leader Hanergy follows a similar business model, in which the construction and operation of solar farms and hydropower plants forms the mainstay of its business. Having in-house technological expertise is seen as a strategic advantage in the downstream market, as a means to lower costs and gain a performance edge on the competition.
Both companies are also seizing the “economy of scale” advantage by securing a large manufacturing footprint to further lower the cost per watt of its products and the levelized cost of energy (LCOE) of its power plants. According to the latest NPD Solarbuzz PV Equipment Quarterly, the new normal in terms of capacity expansion will be “in increments of 1 GW or more.” This will further enhance the gulf between top-tier manufacturers and lower tier suppliers who have somehow managed to survive the last few years. This brings us to the latest string of measures the Chinese government has introduced to streamline the upstream part of the market.

Local vs. central government

A key shift in this area has been a move away from the “Wuxi model” which spawned and nurtured Suntech for many years. As Dirk Kayser and Li Shi explained in a pv magazine article in August 2013 (“Through thick and thin?”, pp. 38 to 41), “the development approach that Wuxi pioneered, local governmentagencies directly providing equity capital, loans and production factors to promising companies, became known as the Wuxi model.” Suntech’s insolvency in March 2013 also bankrupted this model of local government intervention in the business development of a solar manufacturer. Instead the central government has stepped in to limit local intervention and set national standards for PV manufacturers. One outcome is a list of 109 PV manufacturers that comply with newly created PV industry standards, published by China’s Ministry of Industry and Information Technology (MIIT) on December 30, 2013.
As Kris Shen of SEMI China makes clear, “the list of 109 PV manufacturing companies released by MIIT shows that the central government wants to regulate the capacity expansion of PV manufacturing.” Shen goes on to say that the “next round of reform in the economy will be led by the central government. Local governments’ direct involvement in the PV industry will be strictly controlled to avoid the demand and supply imbalance. All the PV companies in China, including the ones on the list, will get less resources directly from local government but play under a much more open, fair and free economy environment.” However, it would be an exaggeration to describe the December MIIT list as a “cull list” of Chinese PV manufacturers. For one, some prominent manufacturers, like Shunfeng, are not on the list. The list will actually be updated every six months, so manufacturers can qualify in later rounds. And much like SEMI’s international standards for PV manufacturers, these MIIT standards are not mandatory. Failure to comply with these standards will not result in any direct sanctions by the Chinese government. However, insofar as the MIIT standards are concerned, failure to meet these guidelines and be included in the MIIT list could make it difficult for these manufacturers to secure bank loans, export tax credits and inclusion in public tenders for PV projects.
While SEMI’s standards are highly technical and detailed, the MIIT guidelines also cover financial requirements, for example the need to limit debt financing to 80% of a fab construction, renovation or expansion project. Or the requirement to invest at least 3% of total sales and not less than RMB 10 million on an annual basis in “research and development and process improvements.” Or the qualification that fab capacity utilization be at least 50% in the year prior to submitting an application to MIIT for inclusion in their list.

The primacy of the market

As Shen points out, the key take away from the new policy direction of the central government is not that PV manufacturing will now be subject to central government management. On the contrary, market principles are to be the driving force and not local or central government direction, which in the old Wuxi model verged on outright local government management. This is at least the theory. Despite the Suntech bankruptcy, local governments continue to play a critical role in the development of business in China. Shunfeng’s first wave of projects in western and northwestern China are a case in point. Backed by RMB 980 million in loans by the China Development Bank (CDB), six subsidiaries of Shunfeng will construct 130 MW of solar farms in China’s westernmost autonomous region Xinjiang. In most cases these subsidiaries include up to 10% outside shareholders, most likely local government partners or partners with strong ties to these authorities. It is also interesting to see CDB investing in Shunfeng projects despite the fact that non-inclusion in the MIIT list was supposed to rule out funding by key government lenders like CDB. To Shunfeng’s defense, they are most likely delaying their application to be included until the integration of the Wuxi production unit is finalized.
The tension between local governments and Beijing is a very old theme in China and it is said that the further one is away from Beijing, the more room one has to maneuver. This would certainly help local chieftains in Xinjiang, which is about as far away from Beijing as San Francisco is from New York. Another major theme in China is the level of government involvement in a particular industry. In modern China the energy industry has always been tightly controlled by the government, but there are increasing signs that the government will allow more private enterprise in areas so far monopolized by the government. For example, the government plans 100 new energy cities, 200 green energy demonstration counties and 30 micro-grid demonstration projects during the current 12th Five Year Plan (2011 – 2015) and distributed PV stands to play an important role in these projects. Most likely private service providers will be given more room to service their customers in these areas, including the direct supply of electricity currently monopolized by China’s two state-owned grid companies. So in various respects China’s PV market will be an interesting one to watch in 2014 and one big unanswered question will be the role of foreign players in this market. Hopefully, there will be plenty of engagement and solar profits for both domestic players and some foreigners courageous enough to venture into this very large market. Both sides would benefit from this engagement and together this know-how could be applied in the many new PV markets emerging worldwide.