Chinese Solar: On The Upswing?

Chinese Solar: On The Upswing?

October 10, 2013

The poet Percy Bysshe Shelley wrote in Ode to the West Wind, “If winter comes, can spring be far behind?” This is a good description of the current solar photovoltaic industry in China. The Chinese PV industry has suffered two long years of winter, and now the government is working overtime to make the spring winds blow in order to spare the PV industry from being frozen to death.

The China National Development and Reform Commission (NDRC) issued two notices at the end of August on “Using Price Leverage to Promote Healthy Development of the PV Industry” — called the PV notice — and on “Matters Related to Surcharges on Prices for Renewable Energy and Energy Generated by Environment-Friendly Coal-Fired Power Plants” — called the surcharge notice. The notices implement policy decisions taken earlier by the State Council, which is eager to promote solar energy.

On-Grid Prices for Solar

Investors looking for solar opportunities in China should keep in mind that there is differential pricing for solar electricity based on the project location. The PV notice establishes three categories of benchmark on-grid prices for solar power. These are prices that state-owned utilities will pay for electricity from solar power generators.

The benchmark on-grid price for category I is RMB 0.90 and covers areas like Ningxia, Haixi in Qinghai province, Jiayuguan, Dunhuang, Jiuquan in Gansu province and some cities in Xinjiang and Inner Mongolia (mostly in the northwest of China). It is RMB 0.95 for category II, which covers areas such as Beijing, Tianjin, Helongjiang, Liaoning, Jilin, Sichuan, Hebei and the areas in Qinghai, Gansu and Xinjiang excluded by category I (mostly in the northeast, southwest and northern China). It is RMB 1.00 for category III, which covers areas not covered by categories I and II. The benchmark on-grid price for solar power in Tibet, where insolation is the highest in China, will be decided separately. Currently, the on-grid price of coal-fired power is from RMB 0.40 to 0.50.

Solar power suppliers are able to sell at a profit at the benchmark prices since modules are cheap due to overcapacity among solar panel manufacturers and technological advances. The difference between the benchmark on-grid price for solar power and coal-fired power is paid by the National Renewable Energy Development Fund (NREDF).

Generally speaking, the benchmark on-grid prices are 20% more than what the industry expected and will help beleaguered solar panel manufacturers by creating additional demand for solar panels. The condition of major manufacturers should be improved by around 80% if all the provisions in the PV notice are implemented as planned. On the other hand, this may attract more investment in the manufacturing sector.

The actual prices may be lower than the benchmarks in the PV notice. The actual electricity price is set through public tender. The winning bidder’s price should not exceed the benchmark prices in the PV notice; it can be lower.

Distributed Solar

The draft PV notice set a benchmark grant — as opposed to electricity price — of RMB 0.35 for distributed solar. The grant in the final PV notice is RMB 0.42 per kilowatt hour and is much more than was expected. Any shortfall between the grant amount and the market price will be paid by the NREDF through the grid companies. The grid companies enjoy a monopoly position at the intersection with the grid. It is not clear how the regulators will supervise the payment function.

The distributed PV market in China is becoming hot. The on-grid price for electricity for systems connected to the grid will be the same as the benchmark price of coal-fired power, which is around RMB 0.50. Therefore, the total revenue to the owner of a distributed solar facility that is connected to the grid will be slightly less than RMB 1.00 per kilowatt hour, or a grant of RMB 0.42 and a payment for electricity of RMB 0.50. Furthermore, the government has lifted the need for approval for construction of residential PV systems. Some companies and even individuals are eager to break into this market as installers of residential solar systems. Foreign companies with experience and technology in these services will have a huge opportunity in the local market.

However, the grid company still needs to do a survey and connection plan before installation commences. It has to confirm that the building can bear the system and assess the impact on the surrounding environment and neighbours. This could be time-consuming.

The period of return on investment will be cut in half from 15 to 20 years to seven to nine years. Foreign solar companies interested in the distributed PV market should assume it will take around seven years to get all the investment back for a four-kilowatt distributed PV system based on the current on-grid price and grant. The system’s life will be around 25 years. This sector is becoming more attractive.

Who Qualifies?

Solar PV projects qualify for the benchmark on-grid prices in PV Notice in two situations.

An application for the project must have been filed or approved after September 1, 2013. Alternatively, the project must commence operation on and after January 1, 2014.

Interestingly, investors who obtained approval years ago for projects whose construction or operation was delayed will also benefit from the prices in the PV notice. This is probably not fair for those who struggled to complete construction in time, even though their projects may be operating at a loss.

The PV notice requires the grid company to pay the on-grid price on the project output as measured by the grid company.

The grant for distributed solar is only available to projects that do not enjoy other government grants, such as the Golden Sun and BIPV grants.

The benchmark price for PV power and grant to distributed PV will last in principle for 20 years beginning from when a project starts operation. However, the government reserves the right to decrease the price and grants based on the development volume and cost.

Due to overcapacity and the high growth rate in the PV sector in China, it would not be surprising if the prices and grant are reduced in the near future.

Electricity Surcharge

The government collects a surcharge on all retail electricity sales. The surcharge notice in August increased the rate to RMB 0.015 per kilowatt hour, 87.5% more than the past rate. The central government will not be able to afford the grants to owners of distributed solar facilities without such additional funding. The surcharge was only RMB 0.008 per kilowatt hour before the surcharge notice. Based on the old rate, the government collected around RMB 20 billion each year. By the end of 2011, the gap between what the government was collecting and grants owed to renewable energy projects was RMB 10.7 billion. That’s why grants are always being paid in arrears. The average delay is around two years.

If the surcharge rate had not increased, then it was estimated that the gap would have widened to RMB 33 billon by 2015. The total power generation output in 2015 will reach 6.4 trillion kilowatt hours. The total collected surcharges at the new rate will range from RMB 80 billion to RMB 100 billion, which should be sufficient to support the development of PV sector in China.

China is changing its approach to incentives to the PV sector from the upstream to mid-downstream. For large-scale projects, the on-grid benchmark price will be paid by the grid company to the generator directly. For distributed solar facilities, the grant will be given to the homeowner who has the facility in his yard. The government is expected to use this American-style approach to foster a healthy upstream manufacturing market. The spring in 2014 should be much warmer for both local and foreign solar companies.