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How China plans to rewrite the rules of solar energy

Last year China leapfrogged past Germany to become the world’s largest market for solar equipment, according to industry figures. True, a September report showed the former is also set to push global carbon emissions to a record high in 2014, but the current and potential immensity of its solar market is no less staggering for that.

According to solar manufacturer Hanergy and the China New Energy Chamber of Commerce, the country installed 12 gigawatts (GW) of solar power in 2013 – a 232% increase over 2012. Of the total installed solar generation capacity of 140 GW worldwide last year, China contributed about 20 GW, while world leader Germany had 35.7 GW. But Germany managed to derive 29% of its total power from solar last year; China barely eked out 1%.

Undeterred, China’s National Development and Reform Commission has set a goal of installing 100 GW of solar capacity by 2020. That will require a ferocious installation rate of more than 10 GW per year, but previous solar power pushes have ended in oversupply and bankruptcy for many local panel manufacturers. (The resulting glut of panels was actually key to making solar cheap enough to revolutionize Germany’s energy sector.) As part of the state’s new strategy to reach its lofty gigawatt goal, it is rethinking how it wants to encourage solar power installation across the country.

In September the National Energy Administration published a policy document that officially laid down its strategy for the next stage in national solar energy development. The fifteen-point document prioritizes “distributed photovoltaic” (DPV) – that is, power generated near the consumer, such as through rooftop arrays and some ground-mounted systems. The shift is designed to help address numerous problems that have plagued the young industry in China and to help boost the domestic market for solar power equipment that will be key to a clean energy future. 

Whether DPV will become a financially attractive prospect for buyers remains unknown, but perhaps not for too long.

“It’s a new business,” said Frank Xie, a senior analyst of power and energy at IHS Technology. “The extent to which [distributed solar] can reach depends on how attractive it will become in the next five years.” 

Burned at both ends

China’s solar industry is about ten years old – past its infancy, but not yet beyond a rocky adolescence. While manufacturing is reaching the end of a consolidation process, the government’s efforts to encourage DPV are attempting to chart a path away from a collapsed foreign market, and seek to avoid the past mistakes of failed initiatives at home.

Solar manufacturing’s first growth spurt occurred in the mid-2000s, mainly in response to foreign demand as renewable energy gained policy momentum in the West. In 2005, Germany overtook the US as the largest producer of solar energy. The boom years of 2008-2012 saw solar installation increase more than eight-fold over 2007, with Italy experiencing a lesser boom in 2011-12 quintupling its capacity. All told, Germany and Italy added over 45GW of total solar power in that period. Last year, though, it added only about 4.5 GW, with slowing growth forecasts, plus added anti-dumping tariffs on Chinese equipment. In other words, the foreign market largely disappeared.

Meanwhile from 2009-12, China undertook the large-scale Golden Sun project, whose failures in quality are influencing the refocus to DPV today. The government shelled out nearly $3 billion in the initiative, mostly to pay for large, utility-scale projects. The foreign and domestic cash flood resulted, predictably, in many new players diving into the manufacturing space – some less well-equipped than others. When the flow of funds foreign and local wrenched shut almost at once, the result was an overcapacity crisis and subsequent consolidation.

While consolidation continues, the manufacturing sector as well as overall quality of solar equipment produced has already stabilized significantly.

“The market has already entered the second phase of development,” said Frank Xie. “Downsteam users are starting to note of the merits of tier-one suppliers. Tier-two module suppliers are selling more cheaply.”

The dominant, quality producers, including Yingli, Canadian Solar and Trina Solar, are here to stay. What remains is the matter of encouraging buyers.

Home-grown business

The lessons of Golden Sun are now being brought to bear in the form of China’s distributed solar strategy. Broadly speaking, there were two core problems with the old approach.

First was the program’s design. Golden Sun focused specifically on the quantity of solar power installed, with subsidies going to developers of large, utility-scale installations. But this incentive to install for capacity meant there was little or no oversight on quality. With the concurrent entrance of many manufacturers a wave of cheaply made panels entered the market, and has proved a lasting problem. Shen Yongbing, a senior expert at consulting firm Tellus Energy, said that it can take up to five years to gather enough energy output data to really identify an installation’s level of inefficiency.

The second, more intractable issue is the distance of utility-scale plants from end users, combined with the current state of China’s power grid. Utility-scale solar installations require plenty of space and sun, both of which are typically far away from China’s densely-packed cities. Because the grid hasn’t yet been built out to many of the areas where big solar farms were constructed – or even to places that have the potential for such farms – the panels often sit idle. Or worse: the power they create can overload and damage the local grid.

Distributed solar power solves the distance problem because it’s close to end users by definition. For example, rooftop panels that can generate electricity for their host building. The problem of subsidizing the construction of big installations is also obviated by offering payment for power generated. Through the use of a “feed-in tariff,” unused power produced by the owner of the solar panels can be sold to the grid at large. That’s the idea at the heart of current policy encouraging the developing of DPV.

In that respect, one of the biggest changes made by the September document was an increase in the price paid per kilowatt-hour produced by distributed panel installations from 0.78 RMB to nearly one RMB. That might sound slim, but it brought the price into line with utility-scale installations already earning as much. It also expanded the official definition of “distributed power” to include some smaller ground-mounted systems, such as those that can be placed on unused urban land, assorted empty lots, or even floated on fish ponds. That gives potential investors in these systems more options.

Go green, see red?

It all makes for a promising hypothesis, but serious obstacles could yet stunt solar’s growth here. Among them: exactly how to make people buy into the new push.

While the National Energy Administration policy paper expanded the scope of possible projects, many of them will be still be rooftop installations, for example, on top of factories. That begs the question of ownership. Jenny Chase, manager of Solar Insight at Bloomberg New Energy Finance, pointed out that the average company life in China is eight years. The company might move, shut down or otherwise cease to occupy a building where it installed solar panels. Where that leaves the panels and their erstwhile energy production remains unclear.

Another snag is the institutional structure of the State Grid Corporation of China, which has many smaller subsidiaries throughout the country. Although the new policy paper raises payments for feed-in tariffs, State Grid subsidiaries – especially those farther away from big cities, where officials are more apt worry about problems connecting DPV units to the grid – might not agree to connect distributed solar panels to the public grid once they’re installed.

Third, because distributed solar is new and untested here, equipment suppliers are taking a bigger risk with system owners by paying up front for the equipment’s production. Frank Xie said Huawei, which supplies an integral piece of tech that converts solar panel electricity into a usable form, is skittish about supplying their products to DPV projects because it can’t be certain of when the equipment will be fully paid off by buyers or investors. It currently takes about five years to learn if a given DPV installation is profitable, or can even pay itself, and very few systems have been around that long.

“There is no data,” Xie said. “Many investors and banks are still pending to see if [DPV systems] will be profitable,” adding that he could foresee an established market in 2-3 years’ time, provided the current projects are running smoothly.

Finally, current DPV installations are concentrated in densely populated eastern cities, where conditions help keep solar energy competitively priced. To meet its install target, though, the government will have to look to untapped cities in China’s West. Relatively cheaper conventional power sources inland make solar less attractive, and could prove a serious long-term barrier to its adoption further from the coast.

With the decline of solar power installation rates in Europe and slow movement in the US, China is likely to remain the largest market for solar equipment. It will probably overtake Germany as the top solar power-producing country before the end of the decade – even as the European powerhouse continues an unrelenting push into renewable energy. Whether China attains the goal of 100 GW of solar power installed by 2020 is much less clear. For his part, Xie at IHS is pessimistic, expecting 50-60 GW installed by decade’s end, tops.

But even if China does reach its 100 GW goal, that would still only add up to 8% of last year’s total nationwide power capacity of roughly 1,250 GW. And the US Energy Information Administration predicts that 66% of China’s electricity will still come from smog-belching, carbon-spewing coal in 2020. For now the future of solar in China remains hazy, bright spots aside. 


Author: Tom Nunlist

Editor: Hudson Lockett (@KangHexin)

 

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