Solar sector faces uncertain future in China
Uneven development fuels concerns that a repeat of the boom and bust of recent years lies ahead for the mainland
China's solar energy sector is a tale of two industries, in which ailing, overcapacity-plagued panel, parts and materials manufacturers are shunned by banks, while downstream solar farm developers boast mind-blowing expansion plans and credit lines.
But behind the multibillion-yuan construction plans and loan agreements with banks lie concerns that the solar farm building binge will see a repeat of the growing pains and low returns suffered by wind farm developers in 2011 and 2012 due to the inability of power grids to absorb much of their output.
"Risks abound, some of these developers have been telling investors that their projects have no problems connecting with the grids, but they have yet to give convincing evidence to support their assertion," said CIMB Securities utilities and renewable energy analyst Keith Li.
Shunfeng Photovoltaic International, a solar farm developer controlled by Cheng Kin-ming, an investor known for buying distressed assets, said last month it planned to spend eight billion (HK$10.2 billion) to nine billion yuan to install three gigawatts (GW) of solar farms a year in the next three years. The 3GW target equals 21.4 per cent of this year's national target of 14GW of additional solar power capacity.
It came shortly after Cheng funded the bulk of Shunfeng's three billion yuan takeover of bankrupt Wuxi Suntech, once the world's largest solar panel maker.
Shunfeng executives said financing the solar farms plan was feasible because Beijing supported clean energy development to contain air pollution, and it had secured more than 2.3 billion yuan in lines of credit from mainland and offshore banks, including 1.2 billion yuan from China Development Bank (CDB), a mainland policy bank.
They also dismissed concerns that projects in remote northwestern regions would face difficulties delivering their output, saying construction of the projects would only start once consent from monopoly power distributor State Grid Corporation of China was secured, and they were mostly located close to new transmission lines that send power to eastern regions.
Wind farm developers endured two years of low plant utilisation after projects were installed much more rapidly than grid operators could cope with, until last year, when infrastructure partially caught up.
That was because power demand was modest in the sparsely populated northern and western regions, which have an abundance of riches in wind and solar resources, while transmission to distant markets required years of costly infrastructure building.
Wind speed tends to be highly variable. Solar power is more predictable, but its output varies according to the time of day and is absent at night.
Both could bring instability to a power grid if they were dispatched in large amounts and not balanced by more stable energy such as coal-fired, gas-fired or hydroelectric power. Power storage could be a solution in the future, but current technology is not commercially viable.
Wind farm developers' returns have also been hurt by the slow payout of power tariff subsidies, financed by a surcharge on consumers' power bills.
Delays of a year or longer in the payment of subsidies are common, with a shortfall of funding - 10 billion yuan nationwide at the end of 2011 - caused by the rapid ramp-up of wind power output and exacerbated by past instances of fraud that have prompted Beijing to carefully verify the output being claimed.
The delays meant lower returns in the initial years of wind farm operation, higher interest costs and longer payback times.
Solar farm developers are undeterred due to policy support.
To cut the mainland's reliance on polluting coal-fired power, Beijing set a target in July last year for its solar power generating capacity to reach 35GW by 2015, up from a target of 21GW set just six months earlier.
Two months later, it raised the surcharge that funds subsidies for renewable energy to 1.5 fen per kilowatt-hour from 0.8 fen, to plug a funding gap that Beijing forecast would reach 33 billion yuan in 2015 without an increase.
The National Energy Administration and CDB also announced measures to give solar farms easier access to financing.
Based on the annual installed capacity targets, CDB will provide credit to financing vehicles run by local governments, which provide trust loans to developers.
Tan Zaixing, a project appraisal director at CDB, told an energy conference in Wuxi in October that the bank had lent over 60 billion yuan to the nation's solar sector, accounting for 60 per cent of total loans to the sector.
"CDB is a policy bank, we do not see profit as our primary objective, so we did not abandon the solar sector when the going got tough," he said. "Supporting strategic emerging industries is important."
A credit executive at a major bank said commercial lenders were still shying away from extending new loans to solar firms after being burned by an explosion of bad loans to upstream makers in the past two years.
That is despite improving profitability as product prices stabilised following years in which they fell faster than the cost of raw materials due to weakening growth in demand and rapidly rising output.
Former industry leader Wuxi Suntech, whose major creditors include CDB, was put into bankruptcy and sold to Shunfeng after it defaulted on bond payments, while Jiangxi-based LDK Solar also struggled on debt payments.
"Downstream projects usually need 15 to 20 years of financing due to the huge initial capital outlay, which involves substantial uncertainties on government policy, operation and maintenance," the credit officer said.
A bigger risk is power grid operators dishonouring their state-stipulated obligation to buy all the power generated by solar farms because their grid infrastructure cannot cope with the rapid addition of new projects.
Developers are entitled to compensation from State Grid, but legal cases against the state monopoly are almost unheard of.
China Business News quoted results from a study by the Ministry of Science and Technology in May last year that found grid bottlenecks meant most ground-mounted solar farms in Qinghai province were operating for only 1,500 hours a year, much less than the region's total sunshine hours of 2,500 to 3,000 hours.
"There is a mad gold rush to secure downstream solar assets in China right now … curtailment of power purchases by the grid is inevitable," said CLSA's head of sustainable research, Charles Yonts. "I'd like to think [Beijing] and State Grid have learned from past mistakes with wind … but looking at developments in the northwest, it is not entirely clear they have learned the lesson."
He said the mismatch between output and demand should be less for solar than wind power, given the solar resource is strongest in the middle of the day, when demand is high.
Macquarie Securities senior analyst Patrick Dai said developers were unlikely to be able to realise all the expansion plans. Curtailment was likely to be worse in Gansu, which already had a lot of wind farms, than in Xinjiang, where an ultra-high-voltage line had recently been completed in the region's northeast by State Grid to send power eastwards, he added. Another line is scheduled for completion late this year.
Additional reporting by Jane Cai