Across The Border

Solar prospects dim as subsidies peter out and overcapacity builds

After a rush in installations to pre-empt scheduled subsidy cuts from July 1, analysts turn bearish on the outlook for sector in second-half and next year

PUBLISHED : Monday, 08 August, 2016, 6:01pm
UPDATED : Monday, 08 August, 2016, 9:49pm

“What goes up, must come down.”

That’s the rather stark assessment by one analyst, of the expected fortunes of China’s solar power industry in the second-half, after the number of panel installations scorched ahead by a record 159 per cent in the first six months.

Others say volumes may continue falling moderately next year, too, and remain subdued for the next few years.

The likely easing in the sector’s progress is the direct result of growing difficulties in the financing of new projects, not helped by a reduction in generous government subsidies for new developments.

Many firms are already finding tighter cash flows, too, from growing amounts of still unpaid government subsidies, and of low plant utilisation caused by power grid bottlenecks.

“After a rush in installations [during this year’s first-half] to pre-empt scheduled tariff cuts from July 1, we are now turning bearish on the outlook for China’s solar sector in the second-half and next year,” said Macquarie Capital senior analyst Patrick Dai in a report, in which he even advises investors to shift their holdings to wind power.

Dai forecasts second-half installation volume to fall by half in the second six months, and next year to 5 per cent lower again than this year.

The China Photovoltaic Industry Association claims just over 20 giga-watts (GW) of solar output was built in mainland China in the first-half, up from 7.73GW in the same period last year. The official industry figure will be confirmed by the National Energy Administration later in the year.

If true, the association’s figure would be higher than the full-year installation for the past two years, but its secretary general Wang Bohua puts the rush in business squarely down to developers hurrying to finish projects before July 1, when newly completed projects were subject to tariff cuts of between 2 and 11 per cent.

Wang is projecting full-year project volume to reach 25 to 30GW, he told Xinhua at an industry seminar in Beijing late last month. That would imply 5 to 10GW is likely to be added in the second-half.

His prediction means this year’s additional capacity could almost double from last year’s 15.1GW, and be 43 per cent higher than in 2014.

Frank Xie, a senior solar analyst at IHS Markit, said the building frenzy is also likely to see his firm raise its earlier capacity estimates for this year.

Dai said over 4GW of solar projects were installed late last year, but were only connected to the power grid this year, while some 10GW were built and connected in June alone, ahead of the July 1 tariff cut, which had largely distorted the readings

China’s solar industry has expanded at breakneck speed over the past three years, fuelled by those and other generous tariffs.

The industry subsidies have encouraged the creation of hundreds of developers, who are still jostling to build projects, particularly in solar energy-rich but sparsely-populated northern and western regions.

As well as many well-heeled state-backed power firms, developers have also included solar panel assembling equipment makers and farm developers, including Hanergy Thin Film Power Group, a Hong Kong-listed firm controlled by mainland businessman Li Hejun.

Hanergy’s huge early profits generated from transactions with its parent firm, however, turned into massive losses after stock market regulators questioned the sustainability of its business model and the failure by its external auditor to find sufficient evidence to support some of its major deals.

This is exactly the kind of situation the government would like to avoid – a boom-and-bust cycle instead of more healthy and sustainable market development
Frank Haugwitz, Asia Europe Clean Energy (Solar) Advisory

Analysts are expecting Beijing to further slash regulated tariffs again January 1 next year, which means subsidies for the production of solar power instead of cheaper coal-fired power may be cut again, as the government is struggling to keep up with rising subsidies payments in-arrears that it needs to honour.

IHS had previously forecast 6 to 7GW of new capacity in the second-half, and 19.8 GW for next year.

“This is exactly the kind of situation the government would like to avoid – a boom-and-bust cycle instead of more healthy and sustainable maF6rket development,” said Frank Haugwitz, the Beijing-based founder of consulting firm Asia Europe Clean Energy (Solar) Advisory.

“The future market landscape and demand is bound to change.”

Haugwitz added the industry regulatory regime is also likely to continue evolving, with the development focus shifting towards quality, rather than sheer volume.

Adding to the problems, during the first-quarter, some 13.9 per cent of the power generated from mainland China’s solar farms could not be delivered by the power grid and was wasted due to weak power demand growth, rapid growth in generation capacity of coal-fired, nuclear, wind and solar power, and surging hydro power output from higher-than-normal rainfall.

Of the worst hit regions, wastage rates were 39 per cent in Gansu province and 52 per cent in Xinjiang Uygur autonomous region, where power grid construction lagged badly behind capacity growth.

Even if Beijing does dole out 8 billion yuan in overdue subsidies in the third quarter, as the industry hopes, Dai says outstanding amounts will still amount to some 13 billion yuan, “leaving the industry’s financial constraints [to fund new projects] unresolved”.

Haugwitz now expects the National Energy Administration (NEA) to set an average new installation target as low as 15GW for the five years to 2020, when it unveils its latest five-year plan for the industry’s development, later this month or next.

This could see cumulative installed volume reduced to between 110 and 125GW instead of the 150GW planned earlier, by the end of 2020.

Haugwitz also claims the government has planned further regulatory changes to foster a “national competitive market” within the industry, with the gradual replacement of the current system whereby solar-farm developers enjoy higher guaranteed subsidised power selling prices than those won in national and provincial tender processes.

The NEA did not responded to faxed queries on the possibilities.

A pilot 1GW-tender program in Shanxi province, completed last year, meanwhile, has already been expanded to other regions and increased to 5.5GW this year, he noted.

Macquarie’s Dai said competitive bidding for that has been launched in Heilongjiang, Hubei and Henan provinces, which led to 9 to 10 per cent discounts to existing state-stipulated subsidised tariffs.

“Competitive bidding will undoubtedly lead to lower margins for developers,” Haugwitz said.

“The NEA is studying the global policy landscape which increasingly features tender or auction-based schemes [and the degree they] can be applied to China.”