China’s Solar Conundrum

Friday, September 28, 2012 9:34

While on the HangOut with Terry and Fons last night, we spent quite a bit of time discussing solar and solar policy as part of China’s wider energy policy.

It is a topic fresh on the minds of many as the recent actions in US/ EU have put a lot of pressure on Chinese producers.   Producers who, in any other market, would be bankrupt.  But an important one as solar in China has had a different trajectory from other forms of energy.

It was seen primarily as a part of its export, not energy economy. Grid was not interested in it. There were no feed in tariffs to support its domestic consumption.

Which wasn’t really a problem because German, Italy, Spain, and the US were gobbling up the cheap panels at record pace as their economies looked to decarbonize.  A party that came to an abrupt end. Sadly after China’s solar firms had leveraged themselves up, gone vertical, and built out massive capacity. Capacity which has slaughtered their balance sheets and brought many in the industry to their knees.

Which brings us full circle to the discussion of last night, which was what role solar will play domestically in China.  Would the central government allow these firms to fail?  Or would a bail out occur?  Well, if the news that followed our Hangout is an y indication, it looks like China is going to turn on the taps …. in a major way.

The first is to provide the cash flow necessary for firms to maintain operations.

As the Reuters article Chinese local govt lends $32 mln to solar firm Suntech suggests:

Banks in Wuxi, Jiangsu province, have extended new loans totaling 200 million yuan ($31.73 million) to locally headquartered solar power giant Suntech Power Holdings Co Ltd, the Shanghai government-owned China Business News reported on Friday, citing anonymous sources.

The U.S. imposed import duties on Chinese solar panels as of May, and an anti-dumping investigation against Chinese solar companies is underway in Europe. The erection of trade barriers against Chinese solar products would make it even more difficult for the industry to resolve its capacity and inventory gluts.

Local branches of Bank of China Ltd , Industrial and Commercial Bank of China Ltd , Agricultural Bank of China Ltd , China Construction Bank Ltd and policy lender China Development Bank joined together to make the loan, the report said.

Second, China is going to create local demand.

As highlighted by To Save Solar Companies, China Considers Creating Its Own Demand

China is not going to sit around for the “free market” to save what it deems as an important sector of the future economy. And on Thursday, the National Energy Administration asked state provinces to submit plans by Oct. 15 on ways they can implement a pilot program for adding solar power to their energy grid.

The National Energy Administration recently asked all provinces to submit by October 15 their plans on implementing a pilot program for the so-called distributed photovoltaic power generation, the China Securities Journal reported Wednesday.

Shanghai, Beijing, Tianjin, and other coastal states are said to be taking part in a pilot program, creating demand from local governments to increase solar power in their energy matrix. Even though China is the world’s largest producer of solar panels, less than 1 percent of the country is powered by solar.

Where this gets tricky politically is that if not handled properly, Chinese solar firms are most certainly going to see further action abroad to “balance” out the subsidies that Chinese producers are being provided with.  The EU is only starting their investigation, so a massive bailout may be too difficult.

UNLESS.. China goes big domestically.  So big that its major producers are able to sell their entire stock (and future production) locally… for the foreseeable future.

HOWEVER.. nothing is certain domestically.  Particularly at this time as China’s leaders are in the middle of their transition and today’s local champion may find themselves in a position where they are no longer rewarded for the success of these firms.  Which requires producers to wonder… will the new leaders who may not be all that keen on supporting a failing industry?

Only time will tell what will actually occur, but one thing is clear.  If China does not create domestic demand for panels, and a significant amount, the solar industry will continue to bleed out, stocks will be delisted, and employees laid off.

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