China PV Market Development

by Matt Miller, Matthiah Larkin

One constant in what many have called "the miracle" of China's enormous economic growth over the past 30 years has been a reliance on export economies. The development of the PV industry has been no exception. Since the industry's modest beginnings in 2002, domestic cell and module manufacturers have exported more than 95 percent of their products to overseas markets - relying on the favorable energy policies of European governments to drive demand for Chinese production. China has rapidly vaulted to the top of global solar cell manufacturing capacity due to unprecedented demand from countries like Germany, Spain, Italy, and the United States, among others. As 2008 drew to a close and the realities of one of worst global economic crises since the Great Depression began to crystallize, domestic Chinese manufacturers in many industries scaled back production, laid off workers, and some even stopped operations completely. It was in this context that the Chinese government, recognizing the need to support this critical growth industry with domestic demand, began to seriously consider national solar incentives. With many other markets stalling due to a lack of financing, China may be one of the key growth markets for the solar sector in both the near- and long-term.

This report presents the findings of over 20 interviews and site visits around China with major solar manufacturers and installation companies, relevant government regulatory bodies, wind industry representatives, and local utility analysts. It analyzes how the Chinese domestic PV market will develop, major players and their strategies, and opportunities throughout the value chain that market development presents.

Beyond presenting a critical analysis of current Chinese solar policy and market development, the goal of this report is to provide a basic understanding of both Chinese power sector dynamics and the historical development of the domestic wind industry. In turn, an appreciation of these dynamics is intended to provide critical context to the detailed analysis of the solar sector and its potential going forward. Since the Chinese power sector is quite different than its analogues in Europe and the United States, gaining an appreciation of its structure is critical to acquiring a more comprehensive understanding of potential solar development. The majority of China's electricity companies are state-owned, and because of this structure and the strategic nature of the electricity industry, energy infrastructure development is not necessarily executed based primarily on economic considerations. Additionally, the large state-owned grid and generation companies wield significant influence and have the ability to significantly delay or accelerate adoption of solar. The wind market has undergone enormous changes over the past decade, and its development serves as a helpful framework for understanding solar's domestic potential. China's experience with wind policy and project execution, as well as technical and interconnection issues, may provide solar with an advantage for developing a sustainable market from its early stages.

Market Projection vs. Domestic Manufacturing (MW)

In this Report:

  • Installed capacity projections for 2009-2012
  • Profiles of 18 different solar companies, electricity generation companies, and government agencies
  • Extensive project return analysis for different locations under various incentive schemes (both approved programs and proposed programs)
  • Detailed overviews of the Chinese electricity sector and wind sector

Sample Conclusions

  1. The structure of the electricity market in China does not allow for traditional grid parity economics for solar, at least in the near term. Base-load generation will continue to be dominated by coal, and natural gas will likely remain a non-existent generation source due to China's strategic use policy. As electricity rates at the wholesale and retail level are set by the NDRC, competition among generation providers is not as evident as it is in Western markets. The only time that the cost of displaced electricity argument can be used within the Chinese market is in the off-grid segment, where solar costs can be directly compared with diesel generation (~$0.15/kWh). Ultimately, the Chinese power sector wants solar electricity generation costs to approach those of wind and later coal. Because of the government's heavy involvement in the electricity sector, power projects do not have to be immediately profitable to be built. As evidenced in the wind sector, the Chinese government pushes for high amounts of installed capacity, with the long-term goal of bringing down high capital costs. This development model serves two goals: It supports domestic manufacturers and domestic economic growth, and it pushes installed capital costs of new technologies down to approach base-load capital cost.
  2. With current overcapacity in the Chinese generation market, grid interconnection is a major concern for newly installed generation capacity. As has been the case with recently installed wind capacity, it is highly likely that newly installed solar PV capacity will face significant delays (and some may be unable to connect to the grid). The reasons are two-fold: first, a lack of standard interconnection procedure across grid regions; and second, a general lack of experience on the side of the developers. Until the grid connection process becomes a more standardized and reliable process, there will likely be a dearth of independent project developers in the market, as their return is based on kWh they are able to deliver to the grid (assuming a national feed-in tariff).
  3. Local support (whether municipal or provincial) will push for project development with corresponding investment in manufacturing facilities as part of broader economic development plans. A well-known example of this includes the agreement between LDK and the Qinghai provincial government to develop hundreds of MWs of projects and establish a 500-MW module production facility in the province. Yingli has signed a similar style agreement with the government of Hainan province, investing in a fully integrated solar value chain along with an integration company in the province to develop local projects. Provincial GDP growth is one of the key metrics by which Communist party leaders are measured, and so it is clearly in their interest to focus on provincial growth at the expense of any sort of cohesive national policy. This phenomenon will likely occur throughout the solar value chain, from domestic polysilicon production to cell to module manufacturing. Manufacturers that have subsidiaries or invest in job creation/industry in a region will be preferred over unaffiliated companies.
Matt Miller Analyst at Large

Matt Miller previously worked at Trina Solar for two years as a Manager in the Business Development department. While at Trina, Matt focused on various strategic expansion projects including upstream silicon procurement, strategic alliances, joint ventures, and merger and acquisition activity. He was also responsible for analyzing industry trends, and helped to develop and implement the company’s long-term corporate strategy.

Matthiah Larkin Analyst at Large

Matthiah Larkin previously worked for two and a half years at Trina Solar as Account Manager, USA in the Sales & Marketing department. Matthiah was responsible for identifying, developing and managing all customer relationships in the region as well as contract negotiation and execution. He was also responsible for industry analysis, providing the management team with regular reports on policy, market and technology trends. Matthiah is fluent in Mandarin Chinese and has spent more than three years living and working in China.

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