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China uses feed-in tariff to build domestic solar market

SHANGHAI -- After years of simply taking advantage of overseas demand, China has taken a critical step to form its own solar market.

Since last month, project developers here can sell electricity generated from the sun to utilities at a price of about 15 cents per kilowatt-hour, a result of China's first nationwide feed-in tariff scheme for solar energy. And in some cases, depending on the timing and location of solar projects, the price is slightly higher.

Analysts attribute the birth of this long-awaited scheme to two urgent needs: keeping the nation's promise to use non-fossil fuels amid nuclear development setbacks, and feeding its hungry solar manufacturers for whom overseas markets are no longer sufficient.

Up to now, China lacked efficient financial incentives to nurture its solar energy use. In many cases, analysts say, project developers here could barely break even, let alone get a decent investment return.

However, with the newly issued feed-in tariff that guarantees a payback time in a matter of seven years and cash yields for nearly another two decades, developers in China are having a greater desire to harness the sun.

Already, in western China's Qinghai province, for instance, the local labor pool was dried up by solar project developers shortly after the issuing of the feed-in tariff. Among the developers who are scrambling for ways to get more workers, China Power Investment Corp. reportedly asked help from the military and contracted for 2,000 soldiers to install solar panels.

Using solar to fill a nuclear power gap

Before this surge, solar energy laid on the bottom of China's list of domestic clean energy plans. While the nation manufactured 10 gigawatts of solar panels in 2010 alone, less than 1 gigawatt was installed here in total. Instead, cost-competitive nuclear power took the lead in the Chinese clean energy strategy, until a turning point appeared early this year.

As neighboring Japan was hit by a nuclear disaster caused by earthquakes and a tsunami wave, the world's largest nuclear power plant constructor China has halted its approval for new projects due to safety concerns. Meanwhile, four nuclear power plants, which were approved just days before the Japanese disaster, were ordered to freeze their construction efforts.

But what didn't get frozen is China's promise of using more green power. As 15 percent of the country's power supply will come from non-fossil fuels by 2020, the slowdown in nuclear power development has to be compensated by using other emissions-free power sources like solar energy for instance.

On top of that, Chinese policymakers are being pressured by solar manufacturers to create more demand. Since Italy and other European countries -- which absorb more than 80 percent of Chinese solar panels -- recently slashed subsidies for solar energy, China, which is known as "World's Solar Factory" for its manufacturing scale, has seen its production outstrip the demand.

Already, second-tier Chinese solar manufacturers are being hit and will start going out of business, said Charles Yonts, who heads sustainable research at CLSA, an Asia-focused investment group in Hong Kong. Statistics show that some of the larger manufacturers are also seeing a free-fall in their profit margins.

China's solar industry gets 'cheered up'

That is the case of LDK Solar, a Chinese solar manufacturer listed on the New York Stock Exchange. The company's gross profit margin dropped to 2.2 percent in the second quarter of this year, compared with 18 percent the period a year ago, according to its statement. And, to ensure its future growth, the company executive stated, it will seek opportunities created by the feed-in tariff at home in China.

LDK Solar isn't alone. Yingli Green Energy, another Chinese solar giant, aims to sell one fifth of its products here this year, up from fewer than 10 percent in 2010. And while another company, Suntech Power, holds cautious tone on future sales to China, the Chinese solar industry leader did admit that there is a positive impact from the feed-in tariff.

"This cheered up the Chinese solar industry," said Lei Ting, vice president at Suntech Power. "The uncertainty of purchasing prices made investors hesitant to develop solar projects in China. But now, with the feed-in tariff, developers will be more active in the Chinese market."

His words proved to be true in the Gobi desert city of Golmud. Over the past years, only 40 megawatts of solar panels were installed on this sun-rich land. But driven by the feed-in tariff, its installed solar panels capacity is expected to hit at least 300 megawatts within less than six months.

A similar increase is also being seen in Ningxia, Inner Mongolia and other parts of China, pushing this year's estimated solar panel installation to reach 2,000 megawatts, twice the country's total installed capacity so far.

Despite such a rapid growth, however, the feed-in tariff may not propel China to become the world's top solar energy market as was the case of wind power.

Wu Dacheng, vice chairman at Photovoltaic Committee of Chinese Renewable Energy Society, an influential organization in Beijing, said that China is more likely to set up a ceiling for its solar energy growth due to cost concerns as well as avoiding a mistake made in its wind power sector.

The industry may be ready, but the grid isn't

Since China issued a similar feed-in tariff scheme for wind projects in 2009, it overtook the United States to become the world's number one wind power market. But the nation's grid infrastructure failed to cope with such a big jump.

Not all newly installed wind turbines in China found electric lines around to get hooked to. And for connected wind turbines, they were often forced to be shut down during peak winds, as the existing power grid is too weak to handle the unpredictable off-and-on nature of wind power surges.

Thus, in the first half of 2010 alone, wind-generated electricity that could have been used by about 10 million Chinese for a whole year ended up with being abandoned, according to the latest government figures.

To avoid the same waste happening to solar projects, experts predicted that its growth will be closely watched and controlled by Chinese officials. Yet even with that, some claim, the challenge still persists.

"Although the feed-in tariff is given nationwide, it is only profitable in western China which is rich in sunlight resources," said Lin Boqiang, an energy expert at Xiamen University. "Most of China's future solar projects will be built there as a result, but that region lacks industries and population big enough to consume power that those projects generate. And so, much of the electricity has to be sent thousands of miles away to the power-hungry eastern China."

State Grid, China's largest electricity transmission company, is now expanding, upgrading and smartening its grids to respond. But there are no details on the costs of building up such grid and who will pay for it, Lin said.

"Thanks to the feed-in tariff, China's solar market may grow very quickly in the next two or three years," Lin said. "But then it will probably get stuck with grid connection just like the case of wind power."

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