In an effort to boost the Chinese solar industry and increase the share of solar power in its energy portfolio, the Chinese energy regulator now applies its first nationwide feed-in price for solar photovoltaic installation projects.

This Solar Special discusses the content of this new legislation, as well as its defects and practical implications. It will finally summarise some of the most recent interesting developments in the Chinese solar industry.

Solar power is one of the biggest industries in mainland China. China has over 400 photovoltaic companies and is one of the main producers of photovoltaic products worldwide.

On 24 July 2011, China’s energy regulator (NDRC) announced a new circular on the feed-in price for solar photovoltaic power. The new legislation, the Circular of the National Development and Reform Commission on Improving Policies on the Feed-in Tariff of Solar Photovoltaic Power (the “Circular”), introduces a uniform feed-in tariff for solar photovoltaic power projects. According to the energy regulator, the aim of the Circular is to improve the policy on the price of solar photovoltaic power, to regulate the management of the solar photovoltaic power price and to promote the ‘healthy and sustainable development of the solar photovoltaic power industry’.

It is believed that the Circular will boost the Chinese domestic solar industry and increase the share of solar power in China’s energy portfolio. The announcement of the feed-in-tariff policy shed light on China’s goal to achieve 50 gigawatt (GW) of solar installation by 2020.

In this special, we will discuss the contents of the Circular, as well as its practical implications. We furthermore share our thoughts on some possible future defects thereof. Finally, we summarize some recent interesting news and developments in this field.

The Circular
The Circular consists of 4 articles and can be summarized and translated as follows:

Article 1 – Based on the cost for social average investment and operation and in light of the bidding price of solar photovoltaic power plants and the conditions of China’s solar resources, the nationally uniform feed-in price is applied to non-bidding solar photovoltaic power generation projects.

For solar photovoltaic power generation projects for which the construction was approved before 1 July 2011, which will be completed and put into operation before 31 December 2011, a uniform feed-in tariff will apply of 1.15 yuan/kilowatt-hour (approximately 14 eurocent).

For solar photovoltaic power generation projects which have been approved on or after 1 July 2011 or which will be approved before 1 July 2011 but aren’t to be completed and put into operation before 31 December 2011, the feed-in tariff will be 1 yuan/kilowatt-hour (approximately 12 eurocent). This applies to all provinces (autonomous regions and municipalities), except for Tibet, where a tariff of 1.15 yuan/kilowatt-hour applies. The NDRC will from time to time adjust the price according to certain factors such as investment cost changes and technical advances.

Article 2 – For solar photovoltaic power generation projects subject to franchise bidding, the feed-in tariff will be the bid price and the bid price will not be higher than the benchmark price of solar photovoltaic power.

Article 3 – For solar photovoltaic power generation projects which enjoy the allowance from the central financial funds, the on-grid power volume shall be subject to the benchmark on-grid price of local desulfurized coal-fired power units.

Article 4 – The part by which the feed-in tariff of solar photovoltaic power generation projects exceed the benchmark feed-in tariff of local desulfurized coal-fired power units, will be covered by the “nationally renewable energy price surcharge”.

Golden Sun Subsidies
No official interpretation has been issued on the above solar photovoltaic power generation projects which enjoy the allowance from the central financial funds (Article 3). Some experts think this article indicates that the benchmark price will not apply to the approved Golden Sun Projects. Golden Sun Subsidies are mainly used on self-used and building-integrated solar PV projects; it provides financial support to purchasing equipment at the first stage. This kind of subsidy is popular in the eastern of China, as commerce and industry are better developed there. In all, the Golden Sun Subsidies are to help enterprises reducing the costs in order to stimulate the market in an early stage; whereas the benchmark price is aimed at pushing the fast development of the Solar market.

Nevertheless, China has other central solar funds, such as the ‘Building Integrated PV Application Subsidies’. Whether these funded projects will be subject to the benchmark price is not clear yet.

The price policy has not worked out different installation methods. According to the cost estimate, it is reasonable that the benchmark price would only apply to the grounded installation solar PV projects. However, as a new regulation in China will always be further detailed by its supporting measures later, we will be sure to update this information in our next Solar Specials.

Possible defects of the Circular:
(1) Uneven distribution leads to an unbalanced industry

Uneven distribution of solar resources leads to unbalanced development of the Chinese solar photovoltaic power industry.

Solar energy resources are unevenly distributed in China: the west has more hours of sunshine than the east of the country. In the 9 western provinces, the average quantity of yearly radiation is 5519.46 MJ/m2 while in the 17 eastern provinces, that amount is only 4836.23 MJ/m2.

Experts’ research has shown that, after the execution of the uniform feed-in tariff, only those solar photovoltaic power enterprises located in the western part of China could have a tolerable profit. The enterprises located in the eastern part of China will be “fruitless” or even worse, “deficit”. If a solar photovoltaic power station would run for 25 years, the promulgated feed-in tariff could make the rate of return of some western located enterprises’ raise to 200% (eg those located in Ningxia, Qinghai); while on the other hand in some eastern regions with less duration of sunshine, the internal rate of return could only maintain 8% which is the bottom line for a solar energy project investment in China.

Therefore, setting up a uniform feed-in tariff for solar photovoltaic power in China will lead to a severe profit related divergence between western and eastern regions. Experts suggest China to divide the country into four different geographic regions, with each a separately fixed feed-in tariff whilst referring to the local peak price applicable to the power-thirsty enterprises.

If governments of eastern provinces don’t issue a positive subsidy policy based on the current feed-in tariff, profit-oriented enterprises will definitely be concentrated in the western regions. It will reversely impact on a balanced development of the Chinese solar photovoltaic power industry.

(2) Insufficient funds
Pursuant to the Circular, if the execution of the feed-in tariff would exceed the benchmark feed-in tariff of local desulfurized coal-fired power, the surcharge could be covered by “renewable energy power- electricity price surcharge”, which is a government policy to collect funds from specific local electricity grid purchasers or users (including wholesale purchasers, or large-consumption users who directly purchase the electricity from the power plant).

An inescapable issue is that most of the government funds have already been spent on wind energy projects, which prominently sprung up in the course of 2010. Therefore, there will not be sufficient funds left to support the solar photovoltaic power projects under the new policy. NDRC has been negotiating with the Ministry of Finance to appoint more funds in support of solar photovoltaic power projects. At this point however, nothing has been further publicly announced in this respect.

(3) The risk of connection with the electricity grid
The most significant risk of solar photovoltaic project investment lies in its connection with the local electricity grid. Take wind energy as an example, by the end of 2010, the installed capacity of wind energy was 44.7 GW, whereas only 60% of the installed capacity was connected to the electricity grid. The State Grid Corporation of China (the “State Grid”) could request stopping part of the wind turbines at any time to secure the steady operation of the national electricity grid.

If the connection with the electricity grid could not be guaranteed or frequent disconnection might happen at any time as required by the State Grid, then the uniform feed-in tariff system for solar photovoltaic powers is totally meaningless.

Related recent news and developments:
1. By the end of 2011, a new 5 year plan on the solar photovoltaic industry will be published by the Ministry of Industry and Information Technology (the “MIIT”). The 5 year plan is an industry guideline and elaborates on a strategic development plan for the solar photovoltaic industry in China. The Exposure Draft of the 5 year plan, which was issued by the Government for public commentary on the proposed new provisions, could be summarized as follows: (i) The Chinese government will provide financial support to leading solar photovoltaic enterprises; (ii) The production of the thin film solar cell is further encouraged by the government due to its lower cost and less pollution; (iii) The government will adopt a differential pricing policy, which will separate between the western areas and eastern areas.

2. According to the authorities, China’s installed capacity of solar photovoltaic generation should reach 15 GW by 2015. The target of 15 GW is 50% higher than the target previously laid out in the “12th-5 Year Plan for New Energy”.

3. On 10 November 2011, a large-scale solar photovoltaic power station in Ningxia province was successfully connected to the electricity grid and officially put into operation. This pilot project was developed by the local State Grid. It was the first time for China to realize the closed-loop control alignment of solar photovoltaic power station.

4. Schweitzer Corporation, one of the largest printed circuit board (PCB) manufacturers in Europe, will invest USD 245 million in the establishment and operation of a project for the production of solar cell and modules in Nantong City, Jiangsu province.

5. Israel Electric Corporation (IEC) would invest USD 1.3 billion solar to build a project in Northern China, including three photovoltaic solar arrays. IEC would be responsible for 50% of EPC (engineering, procure and construction) in this project.

6. A recent anti-dumping/anti-subsidy trial was initiated against Chinese solar panel exporters. On 19 October 2011, Solar World Industries America, a subsidiary of Solar World AG Germany and the leading manufacturer in the solar energy sector in the US, requested the US government to impose trade sanctions on China. The Chinese government had allegedly subsidized domestic solar panel exporters, leading to unfair competition with US solar panel manufacturers and distributors.

Upon the appeal filed by Solar World and six other undisclosed firms, the US Department of Commerce (DOC) proclaimed on 8 November 2011 that an anti-dumping and anti-subsidy investigation against Chinese solar panel exporters would be initiated, in order to determine whether Chinese exporters distributed solar panels at unfair discounts to the US market and received any illegal government subsidies.

On 3 December 2011, the International Trade Committee (ITC) made a 6 to 0 vote on the preliminary decision of reasonable indication of damage or threat of damage. The case now moves on to the Department of Commerce (DOC). The DOC will consequently make preliminary decisions regarding anti-subsidy and anti-dumping measures in January and February 2012, respectively.