Friday, June 19, 2009

Reuters: Incentives Add Shine to China's Solar Drive

Looks like the strength in Chinese solar stocks today is this Reuters news story, which I don't see adding much to what has already been disclosed. But it's not really news I suppose until the Wall Street Journal or Reuters blares it over the wire. Judging by these incentives this should put the US in its normal place a decade behind Germany and Japan, 5 years behind Spain and instead of being neck and neck with China for laggard status... somewhere in the dust. And yes, each of those countries did a bevy of government incentives which is anathema to our (ahem) "free market ideology" (I say that chuckling under my breath based on what we've been seeing for 2 years) Even the CEO of General Electric (GE) was out this week saying that in the U.S. "it is not a free market, it never has been" when he was talking about his decisions to go after the money the government is offering left and right. Personally I much prefer when the truth is spoken, even if it's ugly - versus the dogma that dominates our media and national mindset. Thanks Mr. Immelt for speaking reality.

It's never been a free market; it's never gonna be a free market. That's just the way it is. The fact that I'd like GE to work in concert with where government policy is in the U.S. doesn't mean that I'm a traitor or a bad guy, I think it's just being practical that that's gotta happen.

Now with that said, let's continue to fall behind all the other industrialized 1st world countries and even some 2nd world... because the "free market" does not want solar (impeding on their entrenched profits from among the largest energy based lobbyists groups). Seriously folks, Germany with all its "sunny locales" is beating us at this. Via Reuters
  • Beijing's bid to boost the solar energy sector could draw more than $10 billion in private funding for projects and put China on track to become a leading market for solar equipment in the next three years.
  • China, the world's top greenhouse gas polluter, is trying to catch up in a global race to find alternatives to fossil fuels, blamed for carbon emissions affecting the planet's climate.
  • Top panel-makers including Trina Solar (TSL), Yingli Green Energy Holding Co (YGE) and JA Solar (JASO) are expected to benefit, while solar wafer-makers such as LDK Solar (LDK) could gain from related business opportunities.
  • Although China supplies half the world's solar panels, it contributes very little to demand as the cost of tapping solar energy to generate electricity remains steep and investors find little economic sense in pursuing solar projects in China where incentives are few. But that's about to change.
  • China's government said in March it will offer to pay 20 yuan ($2.90) per watt of solar systems fixed to roofs and which have a capacity of more than 50 kilowatt peak (kwp). The subsidy, which could cover half the cost of installing the system, was popular among developers, attracting applications equivalent to the building of 1 gigawatt of solar power. One GW, or 1 billion watts, is enough electricity to power a million homes. (none of this is new, it just made a Reuters article so guys in NYC can read it) :)
  • China is expected to raise its 2020 solar power generation target more than fivefold to at least 10 GW. With incentives, analysts expect over 2 GW in new solar capacity will be installed as early as 2011, up from just over 100 MW in 2008.
  • To further attract investors, Beijing may align its solar energy policy with an incentive scheme used in Europe and the United States called "feed-in tariff," which guarantees above-market prices for generating solar power.
  • China is widely expected to announce a subsidized price for solar power of 1.09 yuan per kW-hour (kwh), or 16 cents, which is over three times the rate paid for coal-fed electricity in China, but far below the established solar tariffs of about 45 cents in Europe and 30 cents in the United States. "It would be too low considering the current manufacturing technology," said Fang Zheng, general manager of China Huadian Corporation New Energy Resources Development Co, the renewable energy unit of state-owned Huadian Group. "Such a price would not help the development of the solar power generation industry."
  • "In itself (the tariff), it's not enough encouragement for the market," said CLSA analyst Charles Yonts. "Even in the sunniest areas, you're still looking at a negative return or below your cost of capital based on current prices."
  • Nevertheless, analysts say that taken together, Beijing's proposed tariff and other perks should help generate decent returns given that local labor and equipment costs are cheap.
  • "(The tariff) sounds a little light relative to European feed-in tariffs," Steven Chadima, Suntech vice president of external affairs, told a recent conference in the United States. "But the costs are substantially lower in China and there are also other incentive programs available to package together to be able to create a reasonable electricity price coming off these projects." (the cheap labor helps here)
What the story fails to mention is there are literally 100+ companies in mainland China and Hong Kong. While it's a sexy story and a growing sector, competition has been and will be cutthroat and I expect margins to continue to be at risk at all times in this sector. It is actually relatively low barriers to entry, but eventually I said even in 2006/2007 I expect the industry to be dominated via scale by a few larger players - very similar to the semiconductor industry. [Jan 3, 2008: The Long Term in Solar] That said, if China wants to throw $10 billion around I expect it to go internally to their domestic industry, and the largest players should benefit.
  • "China could potentially be the top market for solar. Companies up and down the supply chain should benefit," said Wu.
  • Beijing is considering enhancing cash incentives at a time when European states including Germany, one of the largest solar markets, are pulling back on spending to slow industry growth. Nearly 10 years of subsidized prices have made Germany among the largest markets for photovoltaic panels, which transform sunlight into electricity, producing solar giants including Q-Cells AG and Conergy.

Some interesting viewpoints in this story as well - 2 analyst's takes (please ingest with much salt)
  • "The message we're imparting to our clients is still caution. There is a lot up ahead that could really help solar out, like the subsidy environment in China. It has the potential to be a very big market. The Chinese government has said that they want to do it .... However, we just don't know the magnitude of the potential move.
  • The question is who can join First Solar Inc (FSLR) (as a low-cost maker of solar panels) .... There are some of these Chinese companies like the Suntechs (STP) of the world and the Yinglis (YGE) and the JA Solars (JASO) that have a very low cost structure. Suntech, they are somewhat the Wal-Mart of solar at this point. They have a quality product and they have the largest amount of scale.
  • First Solar for the forseeable future has the low cost advantage, but one thing that may be challenging is access to the Chinese market. The management team there is smart enough that they are starting to ask questions about how they can access China."
  • "Now that they are able to access lower priced silicon, the Chinese rapidly gain a price advantage."
  • "The solar market is still in a very difficult situation. Chinese companies are slashing prices and there is no short-term easing in sight. Add to this the slump in the Spanish market, and it is clear why 2009 will be tough and I actually expect a rather slow recovery. I'd see winners in companies that are big enough to survive such as Q-Cells (QCEG.DE) and SolarWorld AG (SWVG.DE), who are also taking advantage of economies of scale."
Sounds quite familiar to what I've been saying for a few years actually.

[May 11, 2009: Energy Conversion Devices (ENER) Results and Darker Times for the Solar Industry]
[Mar 14, 2009: NYT: Europe's Way of Encouraging Solar Power Arrives in U.S.]
[Feb 6, 2009: NYT - Dark Days for Green Energy]
[Dec 20, 2008: BusinessWeek - Clouds Over the Solar Industry]

Long Yingli Green Energy in fund and personal account

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