Chinese Lawmakers' New Renewable Energy Policy Will Benefit Solar Companies

In my previous article "Chinese Congress: 8% GDP, No Problem", investors have learned that China will start global raw material takeover in the coming years. The Chinese congress has drawn a picture for China after the economic recovery - that is, massive raw material demand in its over 10% growth for the years to come. As a part of its ambitious energy policy, Chinese law makers has started to make new policy for renewable energy (read here), according to the official renewable energy network. The new policy will focus on expanding domestic market for renewable energy. For the time being, China domestic market only occupies less than 10% of global demand, this will change quickly when new stimulus kicks in. A real boost to China's renewable energy market will likely be seen in the coming year.

According to Mr. Ren Dongming, vice director of the Renewable Energy Development Center under the NDRC, "Part of the CNY 210 billion spending distributed between November 2008 and March 2009 has already gone to local wind turbine manufacturing and household biogas in rural areas." This explains why the domestic wind turbine makers such as A-Power Energy (APWR) is ramping up capacity to Giga Watt level through a joint venture with GE (GE), and foreign turbine makers such as Vestas and German Furlander Wind Generation expanded in China. It is very likely China will adopt wind energy sooner than U.S.

On the solar energy front, a leadership shift in Chinese market is working. Yingli Green Energy (YGE) is replacing Suntech Power (STP) to become the leading lowest cost PV producer in China and around the world. Yingli Green also had better a quarter than Suntech Power and 2009 guidance is much better than the rest of its Chinese peers. Yingli is the only company that reported strong revenue growth in the fourth quarter of $258.1 million, up 21 percent year-on-year. According to a Chinadaily report, Yingli Green is now the lowest cost solar cell manufacturer in the world as it uses four processing procedures. Most of the other solar cell producers, like Suntech, only make solar cells and modules, buying products of the first two procedures (read here). However, withthe new renewable policy coming to the industry, all Chinese solar makers, including LDK Solar (LDK), Solarfun (SOLF), Renesola (SOL), China Sunenergy (CSUN), Trina Solar (TSL), JA Solar (JASO), and U.S. solar names, including First Solar (FSLR), Sunpower (SPWRA), will benefit from it.

Disclosure: Long STP, YGE, APWR, FSLR, SPWRA.

Comments

[john s. gordon:]

some renewable technologies face hurdles in china -
much of the terrain is so mountainous and airflow patterns so complex that siting of wind farms may be difficult.
air pollution and visibility impairment are so severe on most days that operational efficiency of solar energy equipment may be impaired.
> jack

Mar 16 08:30 AM

[sirfisup:]

What you failed to mention in your comparison of Yingli and STP is that STP has a huge advantage over YGE in the technological advancements it has already made with their Pluto Technology and is already working on 2nd and 3rd generation amorphous silicon solar cell advancements of which IMHO will position STP well ahead of YGE and matter of factly will leave them in the dust. STP is a much better positioned company regarding product diversification and is far better positioned to resume significant growth as they now are well positioned for larger scale utility projects. STP ownership made only one mistake and perhaps it will not be the impediment that most people think and that was to negotiate long term silicon contracts and when the economy went south had to write down their losses which were principally overinflated payments for raw materials. Fact is that STP did the smart thing and came up front and center unlike LDK which likes to decieve its stockholders as witnessed by their massive losses in 4th Q and very poor 1st Q forecast. STP also added to their cash position and is being conservative with Capex so that they will meet their debt obligations. Fact is that STP's diversification with BIPV thin film and increased cost efficiencies through Pluto will make it clearly the most cost efficient PV company in China and will ultimately be the lowest cost per watt producer of panels as solar cell efficiencies improve and raw materials remain at their current prices. When and if prices for raw materials inccrease which many people feel will happen with rebound in technology sector for silicon demand expected in 4th Q of 2009. Either way STP will benefit from new reduced raw material contract pricing for silicon and if silicon demand increases STP will be miles ahead from their competition because they have secured long term contracts while competitors will have to pay a premium for silicon when spot prices spike. Don't discount STP's ability to navigate through these troubled times and when the business climate should change I expect STP to be well positioned for the world adoption of solar as cost per watt continues to plunge and solar becomes more cost efficient than coal.

Mar 16 11:07 AM

[Davidpeers:]

I am a serious FAN...no pun intended of APWR!! Got a bit worried when GE was sinking, since they are partner's with APWR going forward!! But since GE bottomed at 5 and change, it is now over 10 per share, and looking much better!! So, I believe this APWR...GE Connection blowing in the wind is gonna be HUGE!!! IMO

Mar 16 12:17 PM

[Road Runner:]

Quiz. What is the best form or government? Answer. A benevolent dictatorship. No, not a democracy/republic - I will explain later. China is something like a benevolent dictatorship now because it is forced to be pro growth, plus, at the same time, take care of its people If it doesn’t, it will be overthrown by the masses - in China, the word “masses” takes on a whole new meaning.

The reason a benevolent dictatorship is better than a democracy/republic, like the US, is it can get things done that are in the best interest of the economy and people without being thwarted by special interests. This mainly entails funneling wealth into public works projects that have a high “multiplier”. Multiplier is the economic term that means the economic benefits of the project far outweigh the cost of the project. My favorite example is the Hoover damn. It cost 10s of millions to build, but it launched the multi billion dollar expansion of the Southwest US. Millions spent for billions returned, nice!

Please don’t misunderstand me. I am not saying to turn away from democracy. A benevolent dictatorship is almost impossible to actively implement. Dictatorships usually lead to corruption, destruction of the middle-class, and poor economic growth. I am only making a point about how, in this economic crisis, China has an advantage over the democracies of the world in being able to quickly, decisively, take action to promote alternate energy. They can build power lines wherever they want. They can spend 100s of billions building on electric and alternative energy infrastructure that will take decades to pay for itself, but reap huge long term (30 plus years) economic benefits. We, the US, are still getting the economic benefits of the Great Depression building projects (like the Hoover damn and damns of the Tennessee Valley Authority) 80 years later.

So, my point is, take China seriously when it comes to government action. If they get focused on alternate energy, which they should for multiple reasons (remember smog at the Olympics), it will take on the feel of a highly coordinated, powerful, military assault. It will not be the piece-meal, anemic, politically-driven, uneven, destructive (ethanol production from corn) effort that the US is putting forward in promoting alternate energy.

Mar 16 02:43 PM

[omooc:]

Road Runner: Don't understand what you meant by "difficult to implement", "lead to corruption," "destruction of middle-class," and "poor economic growth." (next to last paragraph). The last one is particularly puzzling.

Mar 16 03:09 PM

[Road Runner:]

Quiz. What is the best form or government? Answer. A benevolent dictatorship. No, not a democracy/republic - I will explain later. China is something like a benevolent dictatorship now because it is forced to be pro growth, plus, at the same time, take care of its people If it doesn’t, it will be overthrown by the masses - in China, the word “masses” takes on a whole new meaning.

The reason a benevolent dictatorship is better than a democracy/republic, like the US, is it can get things done that are in the best interest of the economy and people without being thwarted by special interests. This mainly entails funneling wealth into public works projects that have a high “multiplier”. Multiplier is the economic term that means the economic benefits of the project far outweigh the cost of the project. My favorite example is the Hoover damn. It cost 10s of millions to build, but it launched the multi billion dollar expansion of the Southwest US. Millions spent for billions returned, nice!

Please don’t misunderstand me. I am not saying to turn away from democracy. A benevolent dictatorship is almost impossible to actively implement. Dictatorships usually lead to corruption, destruction of the middle-class, and poor economic growth. I am only making a point about how, in this economic crisis, China has an advantage over the democracies of the world in being able to quickly, decisively, take action to promote alternate energy. They can build power lines wherever they want. They can spend 100s of billions building on electric and alternative energy infrastructure that will take decades to pay for itself, but reap huge long term (30 plus years) economic benefits. We, the US, are still getting the economic benefits of the Great Depression building projects (like the Hoover damn and damns of the Tennessee Valley Authority) 80 years later.

So, my point is, take China seriously when it comes to government action. If they get focused on alternate energy, which they should for multiple reasons (remember smog at the Olympics), it will take on the feel of a highly coordinated, powerful, military assault. It will not be the piece-meal, anemic, politically-driven, uneven, destructive (ethanol production from corn) effort that the US is putting forward in promoting alternate energy.

















One more point about China. China has a huge incentive to keep the economy growing at a high single digit rate, plus to keep its people employed. If it doesn't, it risks unrest and demands for government overthrow.

But, China growth was hugely dependant (by like 50%) on exports, and exports have collapsed without expectation of recovery because the US consumer will be in a coma for many years with high debt and low housing prices (no more using a second mortgage to buy a big screen TV).

The Chinese government must spend big to make up the gap in exports. One of the best places to spend is infrastructure because it improves productivity (has the multiplier effect as I mentioned above) and it puts home country people to work (hard to outsource construction). The downside for infrastructure spending is it often takes years to go from kick-off to fully employed job sites. Unlike in the US where infrastructure spending is not the best short term stimulus because of this huge delay in job creation, in China they can cut through the red tape to get projects going much faster. I’m not saying this is always good since things like the environment may suffer. I’m just saying it is something to understand about China and their “go go” economy and paranoid benevolent government.

Mar 16 03:13 PM

[Road Runner:]

Sorry - accidentally reposted first post.

Mar 16 03:15 PM

[Road Runner:]

Response to omooc. Here is what I said above, “Dictatorships usually lead to corruption, destruction of the middle-class, and poor economic growth.”

A dictatorship maintains power through a network of ruling people. This network extends all the way down to local governments. They maintain their loyalty to the ruling power usually by being paid and/or getting favoritism (corruption) that leads to their economic gain. Thus, there is a huge amount of funneling of wealth to this ruling class, leaving a poor underclass. Thus, a country of rich and poor is created, with few middle class.

The middle-class is where the wealth of a county is built. Usually the rich are too involved with maintaining their power and money, and it perusing pleasure to build things of value (like owning multiple homes). The poor are too involved with day-to-day survival to build things of value. The middle class is the group of people that work hard and have the spare time and faith in the future to invest in the future by improving the infrastructure of their local communities, etc. They invent things to make their lives better.

One way this “payola” dictatorship/ruling-cl... economy can still create a strong wealth-generating middle class is if the overall economy is growing fast. This may be the current situation in China.

Mar 16 03:45 PM

[Jade Queen:]

I cautiously second sirfisup, above, about STP. They seem pretty above-board in their postings to stockholders, and I have always found their website to be interesting and useful. They have installed base around the world, in places where I have confidence they have been thoroughly vetted and where pictures of past projects are posted as testimonials. They have a wide array of products, mono-, poly-, and BIPV. They say they are using the downturn to improve manufacturing processes, to be ready when things start to go again.

Disclosure: I own a small position in STP.

Mar 16 03:50 PM

[Road Runner:]

john s. gordon, China is a large country that includes many places that are very well suited for solar and wind farms. They have the Gobi desert which is equivalent to the Mojave desert in California for solar and wind generation.

A very powerful and established, but little talked about, power transmission technology can bring power from those remote places to the big cities a thousand miles away is high-voltage direct current (HVDC), en.wikipedia.org/wiki/.... This is the technology that can move the power of giant high-plains wind farms in the US to Midwest and west coast cities, if the politics can be worked out.

Also, the air pollution of the Chinese cities is all the more motive to implement roof-top solar. Shut off those coal fired plants and reduce the health problems of the Chinese people. Healthier people are happier people less apt to get angry at the government and threaten overthrow.

Mar 16 04:24 PM

[billp37:]

"At present, PNM residential customers pay about 8.03 cents per kWh from PNM. It costs about 25 cents per kWh, or more, to generate electricity using a photovoltaic system not considering any state or federal tax incentives to reduce the initial cost of the PV system."

...

The high cost of 25 cents per kWh is a direct consequence of the high up-front cost for the photovoltaic system. Most people who purchase an inter-connected PV system do so to invest in a clean, renewable energy technology because they are concerned about the impacts of conventional power sources on our environment."

www.pnm.com/customers/...

Mar 16 09:59 PM

[aquaculture:]

from press release GCL holdings (LDK competitor) Hongkong, march 17:

-expects silicon pv demand mainland to increase to 3gw annual (from 200 MW now) by 2015.
-will increase poly production from 3000 to 13500 tonnes 2009 to 27000 tonnes in 2010.
-will not IPO on Wall street
-expects poly spot prices to drop from $110 today to $80 by end 2009.
-will build solar power plants starting in 2009.

Mar 18 10:22 AM

[aquaculture:]

wow very aggressive.
at 6 grams/watt this company alone will produce 2.3 GW in 2010 and 4.5 GW in 2011. More competition for LDK.

So be carefull when you think increased demand in mainland China benefits ADR stocks!

The demand in the U.S. needs to increase.
Hopefully it will, because of lower ASP's

Mar 18 11:33 AM

[aquaculture:]

On the other hand JASO will benefit from this. Perhaps being a middleman aint so bad.
And only $15 mln in capital expenditures in 2009.

Mar 18 08:22 PM