Chinese Solar To Rule The World With Massive Chinese Stimulus

by: Shareholders Unite

Last September, we asked the question: when will China become serious about domestic solar energy production? Up until now, China has played what can only be considered a smart game in the solar energy space. The technology was still expensive, much more so than most other domestic sources, so what it did is let its solar companies export and ride the wave of foreign (mostly German) subsidies.

That allowed Chinese solar companies to expand with amazing speed, moving from just about zero to over 50% of the solar production in less than a decade. It allowed the top Chinese solar companies to gain big economies of scale and learning, which allowed these companies to become world beaters (having access to cheap capital and labor certainly didn't hurt either).

Simply look at the following figure, nine of the top 10 solar companies ranked in cost per watt are Chinese, what's more, the only non-Chinese company comes in at number 10.

Click to enlarge

The price falls in the photovoltaic solar market are simple awesome. Compare the estimated 2013 cost in the table above, all well below 70 cents per watt, with just a couple of years ago when these prices were much higher. In the last year alone, prices have fallen by some 50%, 75% in the last three years.

In our earlier article, we suggested that the Chinese would become more interested in developing the domestic solar market (rather than just the export market) when prices would fall enough to near the price of other energy sources, and when their domestic producers would be faced with overcapacity.

Indeed, that now seems to be happening. The Chinese domestic market remained stunted (see table above) as long as solar energy was way more expensive compared with other sources of energy. But now that enormous price fall in photovoltaic solar energy is nearing grid parity, the Chinese authorities are becoming more interested in using it themselves, instead of just exporting it.

Grid parity
While the concept of grid parity is wrought with problems, one thing is pretty certain, in more and more areas of the world, solar energy is at or nearing grid parity:

Multiple sources indicated that systems are currently being installed in Spain without the support of the feed-in tariff. [Greentechmedia]

And in the U.S.:

The recent Renewable Auction Market (RAM) saw 20 year power purchase contracts awarded in California at $0.089/kWh, a clear sign that this overall fall in system costs has now lead to projects bidding under the average residential energy price in the United States [renewableenergyworld]

Here is Reuters:

Last year at this time, industry data suggested that by 2020, 98 percent of the world's population would have achieved grid parity, or solar energy power that is cost-competitive with traditional energy prices, but data now suggests this milestone will be achieved by the end of 2012.

China boom
Now, hot from Bloomberg:

China, the biggest supplier of solar power panels, quadrupled a domestic installation goal for sun- derived energy projects to 21 gigawatts by 2015 to help absorb excess supply of panels and support prices.

To put this in perspective:

China had planned 5 gigawatts of capacity in the five years through 2015 and 20 gigawatts by 2020. The government has considered an increase since last year as solar panel makers led by Suntech Power Holdings Co. and Trina Solar Ltd. suffer from cuts in European subsidies and a global supply glut that drove prices lower. [Bloomberg]

And even a quintupling might be conservative:

"With a significant tumble in photovoltaic prices, the timetable for mass use is ahead of time," said Lian Rui, a senior analyst for the research company Solarbuzz. "The new target is still very conservative; we expect the installation to surpass 30 gigawatts."

Others, like Nigel Morris from The Green Energy Collective, put this into perspective:

To put that in perspective, it means in just 3 years time China will install roughly the same amount of PV in one year, as the ENTIRE WORLD DID IN 2011.

Put these Chinese numbers into perspective with the largest solar market in the world, Germany (good for 33% of all solar energy installed capacity in the world). Last year, 7.5GW of solar energy panels were installed, due to tariff reductions, the market will shrink to 6.5GW this year, according to GTM Research.

Mind you, these are just words, and quite frankly, China has unveiled big plans before and not acted on them. But there are reason to think that this time will be different. It's not only the dramatic price falls of modules, it's helping the domestic solar industry in what can only be described as dire circumstances.

There is rampant overcapacity, of some 21GW, surprisingly exactly the same figure by which the Chinese are going to ramp up demand by 2015. Here is JA Solar (NASDAQ:JASO) President Pickering:

"Capacity," said JA Solar Americas President Jonathan Pickering, "is almost twice the actual demand," adding that it is a "Darwinian world" where "big companies will tend to get stronger." The current "flight to quality" will accelerate over the next six to twelve months, he predicted. [Greentechmedia]

That, of course, is the most important reason for the price decline, which has gone much faster than cost reductions, leading many solar companies in the red. It has been nothing short of a bloodbath in which even the best and the brightest, like Yingli Green (NYSE:YGE), First Solar (NASDAQ:FSLR), SunTech (NYSE:STP), Trina Solar (NYSE:TSL) and Jinko Solar (NYSE:JKS) produce losses.

But the slaughter in the sector itself, the large overcapacity and the American tariffs slapped on Chinese solar panel producers, produce the right circumstances to embark on large scale installations in the domestic market.

An important additional reason is to stimulate the domestic economy. Installing solar panels is labor intensive work, which could employ lots of people in China. Now that the economy is slowing and many industries suffer from overcapacity, embarking on alternative energy seems a good strategy.

If this is as big as they announced (or even bigger, as that director from Solarbuzz suggested), the whole industry in general, and Chinese solar stocks in particular, could finally start to recover. We already argued in April this year that solar stocks must be close to the bottom.

At first, sentiment will likely improve (if the eurozone doesn't implode), and over time, as the Chinese ramp up, the figures will follow. The sun might very well start to shine on the sector again.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in TSL over the next 72 hours.