Bottom line: China is likely to fall well short of its plan for 35 gigawatts of solar power capacity by the end of next year due to profit-seeking speculation and lack of experience among plant builders and operators.
I’ve been quite skeptical for a while about China’s ambitious plans to rapidly build up its solar power capacity, arguing that many of the plants being built are more designed to please central planners in Beijing than of real practical use. Now it seems at least one researcher at a major government institute agrees with that view, prompting him to slash his forecasts for new construction this year. That certainly doesn’t look good for big domestic names like Yingli (NYSE: YGE) and Trina (NYSE: TSL), which are hoping to keep their recent positive momentum going with big new demand from plant developers in their home market.
The latest report contains interesting details on some of the major problems dogging China’s new solar building campaign, which has the country aiming to install 35 gigawatts of capacity by the end of 2015. The biggest problem is one that I previously discussed, namely that many of these projects would be built in remote locations that would have difficulty delivering power to China’s central grid.
But a second problem also emerged this fall as some developers started using the build-up program to make some quick money through a quirk in recent modifications to the power pricing system. None of this is too unexpected, since it was probably unrealistic that China could successfully execute such an ambitious build-up so quickly, especially when it had very little experience at such construction just 2 years ago.
But the growing reality could crimp ambitious sales targets for solar panel sellers that were depending on strong domestic demand to keep fueling their recent rebound. It could also turn into headaches for names like Trina and Yingli, which have recently set up funds for solar plant construction. Those funds could take a hit if many of their new projects get built but then fail to find long-term buyers due to poor planning.
China is now expected to build 10 gigawatts of new solar power capacity this year, well short of an earlier target for 14 gigawatts and a sharp slowdown from last year’s 13 gigawatts, according to the new report from Wang Sicheng, a researcher at the Energy Research Institute of the National Development and Reform Commission (NDRC). (English article) Only 3.8 gigawatts of new capacity were built through September this year, though the report notes that the fourth quarter is typically the strongest for new construction.
It seems that one of the biggest issues has come from lower-than-expected usage of power by local customers from these newly built plants using rooftop-mounted solar panels. Earlier plans that envisioned that such local consumers would use 80 percent of power generated at such plants, with the remaining 20 percent set for sale to more distant locations. But plant operators have only been able to sell about 60 percent of their power locally, because many such plants are located in remote locations with sparse population.
Adding to the problems was a wave of speculative new project announcements that look purely related to a recent preferential tariff announcement designed to promote growth in inland areas. The NDRC quickly moved to plug a loophole that was fueling the speculation, but the result is that many of the new plants announced during that window may never get built since many were conceived simply to earn some quick profits.
These kinds of shenanigans and logistical problems certainly aren’t unique to China. But in this case they’re quite acute due to Beijing’s desire to ramp up solar power output so quickly despite its lack of experience. I do expect we’ll see the rapid build-up continue, but at the end of the day we could see a significant number of planned projects get scrapped, and an equally significant number that do get built ultimately hit financial difficulties due to poor planning.