First of all, the macro is changing with the economy deceleration and a reported reversal in electricity demand and supply
Early this year, there was a rush in applying for the permits, and indeed the total granted permits may reach 7GW or higher. But now, there is not much activity going on despite more than half a year having passed.
This is an eventful year for the Chinese solar industry, with bad news streaming in continuously. The planned FIT cut in Germany and Italy, the high anti-dumping tariff by the US, the financing trouble at India, as well as the just-announced anti-dumping lawsuit announced in Europe, all threaten the once-booming industry. Now, as the economy in China is cooling, the domestic PV demand is also likely to disappoint due to a variety of issues. So far no one has come out with a revised forecast, but evidence so far suggests that it would be lucky for the industry to have 4GW installed, a contrast to some previously rosy numbers of 5-7GW(see my “An In-depth Look At China's PV Market” series)
First of all, the macro is changing with the economy deceleration and a reported reversal in electricity demand and supply. Electricity shortage had been a widespread problem in the past due to the heated economy. Now, with the economy weakened and some manufacturing moving to lower-waged regions like south/southeast Asia, the industrial demand has started to stall or even fall at certain regions. The government in Guangxi Province is said to give incentives to the industry in order to encourage electricity consumption, a rare move in China. Another sign of the cooling economy is the rapid decline of the price of coal, the “fuel” of the economy. Coal prices went down to about 630 Yuan/ton from last year’s 800+ Yuan/ton, and coal-fired power plants become profitable again.
As I explained in my “An In-depth Look at China's PV Market” series, PV is actually a portfolio divestment for the Chinese power-gen companies, as they were squeezed hard by the rising coal prices in their bread-and-butter coal-fired power. In 2011, even though the internal return rate (IRR) for PV installations was quite low, the power-gen companies still embraced PV after the FIT announced by the CDRC. As a result, a record 2.8GW were installed in 2011.
Secondly, there are several issues coming out with existing PV farms, and the power-gen companies are taking a second look at the viability and practicality of such farms. First, there are various operational issues: the broken thin-film modules, the breakdown of electrical parts due to improper design and installation, dust cleaning, the grid-connectivity, etc. Next, there are financial issues with higher fees from local government, higher operational costs, lower actual electricity production, and problems in receiving the FIT subsidy; all making the PV farms not financially viable. Even though the PV system price went down this year, the rise of interest rates and the reduction in FIT neutralized the benefit.
Thirdly, the EPCs are having financial difficulties, which seriously hamper the progress of PV projects. Last year’s quality problems resulted in quite a few delayed or shortchanged payments from PV farm owners to the EPCs. Therefore, EPCs are demanding more upfront payments from the developers. Despite the rush in applying for permits, not all the applicants are financially strong or willing to carry out the PV projects. Since it turns out that PV is not the kind of savior the power-gen companies need, some approved projects are likely to be forfeited if the applicants cannot find someone who is willing to take over.
The conversations between developer and EPC companies evolve around who is going to start up the project financially, on many occasions putting financial weight only on EPC business. At the risk of not getting paid, as the applicants may not be able get financing – or worse, do not have financial strength – projects will remain undeveloped.
Qinghai is the province with the largest PV installation in 2011. It installed and connected 1GW at the end of 2011. Last year the developers and EPCs were already busy working on projects since March at several sites in Qinghai. This year those sites are still relatively quiet, although close to 1GW permit has already been issued. With only five months left in the year, it is certain that some of those approved projects will be left unfinished by the end of the year.