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JinkoSolar’s New Power Strategy

Sep 17, 2013 Hit: 220 Written by 
JinkoSolar’s New Power Strategy

Jinko’s primary market for this business segment is evidently China. This market is emerging as the world’s largest national PV market, in terms of install volume this year


On September 12, 2013, JinkoSolar Holding Co., Ltd. (NYSE: JKS) issued a press release announcing the progress of their solar PV power plant project development. Along with it, they also implied their intended business model for the project development and guided on 2014 power generation and revenues.

Power sales

In their second quarter 2013 earnings release, Jinko announced the current status of their project development, but what was unclear was what they would do with the plants once the projects were completed. The available options were discussed in JinkoSolar Second Quarter 2013 Review. One option is to sell the plants. Another option is to keep them to sell the electric power they generate, and a third option is to do a mix, where the mix might change over time. With this press release it became clear that they intend to keep all plants they develop. This means that the business segment resulting from their project development efforts will be power sales. The press release starts off by announcing that their project development has hit the 100MW milestone of grid-connected plants. Details for the majority of these 100MW have been given. Fifty-five MW of grid connections in the second quarter were disclosed in the latest earnings release conference call and another 30 MW of grid connections in the third quarter were disclosed in this press release.

Most of them are 100% owned by Jinko, but the 5MW in Gansu is Jinko’s share of a joint venture. A 200MW plant is currently being constructed in which Jinko has a 56MW share.

The press release then goes on to provide guidance for this new power sales segment:

2013 year-end grid-connected plants: >200MW

2014 year-end grid-connected plants: >500MW

2014 power generation: 630 GWh

2014 power sales revenue: US$ 96.2 million

China market

Jinko’s primary market for this business segment is evidently China. This market is emerging as the world’s largest national PV market, in terms of install volume this year. This is due to major progress on the introduction, tuning and implementation of incentive programs. The foundation of these incentive programs is a national Feed-in-Tariff (FiT), where PV power will be guaranteed a fixed sales price per generated kWh for a certain period. There are basically two types of PV power generation segments: distributed, where panels mounted on roofs generate power on a small to medium scale; and utility, where ground-mounted panels in PV plants generate power on a large scale. The focus of project development is the utility segment, where the FiT is set for 20 years. As SPVI Research Director, Dr. Jason Tsai, explains in Impact of Chinese FiT Policy on Global Module Availability, the rate for plants completed in 2013 and applied for before September 1 is 1 RMB/kWh (US$ 0.163) across the nation. For 2014, the rates will be tuned to match local solar irradiation and operation costs. Most regions will retain the 1 RMB/kWh, while some regions with very favourable conditions will get a reduction to either RMB 0.95 or RMB 0.90. The purpose of this is to even out the incentives nationally to avoid installation clusters in irradiation and cost favourable spots. It shows the broadness of China’s installation ambitions.

Rumoured complementary incentives

Chinese media have recently reported on government plans for a 50% VAT rebate on the FiT and provision of special loans for PV plants. These special loans would be provided by China Development Bank and have discounted interest rates and much longer terms than normal for the Chinese debt market. These reports suggest that the government is mulling complementary project development incentives to the FiT. The suggested 20-year loan term allows time to fully amortize the loan during the 20-year FiT period without too much impact on initial cash flows from the plant. According to the reports, the interest rate discount would be around 5-10%.

The basic incentive components of any investment are internal rate of return (IRR), cost of leverage and risk containment. Since the complementary incentive plans mentioned above are not official, the following will just be an example. Say that the current national FiT rate and the cost of a plant results in an unleveraged IRR of 8%, and say that 5-year loans at an interest rate of 7% are what is available for debt leverage. The 75% debt leverage would then only raise IRR to 8 + 3 * (8 – 7) = 11%.  This might not be a very attractive leveraged return rate given the small leverage margin and the interest rate risk, as the loan term does not cover much of the plant’s 20-year lifetime. A 50% VAT rebate would increase FiT revenue by 10%, which would raise unleveraged IRR to 9%. If we put this together with a discounted interest rate fixed for 20 years at 6.5%, we get with the same 75% debt leverage: 9 + 3 * (9 – 6.5) = 16.5% leveraged IRR at less risk, which is much more attractive.

Right now there is not a big market for selling plants in China, since the price required for attractive IRR is not high enough to motivate the sale compared to keeping it and collecting FiT with decent IRR until the market improves. The need to ignite such a secondary market in order to attract more capital into project development, to meet ambitious national targets of 35 GW installed capacity by 2015, provides purpose to these reported policy plans. These problems that needed to be addressed have been voiced by the industry, as Ray Yu describes in China Introduces New 20-Year PV Subsidy Policies. From a global solar panel trade perspective it is interesting to note China’s transition of support from the supply side to the demand side. Besides the FiT, the redirection of credit availability from PV panel production capacity to PV power generation capacity is the most evident indicator of this. This should have an easing effect on trade tensions in the industry.

Comparing business models

To compare the plant sales and power sales business models for panel producers, one first needs to understand the difference it makes to source panels for project development from internal instead of external supply. For the particular case of Jinko, the difference their panel production cost advantage over peers makes also needs to be understood. Looking at this year’s second quarter results, Jinko had close to 10 cents blended production cost advantage over many peers. This could mean that their project development cost for the Chinese market using internally sourced panels produced in China could be around $1.25. Less efficient panel making peers would instead be close to $1.35. Developers sourcing external panels would be at $1.45, based on an extra 15 cents added to a mid-range production cost in order to cover the panel sellers’ operating and interest expenses, as well as some profits. In the beginning of this year the panel prices in China were so depressed that those last 15 cents to cover sellers’ expenses and profits did not exist; but, very recently, according to SPVI Research reports, the price has jumped – causing a close to 15 cents year-to-date gain, and suggesting that panel prices in China have normalized to sustainable levels.

In the case of a market for plant sales that is seeing a policy-driven improvement, as discussed above, it can be assumed that projects could be sold at around $1.65 per watt, which is 5-15 cents above today’s market. For Jinko, after $0.06 income tax, that would result in $0.34 net profit per watt developed, i.e. around 20% net margin on plant sales. To compare this with power sales profits, some assumptions about power generation costs are needed.

The majority of the costs for the power sales business is the upfront development cost, which is considered as capital expenditure (CapEx) for the plant. Power sales have low direct costs related to operation and maintenance (O&M) of the plant. As a percentage of the CapEx, the following total costs during the 20-year plant lifetime using 75% debt are assumed:

O&M: 30%

Depreciation: 100%

Interest: 50%

These assumptions consider inflation impact on O&M cost, and current interest rates and amortization schedule impact on interest cost. The income tax rate is assumed to be 15%. Revenue is viewed as net of VAT.

The guidance for 2014 power generation and revenue in the press release can be used to estimate annual performance for the power sales segment. In the China’s western provinces, Jinko’s area of operation, the yield should be around 1500 kWh/kWp*y. With that yield assumption the average generation capacity available during 2014 can be estimated as:

Generation capacity: 630,000 / 1500 = 420MW

This is consistent with the guided year-end grid connections for 2013 and 2014, since it is between that guided >200MW start of 2014 and >500MW end of 2014. Jinko’s key performance indicators (KPI) for the power segment can now be calculated as:

Revenue per kWh: 96.2 / 630 = 0.153 US$/kWh

Revenue per capacity: 96.2 / 420 = 0.229 US$/Wp

Panel efficiency degrades around 0.7% annually; thus, the average revenue will be 7% lower than the first year. This makes the average revenue $0.214 per Wp. With average annual revenue and cost estimates established, the average annual profit per watt of power generation capacity over the plant’s 20-year lifetime can be calculated:

Revenue: $0.214

O&M: 30% * 1.25 / 20 = $0.019

Depreciation: 100% * 1.25 / 20 = $0.063

Interest: 50% * 1.25 / 20 = $0.031

Tax: 15% * (0.214 - 0.019 - 0.063 - 0.031) = $0.015

Profit: 0.214 - 0.019 - 0.063 - 0.031 - 0.015 = $0.09

A first observation is that annual revenue and profit per watt are lower for power sales than for plant sales, but profit margin is higher with 40% vs. 20%. A follow-up article – “Profit Profiles of Different Project Business Models” – will discuss how the long-term profit profiles of these two business models are affected by these properties and the 20-year sustainment of power sales profits.

Disclosure: Long JKS, CSIQ

 

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