Danny Kennedy, the founder of Sungevity, is convinced that China is about to witness rapid expansion of distributed solar generation systems, just as the USA done in 2006. At the same time, Jinko Solar Holding Co., Ltd. announced investments of 1B RMB in the next three years into distributed systems in China. Still, Chinese investors remain skeptical about the future of this model.
“The atmosphere around the Chinese solar energy market is exactly the same as the one we witnessed in the USA in 2006. This is the beginning of the new era,” said Kennedy in the Southern Weekend magazine.
JinkoSolar Holding Co., Ltd. (NYSE:JKS) CEO Xiande Li shares Kennedy’s optimism. Jinko is about to invest 1B RMB into distributed solar generation systems in Jiangsu province during the next two to three years.
Distributed generation systems are certainly the future of the Chinese energy market according to Li, whose company is about to build a 120MW distributed system, which, according to forecasts, should become the largest in the country.
Kennedy and Li might be right, since the Chinese government, pressed by European anti-dumping and anti-subsidy tariffs on Chinese solar products, is more and more looking for solutions in the domestic market. They see distributed generation systems as a way to salvage small and medium-size companies, which are most affected by these tariffs.
Since July of this year, the Chinese government became active on this issue and has issued numerous documents trying to make way for companies that want to build and develop distributed generation systems. It started with the Opinion on stimulating sound development of solar energy industry by the State Council, which was followed by several other documents that tried to regulate this new industry in China. This month, the central government issued a final draft on Administrative regulations for distributed generation system projects, which should be enacted by the end of this month.
Judging from these documents, the Chinese government this time around means business when it comes to making a crucial turn from foreign to the domestic market. Still, despite promising trends in the country, which due to slowing down of exports more and more suggest that the local economy should turn to the domestic market, Chinese investors and analysts remain skeptical and raise the following issues, which secretary of China Investment Federation Luoxiang Zhang, in a recent interview for the Chinese media, summed up in three words: chaos, dispersion and fault.
Number one – chaos. There are too many departments responsible for energy policies. Number two – dispersion. There are too many policies, which are not coordinated. This is the reason why many of the companies try to dodge the official policies – they are not clear, nor precise. Number three – fault. That is, faulty allocation. For example, faulty allocation of subsidies. Subsidies for new energy in China are allocated in the production chain, instead of the end product chain. This is the reason why China has problems with overproduction – the more you produce, the bigger subsidies you get, explained Zhang.
His words, at least the part with chaos and dispersion, were confirmed by an unnamed official from the Bureau of Energy who said to Southern Weekend magazine that it will take another two to three years before the Chinese government drafts all the necessary policies for this new energy supply model.
“In the past nine months, we have issued many policies. But there are still around ten more policies we need to draft in order to get things right,” said the unnamed official.
Analysts and investors warn of the third problem Zhang raised. Since big energy companies are not yet interested due to large projects in concentrated systems in the west of China, distributed systems in China heavily rely on small and medium-size companies, and this brings up the problem of financing. That is, banks are not willing to finance these kinds of projects. Not only because they are risky and they involve small equity companies, but also because the Chinese bank system is not familiar with this kind of energy supply model. In other words, the problem with the companies dealing with distributed generation systems is that they have difficulty calculating expected earnings due to the complexity of the whole project, which more than often revolves around multiple decisive factors, such as owners of the buildings, electricity consumers, etc., which then makes Chinese banks reluctant in providing loans and financing.
Some of the companies are trying to solve this problem through insurance companies. But this method brings them to another painful issue in the Chinese energy system – grid connectivity. That is, Chinese insurance companies which, just as banks, are not familiar with this new model of energy supply are asking from their clients guarantees that their system will be connected to the power grid. Many see China Development Bank as a solution, but although they are known for investing in new energies, they are still having trouble finding a method for safe financing of such energy projects. Bo Qianglin, director of China Centre for Energy Economics Research, raised another issue regarding financing – subsidies.
“I am talking in particular about solar energy systems and their capacity, for which the document stipulates targets of 35GW in 2015. How will they distribute this? Where will they get the financing? Where will it be used? What will be the size of the subsidies? These are real business issues, but they were not mentioned,” warned Bo.
Whether China will finally seize the opportunity and release the forces of its internal market remains to be seen. Zhang sees a solution in four aspects of the Chinese energy industry.
“As far as the system is concerned, we need to unify it and have a unified energy policy and a body, which would quickly solve occurring problems. Second, we need better control of management. For example, in the USA, one who supervises the project is not responsible for subsidies. The third is transparency. We need a supervising body between the government and companies. Fourth, we need a balanced market. That is, in establishing a pricing system, we need to start relying on average market price and average profit rate and not on productivity capacities and expected price,” said Zhang.
