Last week, one of the Japanese utilities, Kyushu Electric, stopped accepting applications for connections to the grid. Now, half of the 10 utilities in Japan, representing 27% of the electricity grid, are doing the same. The Bloomberg and owned by Bloomberg's Businessweek published articles on the event, including "Trina Drops as Japan Outlook Sinks Chinese Solar Makers". They enrolled Mr. Gordon Johnston, a sell-side analyst for a firm called Axiom Capital Management, to share his input on the matters. Mr. Johnson made a couple of statements, which are worth a quick review, under those circumstances.
"All of the Chinese module guys rely heavily on Japan," said Johnson, in an e-mailed response to questions. "If the world's second-largest market puts the brakes on new solar installations, prices for solar panels will fall, negatively impacting the Chinese module producers."
The thesis is correct, but the "if- scenario" described is not reflective of the news of the utility not accepting applications for grid connections. The confusion here is an adaptation of the word "application" as a reference to "construction," where module shipments would be required. In the original news Japan's Ministry of Economy, Trade and Industry, METI, is quoted to approve over 72GW of applications, pointing 69GW exclusively to solar. Since utilities are required to accept grid connections, in reaction to this overwhelming output, they are refusing to do so – which is prudent.
If we theoretically take this figure and apply it to this year's estimates for Chinese exports to Japan, it will require almost 8 years of shipments at 7.5GW per year to reach this level of what METI considers "approved." So, putting on the brakes here is more of a desire to put pressure on the Chinese stocks, not relay the reality of the situation. Further, METI's numbers as far as completion rate show only 15%, or some 11GW solar projects being connected to the grid. So, out of the 72GW "approved," 11GW are actually working. METI was so disappointed by the level of completion that it created a rule on which it is willing to cancel any application if land is not leased and equipment is not available to the site within 6 months of the approval. In this fashion, over 4.5GW of projects can be eliminated from the roster, and in fact 1.8GW already have been.
We have a situation that shows a strong desire by the government in Japan to move to a renewable energy environment, worried about the state of execution, and a utility sector (27% of it) that is not prepare to deal with it for infrastructure and other reasons, using a mountain of paper to highlight its concerns.
As Bloomberg continues, it uses examples of companies that apparently are affected by this condition. The reality is that the process of building a plant takes approval to the grid very seriously. This means that without it, there are no projects. Then and only then can companies seek construction permits. The most advanced Chinese company taking part in the solar farm business in Japan is Canadian Solar (CSIQ). No parts of the article point to the company. Canadian is building 43MW of solar plants in Japan. They also spelled out that they have grid approval for 150MW. It has been very clear from the beginning that already grid-approved projects will not be affected. Of course, this – and the fact that we have a booming market even at half of that 58GW remaining, which has years of demand ahead of it – is no longer worth exploring by the authors.
As a sweetener to the description of Japan as a risk, Mr. Johnson offers another statement on a completely unrelated event, likely because it involves his short recommendation, Trina Solar (TSL).
"Trina said in a statement dated Sept. 29 that it will sell $100 million of convertible notes and issue $2 million additional American depositary shares." The new offering raises concerns, according to Johnson. "They are using equity investors to finance the build-out of solar farms for which they are not certain if there is a demand," he continued.
This, of course, is not Japan; the unknown demand refers to China. If one reads the prospectus issued by Trina, one would learn that the company intends to hold projects in China and collect FiT payments. The demand is Trina's own "want" to earn money as an energy producer. There is certainly demand for renewable energy in China, from a provincial mandate to hold up to 10% energy supply targets from renewables for the next year, to robust plans for 100GW in solar installations 2018. The drive is so hard that China is forcing reductions on usage of coal. We have no doubt that there could be question on how timely Trina's decision was in regard to the market's behavior, but there is very little doubt on the intention and objective the company has operationally. The concerns over the demand seem to inflict hurt on the stock, which is already loaded up with the largest short interest among solar companies, rather than point to anything "real" of concern.
Almost as in an act of defiance, Canadian Solar confirmed today three Canadian project sales, a proof of the company's consistency -- so different from the description of chaos and minute-to-minute fragility characterized by Mr. Johnson
