When it comes to renewables, there’s no denying that China is thinking big and moving fast.
Venture funded-eSolar signed amulti-billion dollar agreement last week to build 2 gigawatts of solarthermal power plants of the "power tower" variety in China. ESolarwill provide expertise and technology in this "master licensing"agreement according to a press release. (See eSolar Lands Whopper Contract). This announcement comes a few months after First Solar signed a similarly large-scale agreement with China for thin film PV panels.
Buttake these announcements with a grain of salt. These deals havemulti-year if not multi-decade timelines and they are more technologytransfer agreements than strict purchase orders. And with regards tosolar thermal, China may not be the best place on earth to install thatparticular technology – too little direct sun, too little water, andgeographical issues make CSP a stretch in China.
Allow me to share an anecdote about PV agreements in China related to me by a friend at Suntech.
The People’s Republic of China has about 33 Provinces(34 if one counts Taiwan). And each one of these provinces has invitedthe founder of Suntech, Dr. Shi Zhengrong, to an elaborate signingceremony replete with speeches, gifts, and plaques. The provincepledges to install 2 gigawatts of solar, food and beverages areconsumed and then Dr. Shi returns to his factory to build more panelsto ship to Germany and the U.S.
The point is – despite theenormous potential, there is very little action in China’s domestic PVmarket. A fraction of China’s PV capacity is deployed domesticallyaccording to the demand data from GTM Research’s PV in China report. Note that the units are "MW."
So what will it take to rev up the Chinese domestic solar market?
Technology transfer from firms like ESolar and First Solar? Or will it come from another more organic direction?
Perhaps we can look at the rapidly growing Chinese wind market as a model for setting the Chinese domestic market in motion.
Thedevelopment of the wind industry in China was the country’s ?rst realforay into scaling a renewable, non-dispatchable generation technology.The government’s approach to building this industry — establishing asubsidy program with grid interconnection and independent powerproduction are good indicators of the way it might approach scaling itsdomestic solar industry.
China’s wind market was virtuallynonexistent 20 years ago, and has grown to be the fourth-largest marketin the world, behind the U.S., Germany and Spain. Over the past ?veyears, installed capacity has grown at an annual rate of 52 percent(!). Cumulative installed capacity through 2008 was over 12 GW, with6.2 GW installed in 2008 alone. China will likely overtake Germany andSpain to reach second place in terms of cumulative installed windcapacity in 2010.
Real progress in China’s wind marketstarted in 2003, when the central government administered the ?rstround of the Wind Power Concession Program. Wind concession projectsare funded by feed-in tariffs (FITs) that vary by province, dependingupon wind resources.
The Chinese government passed theRenewable Energy Law in 2006, and perhaps more importantly, establisheda Renewable Portfolio Standard (RPS) as a part of its Mid and Long-termRenewable Energy Implementation Plan in July 2007. The RPS mechanismincludes both a capacity and a generation requirement. The requirementsare as follows: The share of non-hydro renewable should reach 1 percentof total power generation by 2010 and 3 percent by 2020 for regionsserved by centralized power grids.
The program is not withoutits issues. There is a danger with any capacity-based incentive –putting the asset in the ground is often more important to thedevelopers than correct and ef?cient operation. Due to hastydevelopment and disagreements between the developers and the Chinesegrid companies regarding interconnection agreements, approximately 3 GWof wind-based capacity remains unconnected to the grid. This representsone-quarter of all wind capacity in China.
As with early-stagesolar development in China, wind development has been driven by aconcession process in which a speci?c project is put out to bid.Developers place their bid on a generation basis (i.e. what kWh ratethey would need to receive from the government to operate the projectpro?tably for 25 to 30 years). In the early stages of the concessionprogram, pricing was often the main determinant of the concessionwinner. Large generation companies would bid extremely low kWh prices,effectively meaning the project would run at a loss for its operatinglife. Generation companies’ primary motivation in winning theseconcession projects was to meet Renewable Portfolio Standard capacityrequirements. As a result, projects were not built according to bestpractices, and inexpensive components of lower quality were often used.This has resulted in China wind projects having a net capacityutilization factor 10 percent lower than U.S. wind projects on average.The NDRC responded in 2006 by altering the concession criterion,weighting the price as 25 percent of the overall bid evaluation(previously it counted for 40 percent). In 2007, the pricing criterionwas changed again, with the median bid used to set the winning price.The government seemed to be giving more weight to factors like turbinequality and developer experience, which had been marginalized inearlier National Level Concession Projects.
The history andprocess of wind development provides a potential template for howlarge-scale solar development may unfold. As the wind base plandemonstrates, the Chinese government is prepared to scale renewabledevelopment aggressively once the technology reaches a price point thatit considers appropriate, and local manufacturers and developers cancompetently ful?ll the government’s growth targets.
Theaggressive scaling of wind combined with the potential for solarprojects at low concession rates (i.e., $0.07/kWh for wind, $0.16/kWhfor solar) means that developers will need large balance sheets tofacilitate access to low-cost debt, and will still likely operate atextremely low margins. These factors make it unlikely that any companyoutside of a government-owned or af?liated developer will be a majorplayer in domestic project development. For foreign developers or jointventures, it is likely that the only way to make project economics workat current and proposed tariff rates would by selling Clean DevelopmentMechanism (CDM) credits. Even with that revenue stream, margins will likely be very thin.
As renewable policy transitions to national feed-in tariffs, solar is likely to follow a similar course of development.
For a deep dive into the Chinese photovolataic market – check out the China PV Market Development report.