Capturing The Sun: The Future Of China's Solar Power

Capturing the Sun

The Future of China's Solar Power

With retailers now advertising "solar" backpacks and camera bags to consumers, it's clear solar power has hit the big time. The world's solar industry registered growth rates above 30 percent a year for each of the last five years, and securities markets have seen a surge in the stocks of photovoltaic (PV) cell producers.

Not surprisingly, China wants in on the action. Last December, Suntech Power Holdings, the country's leading manufacturer of traditional mono- and polycrystalline cells and modules, became the first Chinese solar stock to be traded on Wall Street. The successful initial public offering (IPO) raised US$396 million and was considered a major development in China's solar energy industry.

Most significantly, the remarkable growth of Suntech and other Chinese players has convinced even fervent devotees of the oil industry to cast an eye toward China's solar sector, given the country's enormous solar production capacity and low-cost manufacturing capabilities. Yet despite the clamor, some analysts remain skeptical about the future of solar energy in China.

Solar Sells

China isn't the only up-and-comer on the world solar scene, of course. Solarbuzz LLC, an independent research firm based in San Francisco, reports that global installations of PV systems, a key measure of market size, reached a record 1,460 megawatts (MW) in 2005, growing at an annual rate of 34 percent. Led by Japan and Europe, production of solar cells increased 45 percent to nearly 1,730 MW, six times the level in 2000. With a tight oil market, soaring world energy demand, and government incentives favoring solar energy in several countries, the trend towards expanded solar use shows little sign of slowing.

This robust global appetite has enabled China to break into the US$12 billion-a-year industry. Over the next three years, the country expects to significantly boost its manufacturing capacity. An entire solar supply chain is being formed, from the development of polysilicon feedstock to the production of wafers, cells, and modules. The top three domestic manufacturers, Suntech, Tianwei Yingli, and Chinese Electrical Equipment Group, had a combined PV cell manufacturing capacity of 300 MW last year, out of a Chinese total of more than 400 MW.

After adding a new 30-MW solar cell line in late 2005, Suntech's production capacity jumped to 150 MW and continues to grow. "With another manufacturing base in Luoyang currently under construction, we expect our capacity to reach 270 MW by the end of 2006," notes Zhang Guangchun, the company's deputy general manager. Banking on strong global demand, as many as five other Chinese solar firms are aiming for IPOs in the next 12 months, among them Canadian Solar Inc., based in Suzhou City, and Yingli Solar, in the northern city of Baoding.

The key to China's ramped-up solar capacity is its position as a low-cost manufacturer, a factor that enables domestic companies to achieve better margins than their global competitors. Aside from substantially lower labor costs, Chinese companies also benefit from an expanding local manufacturing industry, which provides solar equipment at a fraction of overseas suppliers' costs.

Silicon Shortage?

Soaring global demand for solar power has sparked raw material shortages, however. In 2004, about 65 percent of the world's polysilicon production was used to manufacture semiconductors, with only the balance going to solar cells. Crystalline silicon is the primary raw material for approximately 94 percent of all solar cells. Ultimately, the growth of the crystalline silicon PV market will depend on how much polysilicon is sitting in inventory.

Analysts disagree on the availability. Piper Jaffray, a full-service brokerage firm based in Minneapolis, has estimated that only 13,000 metric tons of the material will be on hand for solar cell production this year, limiting the overall growth of the industry to about 5 percent. A more optimistic report from International Capital Corporation Ltd. puts global PV growth at just under 25 percent, with polysilicon production reaching 31,500 metric tons. And Michael Rogol of CLSA Asia Pacific Market anticipates continued strong growth of as high as 35 percent. But with the contract price of polysilicon doubling from US$30 a kilogram in 2003 to $60 a kilogram in 2005, it's clear that any PV companies that lack long-term contracts for the material-including most Chinese firms-risk being squeezed out of the market.

Sichuan Xinguang is China's biggest polysilicon manufacturing base, with a planned capacity of 1,250 metric tons by 2008, according to Securities Market Weekly. But with the main production facility still under construction, only two other Chinese manufacturers are currently producing the feedstock: Emei Semiconductor Materials Plant & Institute, with an annual capacity of 100 tons, and Luyang Zhonggui, which began production only in mid-December, with a capacity of 300 tons.

This supply constraint has driven spot virgin polysilicon prices up as high as US$200 per kilogram on the Chinese market. PV manufacturer Tianwei Yingli is particularly concerned about the materials gap in light of lucrative contracts it recently signed with two German companies. The Chinese producer plans to deliver additional module capacities of 162 MW to Maaß Regenerative Energy GmbH within the next five years, and 4 peak MW of polycrystalline modules to Phönix SonnenStrom AG during the current financial year. However, the firm anticipates a raw materials gap of as much as one-third in 2006, according to Securities Market Weekly.

Tianwei Yingli's main competitor, Suntech, is actively preparing for the competition. "Suntech expects grant of reception from the Underwriter's Lab Certification this year, which will allow it to enter the U.S. market," said Zhuang Guangchun, senior engineer and deputy general manager of Suntech. Meanwhile, the company says it will use US$100 million in funds from its IPO to buy raw material.

Cloudy Prospects

Yet the Chinese market may not be as receptive to solar power as these companies hope. Germany, Japan, and the United States accounted for as much as 90 percent of global PV market installations as of late 2005. Much of this activity has been driven by favorable government incentive programs. German banks approved loans for more than 250 MW of PV systems by the end of 2003, and in Spain, the government subsidized US$230 million worth of PV projects in 2004. In the United States, the US$3.2 billion California Solar Initiative incentive program aims to install 3,000 MW of solar power over an 11-year period. To help meet global demand, China's Tianwei Yingli has received an increasing number of orders from Austria and Spain this year.

By contrast, China's domestic solar industry faces a rather unusual situation: more than 90 percent of raw materials is currently imported, while 90 percent of products is exported. The lack of local demand for solar energy is related to both the tight material supply and the high cost of generation. In general, PV-generated power is far more expensive than power derived from conventional fuels; in China, it's up to 10 times more costly than coal-based power. As a result, solar accounts for a tiny share of the nation's long-term renewable energy strategy-only 2,000 MW of total electricity generation by 2020, compared with 20,000 MW from biomass and 30,000 MW from wind.

Regulations and government incentives are key to driving the adoption of renewable energy and stimulating the development of fledgling industries like solar power. But while foreign analysts anticipate greater Chinese solar demand starting in the next few years, driven in part by the country's new renewable energy law, experts in China are more skeptical, particularly since the details for achieving the solar targets remain vague. Of course, government price restructuring could change all this. "If we implement on-grid tariffs as the Germans have done, the Chinese solar market would significantly open up," notes Securities Market Weekly.

Zijun Li is a Worldwatch Institute China Fellow.