Its fair to say that FITs have changed the PV industry. They are simply the best way for a government to support the PV industry, surmises Goekhan Demirci, Research Analyst at pvXchange International AG. Chinas decision to put in place two tariff rates, 1.15 Renminbi per-kilowatt-hour (RMB/kWh), 0.18 U.S. dollars (USD), and one RMB/kWh (USD0.156/kWh), for PV installations without a cap and without installation size parameters, seems to be another step taken by the country in its pursuit of cementing its central place as a major PV industry player. But with many questions arising as to how the scheme will be implemented and which projects will be given the all clear, the announcement may have raised more questions than it has answered.
Global market: short-term impact
When looking for the short-term effects of the Chinese FIT schemes introduction on the international PV market, the first thing to consider is the two levels of tariff. The 1.15 RMB/kWh (USD0.18) tariff will be paid for projects approved before July 1 and completed before the end of the year with the one RMB/kWh (USD0.156/kWh) for projects either approved or completed after those dates respectively. The Chinese Governments Renewable Energy Development Fund (REDF) will fund the FIT.
The FIT policy was announced on August 1 and it is understood was effective as of July 24. As this was after the July 1 approval date for the higher tariff, a rush of installations jockeying for approval was avoided. The timing of the announcement itself seems also to indicate that pressure on Chinese module and equipment manufacturers was starting to show after a weak start to the year.
Chinese manufacturer Suntech was unable to discuss the announcements direct impact on module prices, however Björn Emde did indicate that it may be, helpful for pricing, in the short-term. Researchers Jefferies observe that the western province of Qinghais FIT scheme led to a jump in demand in the two to three weeks prior to the national FITs announcement. Only days after this announcement, a 20-megawatt (MW) plant was announced in the Qinghai region, which is expected to be completed by September.
There are other details to the scheme also worth considering. Introduced by the National Development and Reform Commission (NDRC), the Chinese FIT essentially creates a national benchmark PV tariff for on-grid installations, superseding regional tariff systems that may be in place. The exception to this is Tibet, where the rate for all installations will remain 1.15 RMB/kWh for installations approved or completed after the July 1 and December 31 deadlines.
As this national scheme is a unification of the regional programs, Citi reacted to the announcement by saying that it does not anticipate a steep increase in PV demand. Citi continued its estimate of one gigawatt (GW) of installed capacity for 2011, rising to four GW in 2013. Some analysts reacted more positively however, immediately revising up their predictions for 2011 installed capacity. IMS Research was one of the first, increasing its outlook for worldwide installed capacity by one gigawatt (GW), to 22 GW. IMS Researchs Ash Sharma explained, We were always expecting a FIT to be introduced but not until next year at the earliest, due to costs of PV. We expected it to develop in a similar way as the wind market but it was introduced slightly earlier than wed expected and modeled for, which is why we revised up our forecast. Other analysts reacted positively also including pvXchanges Demirci, who said that it should not be a surprise that some short and middle term forecasts have been increased as a result of the Chinese FIT announcement. It will create another market that will be a significant one. Earlier China was rated as a mid-sized market that would gain significance in 2015 more and more. Now after this announcement many have put China as one of the top markets. Lux Researchs Pallavi Madakasira was less impressed, I dont think it will significantly add to demand predictions [in the short term].
Lower FIT, lower costs
The tariff rates under the scheme as announced are not particularly generous when compared to existing European tariffs. Analysts Raymond James describe the Chinese FIT approach to creating domestic demand as, trying to do it on the cheap. Even after recent cuts in Italy and Germany, amongst others, average European FITs are usually greater than USD0.30/kWh, so in the Raymond James analysts words, everything else being equal, [it] should spur more demand than it would have in Europe (or North America for that matter). Citi has released its calculations as to the profitability of larger projects under the FIT rates: Using a FIT of 1.15/1.00 RMB and assuming an investor hurdle of eight percent levered internal rate of return with 80 percent debt; we estimate system costs need to approximate USD3.00/2.50/W around Beijing, USD2.50/2.20/W around Shanghai and USD3.50/3.15/W in areas with the highest solar radiation. With current tier-one Chinese modules selling for USD1.25 to 1.30/W and assuming balance-of-system (BoS) costs in the mid USD1/W for all but very large scale applications, this does not leave a lot of profit margin. However Jefferies was quick to point out that there are some hidden cost savings when it comes to installations in China. Free or cheap land could be provided by the government for projects, thereby subtracting the lease costs that must be built into European or North American projects, from profit viability equations. Lower financing costs may also occur as there is speculation that, as the FIT will be funded by the REDF, Chinese lenders will see the risk as being minimal.
Low and falling BoS costs, in part due to low labor costs, must also be factored in. Jefferies observes that falling inverter, transformer and wire costs could also play a role. At present, it calculates Chinese BoS costs are USD0.75-0.80/W with a possibility of falling to USD0.65/W in the future. In addition Demirci makes the point that Chinese modules are sold at lower prices on the domestic market than overseas.
Winners under the FIT
Where there genuinely appears to be no doubt is that Chinese tier-one manufacturers are the best leveraged to profit from the Chinese FIT, concludes Lux Researchs Pallavi Madakasira. Sharma agrees and adds that this is not restricted to module manufacturers: We will see local module and inverter companies and integrators benefiting the most from this new tariff. Jefferies also observes that in the Chinese Qinghai province a FIT helped to stabilize pricing and increase plant utilizations. On the day of the FIT announcement, Jefferies issued a statement specifying Yingli, JA Solar, Suntech and Trina as being the best-situated manufacturers.
From the manufacturers themselves, Suntechs Björn Emde responds to the announcement by saying that, we had been lobbying for this for quite some time, and that the scheme delivered, a lot of what was asked for. In this respect, facing a tight market and pressure on prices, the Chinese FIT will actually assist manufacturers to maintain levels of employment, which is important to the government.
ThinkEquity understands this as being the primary driver for the tariff: Details clearly point to a policy leveraged to ongoing job creation. Jefferies also makes this argument, saying that the NRDC could rubber stamp some projects when necessary to support manufacturers.
Lack of detail in plan
There remain a number of questions as to how the China FIT will work. In particular, the process by which projects will be approved by the governments REDF. In this respect government connections are key, according to Demirci, Chinese companies already do that, they know about it. IMS Researchs Sharma adds that overseas firms wont, however, be shut out, though he adds but I would say that the odds are stacked in the Chinese firms favor. Jefferies believes projects that use top Chinese brands, that are large employers, will be favored and that favorite sons, or those projects with links to local suppliers and industry, will also be well received.
The lack of detail worries Luxs Madakasira, who makes the case that more detail is crucial before major conclusions can be drawn from Chinas FIT: There are too many moving parts and more clarity is needed. Other uncertainties lie in the duration of the payment schedule, how and when FIT rates may be adjusted, whether a capacity cap will be introduced, and what installation types will be favored. However, Think Equity assumes a 20-year duration for payments for its projections and Citi writes that the tariff will reduce over time as BoS costs fall.
Predictions for Chinese installations now stand at around 1.3 GW to 1.4 GW in 2011, rising to 2.5 GW next year and eventually growing to a figure between five and ten GW by 2015. A Chinese National Energy Administration Official confirmed earlier in the year that an upward revision of installed PV capacity from five to ten GW is under discussion.
These middle-term projections span a very wide range, but with a FIT scheme for which there are many unanswered questions, in a country that is at-times accused of lacking governmental transparency, there is a large margin of error. What is certain and what many analysts agree on is that many parts of the PV industry are watching Chinas demand for PV closely.
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