FOCUS - China solar power industry grows, but exports overshadow home market

8/2/2007 05:38 London Time story 0369

BEIJING (XFN-ASIA) - China''s domestic solar power sector will continue to need government help in the near-term as high costs of installation and low returns deter market entry, experts said.

They said the near-term market will remain export-driven and limited domestically to small industrial and commercial applications.

"Manufacturers are expanding their capacity, but I don''t see a major drive to install solar power domestically," said Wang Xing, senior program officer for electricity and renewable energy at the China Sustainable Energy Program.

"Right now there is not a very strong incentive program for solar power," he said.Wang also said most domestic manufacturers are gearing production toward the export market while looking to tap the public investment in projects such as rural electrification programs."

It''s a rural market... an industrial applications market at the moment," said William Wallace, senior technical advisor at the project management office for the United Nations Development Program and Global Environmental Facility, which has partnered with China''s National Development and Reform Commission.Industry analysts said they believe the commercial solar market in China will be slow to develop without adjustments to the country''s electric pricing mechanism as solar installation in China often depends on government investment targeted at development in rural areas.

Wallace said that large scale domestic production of solar electricity is often limited to government-funded rural electrification programs.

Under the rural electrification program, the Chinese government set a goal to install electricity in some 1,000 townships last year, Wallace said, adding that the goal was achieved mostly through small scale hydro and photovoltaic systems.

"They plan to continue this to the small village level, of which there are 20,000... that could require up to (a total of) one gigawatt of photovoltaics," he said.

Wallace added that this would greatly expand the solar market though the plan is expected to take 10 years to complete.

Industry analysts said that one of the largest obstacles for solar energy is the inability to link small scale power production units to a larger power grid. "

Currently, solar energy is only combined with power generation grid networks on a trial basis in first-tier cities like Beijing and Shenzhen, but solar on-grid electricity generation has not been achieved due to its limited scale," said Gao Hu, a researcher with the Energy Research Institute under the National Development and Reform Commission.

Grid connection provides a substantial incentive for alternative energies such as solar, wind, and small scale hydro by allowing excess capacity to be sold back to the power grid.

Industry specialists, who asked to remain anonymous, told XFN-Asia that domestic consumption of solar power should improve in the next few years.

One source said that rumors are circulating in the industry that the central government will introduce policies this year to promote domestic installation of alternative energies such as solar.

But another industry official said that it may be two to three years before these policies are enacted and then another one to two years after the implementation of those policies before they generate meaningful domestic sales of photovoltaic systems.

He added that the central government wants local governments to speed up the creation of incentives.
"The mandate for the central government is... for the regional governments to really start to put in place incentives and subsidies and start to make that happen," the official said.

The central government has set a goal for renewable energy sources accounting for 10 pct of all energy consumed by the year 2010. Authorities are aiming to increase this to 16 pct by 2020.

An industry source said the mix would likely make hydro-electric capacity its top priority, followed by wind and solar.

"I think maybe it (the three- to five-year outlook for domestic Chinese solar sales) will be promising but no one knows for sure," another industry official added.

Wallace told XFN-Asia that wind will continue to dominate over solar electricity as solar energy costs roughly five to six thousand dollars per kilowatt (KW) to install while wind power costs significantly less at 1,000 to 1,500 usd per KW.

"I think the main driver for photovoltaics right now is just the economy of scale. The manufacturing base is increasing, people are gearing up production, the market is expanding and there''s an actual cost and price reduction associated with that," Wallace said.

Chinese companies such as Nasdaq-listed Solarfun Power Holdings and JA Solar Holdings as well as BP SunOasis, a joint venture linking energy giant BP PLC and solar system integrator China Xinjiang SunOasis Co, are planning rapid capacity increases in 2007.

Solarfun had annual production capacity of 120 megawatts (MW) of PV cells and 60 MW of PV modules in 2006, said a research report from Morgan Stanley. The company plans to increase its capacity for cells and modules to 240 and 180 MW by the end of this year with further increases to 360 and 300 MW in 2008, the report said.

Similarly, Jinglong Group subsidiary JA Solar, a manufacturer of monocrystalline silicon-based PV cells that began commercial operations in April of last year, had a capacity of 75 MW in 2006. The Morgan Stanley report said the company will increase capacity by 100 MW this year.

And BP SunOasis told XFN-Asia in a telephone interview that it is also planning to boost production capacity.

However, market sources said that although the domestic market is growing, the capacity boosts are geared mostly toward international markets such as the US and Europe, where policy incentives continue to spur consumption.

"You''ll continue to see growth in the base-line market, which is the commercial market, and this is telecommunications, cathodic protection for pipelines, other industrial type applications - for railroads and so forth," Wallace said.

He added that he expects the government to focus more on grid connection in the future.

For the near term, the solar water heating market will continue to grow as lower costs make it a more viable option. But while the industry ramps up capacity, government incentives will be critical to shifting the attention of Chinese manufacturers away from the export market.