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The Deeper Reasons Behind China’s New Solar Rout

by | published June 8th, 2018

In two separate moves, Beijing shot itself in the foot this week.

Recently, the Chinese government released a bombshell solar policy makeover aimed at curbing runaway growth – ultimately dealing a major blow to the solar industry worldwide.

As I explained to my Energy Advantage subscribers yesterday, the country’s National Energy Administration, the National Development and Reform Commission, and the Ministry of Finance released new guidance that terminates any approvals for new subsidized utility-scale PV power stations in 2018.

The “Red Dragon” also announced that it will cut the feed-in tariff for projects by 0.05 yuan per kilowatt-hour (a fraction of a U.S. cent), cap distributed project size at 10 gigawatts (down from 19 gigawatts), and mandate that utility-scale projects go through auctions to set power prices.

According to GTM Research, the changes could cut China’s capacity forecast by 40%, to 28.8 gigawatts (GW) from 48 GW. Wood Mackenzie projects a cut of 20 GW this year, down to just 30 GW. Other projections put 2018 capacity closer to 35 GW.

Because of China’s outsized positioning in the solar sector, PV stocks as a whole have been hit on the chin in the aftermath.

That’s why today, we’re going to look at the deeper reasons behind China’s dimmed solar view…

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The Chinese Solar Rout

The solar industry as a whole is used to being dealt wildcards every once in awhile.

The important thing to note here though is that blow came from China.

China leads the world in both solar installations and next-generation solar technology.

In 2017, it accounted for between 15% and 20% of all global demand, depending on whose figures you use.

Even with the supposed boom in renewables that had been evident in Western Europe, there is no equivalent market elsewhere to compensate.

Now, Chinese solar leaders have been quick to petition the government to reconsider.

For Beijing, solar has comprised about half of all new generating capacity nationwide.

But it has also come at a steep price tag.

Anecdotal evidence compiled by Western analysts point to a bill equivalent to more than $15 billion in subsidies, much of which has yet to be paid.

If the capacity figures above are in any way accurate, these moves will have a chilling effect on the worldwide solar sector.

Which means two immediate results are forthcoming…

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First, the Chinese decisions undermines President Trump’s attempt to use a solar import tariffs to jump start U.S. panel manufacturers.

What had already been a “sure thing” that the reliance on local manufacturing would increase the downstream costs of solar in the U.S. just became significantly more expensive.

It’s also having a chilling effect on worldwide solar prospects as forecasters slash 2018 estimates for solar demand.

Second, unless the decisions are rescinded, China has no choice but to put additional reliance on low-quality coal as the overwhelming tool with which to meet accelerating power needs.

My sources are now telling me there are three deeper reasons for these decisions.

Why the “Red Dragon” Pumped the Breaks

First, and in my judgment by far the weakest of the three, is a geopolitical “gotcha” to President Trump.

Beijing simply has not put its own solar sector in retreat, guaranteeing a wave of losses among other producers, to stick it to the President.

The slide in stock prices among American U.S. competitors over the past several days is proof of that.

Of course, such an explanation only goes so far.

How long can one country adversely impact its own power sector just to prove a political point?

Yes, this may be a way to signal unacceptable consequences to the White House.

But since when has that worked with the current occupant?

Still, my early projection is this: If the Chinese moves remain, the U.S. solar sector can expect a least a 15% pullback and another 25,000 or more in employment losses.

That’s on top of the 20,000 plus American job drain already indicated by the initial U.S. tariff decision.

Second, and clearly a part in the overall political calculation, is the need to make Chinese producers less dependent on government largess.

In such an environment, Chinese authorities are saying privately that they have lost interest in having their internal subsidies cut costs elsewhere in the world.

The cut in government support at home is pushing the additional costs of solar installations further downstream elsewhere. Of course, that is also at the expense of export revenues and Chinese solar company equity values.

Finally, there is an ongoing internal political contest underway.

There remains pervasive corruption in such projects inside China.

A fair amount (estimated here are all over the map), of central government subsidies are simply siphoned off without any net improvement in bottom line power.

Projects are approved by regional authorities without adequate planning or integration.

Overall power generation may increase on paper, but so has inefficiency.

That inefficiency has essentially been fueled by the solar power subsidies.

It seems Beijing has introduced a new dance – one-step forward, two-steps back.

Unfortunately, the rest of the word must also now dance to the beat of a Chinese drummer.

Sincerely,


Kent

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