China Boosts Solar Subsides But Benefits Likely To Be Modest

US listed Chinese solar stocks including Suntech Power (NYSE: STP) and Yingli Green Energy (NYSE: YGE) rallied by more than 10% on Wednesday following the news that the Chinese government will be enhancing financial support to its domestic solar industry and a report that the country’s short-term solar installation target may be doubled from the current levels.

We believe the additional subsidies reinforce the fact that the Chinese government remains committed to bolstering its ailing solar sector and could have a moderately positive impact on the companies by boosting domestic demand for Chinese solar products. However, subsidies are unlikely to be a panacea for the industry’s troubles considering that the fortunes are still largely tied to global panel prices and demand.

Details Of The Subsidies

The Chinese Ministry of Finance plans to double its subsides for solar projects from around $1 billion earmarked earlier this year to around $2 billion. These funds will be used to construct around 5.2 GW of solar capacity across the country. The incentives under the scheme are attractive, ranging from between 5.5 yuan per watt (for captive power plants) and 25 yuan per watt (for independent power plants). ^[1] Separately, China’s Ministry of Science and Technology announced that it has selected over 100 solar projects including those by Yingli Green Energy and Trina Solar to receive subsidies that could go as high as $2.5 billion for projects completed by June 2013.

How Will It Impact The Industry?

The Chinese central and regional governments have been supporting the domestic solar industry every step of the way since its inception. Initially, state-sponsored banks provided loans to companies to build and expand manufacturing capacity. When the situation in the  global solar market took a turn for the worse, the government provided bailouts and funding for firms to meet liquidity needs. These measures haven’t been particularly effective in alleviating the industry’s pain given that most problems faced involve overcapacity, falling prices, and subsidy cut backs in key markets like Europe.

At present, nearly 90% of solar equipment manufactured in China is exported but the government is seeking to reduce export dependence by outlining an ambitious target of increasing domestic solar installations to 21 GW (could be revised to 40 GW, based on recent reports) by 2015, up from around 3 GW in 2011. ^[1] The government’s recent subsidy boosts will complement the existing feed-in-tariffs and other infrastructure initiatives like grid connectivity for distributed solar projects to help boost domestic demand. We believe that boosting domestic demand is a good move given China’s burgeoning energy requirement, allowing the country to balance its growing energy consumption with environmental concerns.

However, growing domestic demand is unlikely to be a holistic solution for the industry’s woes given that the annual Chinese manufacturing capacity, which is estimated to be as high as 50 GW, could still be underutilized considering domestic growth (global demand is estimated to be around 30 GW). ^[2] Also panel prices have been on a free fall, dropping by about 40% since last year eroding firms margins. Further, panel selling prices in the Chinese market are generally lower than international prices which could also impact margins.

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1. Solar Surges on Reports China Increasing Subsidy Support, Bloomberg [↩] [↩]
2. Inventory Mountain Adds To Pain For Chinese Solar Firms, Reuters [↩]