The Opportunities And Challenges In The Chinese Solar Market

China remains the largest, and one of the fastest-growing solar markets in the world. The country is poised to install over 17 GW of new photovoltaic capacity this year, accounting for almost a third of projected global solar demand. This marks an increase from a cumulative installed capacity of just 3 GW in 2011. While much of the growth has been brought about by attractive incentive mechanisms ($83.3 billion in green energy subsidies in 2014, per the United Nations Environment Program), the industry has been contending with structural issues as well. In this note, we take a look at some of the trends that could drive the Chinese solar market in the near term.

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Aggressive Government Targets, Urgency On The Climate Front

China’s National Energy Administration – which oversees energy policy – has apparently outlined a 100 GW installation target for solar by 2020 under the country’s five-year plan for 2016-2020. ^[1] However, analysts and industry experts view this number as being relatively conservative, and it’s widely expected that the target will be much higher when the plan is officially announced. For instance, Xinhua, China’s official press agency, has reported that solar capacity could hit 150 GW by 2020. ^[2] This could result in solid growth for Chinese solar manufacturers; the country’s total solar photovoltaic power capacity stood at 35.8 GW as of June 2015. Assuming that installed capacity grows to about 45 GW by year end 2015, this would require installations of about 21 GW per year over the next five years to meet that potential 150 GW target.

While the exact policy incentives that will support such a rapid build-out remain unclear at this point, there are a few good reasons why the government will continue to invest aggressively in solar, despite the country’s recent economic woes. China is the world’s largest polluter, by far, and there is likely to be a sense of urgency to address environmental issues while continuing to meet domestic electricity needs. Additionally, the landmark climate deal that China signed with the United States in 2014 requires China to reduce its carbon emissions beginning from 2030 or earlier, while increasing energy use from zero-emission sources to 20% by 2030. This should ensure that the government stays committed to renewables over the long term.

Subpar Distributed Generation Growth, Weak Grid Infrastructure

There are several structural issues that will also need to be addressed in the Chinese solar market in order to drive further growth. Firstly, unlike most other developed solar markets, China’s distributed generation (DG) segment has significantly trailed the utility-scale segment. This will need to be a key focus area in driving long-term growth, since the DG market is typically a less volatile source of demand when compared to the utility-scale market. During the first half of this year, distributed generation accounted for just 15% of total installations in China, while it accounted for over 40% of total installations in the U.S. ^[3] There are multiple factors holding back the distributed solar market in China, including a dearth of financing options for small-scale projects, permitting and regulatory hurdles, a lack of suitable rooftops and property rights issues between developers and rooftop owners.

Additionally, the utility-scale sector also faces challenges in the form of weak grid infrastructure. Close to 10% of China’s solar capacity remained unused during the first half of 2015, as the government halted power flows from solar projects due to grid congestion, according to the National Energy Administration. This problem is not unique to solar, as wind producers have also had trouble connecting to the grid. According to Reuters, roughly 20% of China’s wind power capacity was curtailed in Q1 2015. The weak grid capacity hurts solar installations and prevents project owners from realizing the feed-in-tariff payments to which they may be entitled. Separately, Chinese electricity consumption grew at the slowest rate in three decades during the first half of the year, with supply surpassing demand. While the strong electric supply could have some short-term implications for the solar space, it shouldn’t hinder long-term growth, as solar’s share in the overall generation mix is likely to increase further, replacing some fossil fuel-powered plants.

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1. China 2020 Solar Energy Target = 200 Gigawatts (Rumor), CleanTechnica, July 2015 [↩]
2. China’s Solar PV Capacity To Reach 150 GW By 2020, Says Xinhua, Clean Technica, October 2015 [↩]
3. Solar Market Insight Report 2015 Q2, SEIA [↩]