China PV project is an opportunity too big for any PV company to walk away, with annual installation of over 30GW and 40% of WW consumption for last two years.
1, Metrics of China PV project
China PV installation is not a FiT driven administration any more, since 2015. It’s a mix of FiT-related projects with defined annual target, and some specific projects applying efficiency requirement and bidding mechanism, plus unlimited volume for several special type of projects..
1) FiT projects. FiT bonded projects still stay as mainstream at this time, but proportion and annual FiT rates at rapid decline. Usually, a PV install annual target is issued by central energy office NEA (National Energy Associate). Relevant FiT funds issued by finance control center NDRC (National Development and Reform Commission), go down through several political structures (center, province, city, etc.), before reaching local grid company and power plants. A list of provincial level quota is provided by NDRC under scope of annual target. A permission is also issued by NDRC for each single project, without which any project in process considered illegal. It’s also an essential certificate for further steps, like obtaining PPA from grid company, connected to grid, and project finance. It’s reported that regulating of FiT projects was lousy at beginning as many were taken by companies having covert government connections.
Trying to fix those FiT loopholes, also noting that cost of PV systems has dropped significantly in recent years, govt has intended to cut off FiT rates in large extent. FiT rate of the year, and its deadline, have become two essential elements while building a solar project(FiT related) in China. The complex part is, deadline usually doesn’t go through a calendar fashion. Both 2015 and 2016 were 30 Jun. of next calendar year. Apparently, deadline mechanism would easily lead to rush installation during months approaching deadline date, which is what happened in 1H’16 and expected for 1H’17.
This has no specific requirement on quality.
2) Front Runner projects.
Trying to curb low-tech expanding in PV industry and push consolidation, NEA brought in this concept in 2015. It has clear requirements on quality of PV system and its key components, such as module efficiency and inverter parameters, as well as makers’ credentials. Funds go through central NEA to grid and project itself, based on bidding power price. Tender mechanism is applied.
Projects are declared annually at calendar basis.
3) Aid Poverty projects. Same quality requirement and bidding process as FRP. Projects get payment with bidding power price from grid company, by funds injected from national financial organization "Aid Poverty Fund”. Project details, volume, location, permission, etc. are listed by NEA. Projects are declared annually at calendar basis.
4) Unlimited projects. No limitation on provinces of Beijing, Shanghai, Chongqing, Tibet and HaiNan for whatever projects, as far as grid transfer allows. No limitation on DB systems (rooftop, BIPV, etc.)
2, Figures, actual and hidden
Confusions arise when looking to variable annual figures of China PV installation. They are entangled with terms like annual target, annual installation connected, overall annual installation, deadline, ratio of FiT payments, and so on.
1) Annual target is an volume guidance given by authority (NEA or NDRC), comprised of firm volume of FiT projects and other types of projects. We must be aware that annual target is a guidance still mainly indicating FiT projects, so it doesn’t fix to a calendar frame at all. FiT projects and FiT rate of the year could be assigned anytime, for only once in mid of the year, lasting until certain time which is defined as deadline. For example, 2015 annual target was announced at Mar. 2015, revised once at Sept. the same year. Its deadline was 30th Jun. 2016. In case of 2016, annual target was given on 16th Jun. 2016, before long time of silence about deadline info. until Dec. 2016, then confirmed as 30th Jun. 2017.
Annual target also includes guidance of new type projects, like FRP and AP projects. But these are mostly bidding based, details clearly declared in the target guidance, like, project name, capacity, place, undertakers, and so on. Practically they are not deadline relevant, they just last as long as finish up. In the end, intertwined with deadline sensitive FiT project and none sensitive other projects, this annual target figure are sometimes quite misleading when people use it to set up demand outlook.
2) Annual PV installation connected, given by China NEA’s Monitoring Center, provides an annual figure of calendar frame (1st Jan. – 31st Dec.)regarding PV project capacity connected to grid and registered in its monitoring system. It mainly consists of annual target, should it be fully accomplished, and other unlisted projects, such as DB systems and projects in un-restrict regions. For example, NEA announced 2015 PV installation connected was 17.6GW, which according to above stated counting, included some projects of 2014 FiT rate and some of 2015 rate(the rest went to 2016 until Jun. 2016), and some unlisted projects (i.g. DB projects, those installed in un-restrict zones, etc.). The same structure with figure of 2016 PV installation connected 34.5GW.
3) Overall annual installation. This is a figure of no official statement but, very meaningful when looking to demand/supply status of PV supply chain. It’s composed of the figure of connected (approved and registered by authority) plus all other projects installed but not approved. There is no official way to know what this figure is. But it’s for sure a huge number, some PV experts suggest about 15-20% of those registered, given the frantic shifts of almost all top Chinese PV makers downward to projects (too cut off huge inventory) and the fact pre-permission and none registered projects went surging since 2014 (a common trick called “build first, apply second”).
Under overall installation figure, we can have other virtual figures in this number labyrinth. We can’t trace them in public but they firmly exist and, no less meaningful at all in financial prospects. For example, those connected but faced with transfer curtailment (a great problem in large northern regions), power in transfer but FiT delayed (a vital problem right now). These figures would substantially explain certain movements on PV market, like, some companies reported large installation in domestic but finance severely strained, large revenues were made but A/Rs soaring and cash draining.
4) Deadline. As above stated, deadline is issued to annual target, but only effective to the part of FiT projects. 2015 PV deadline was 30th Jun. 2016, causing crazy rush installation in 1H. Same story, 2016 was set as 30th Jun. 2017, there should be a similar rush fever but in fact no sign of it until now. We will try to explain it in following notes.
Some actual figures:
2015: annual target was set at Sept. 2015, 24.1GW (23.1GW FiT, 1GW FRP). In the end, annual Installation connected was announced as 17.6GW(yes, short of target). Other figures unknown.
2016: annual target was set at Jun. 2016, 23.83GW (12.6GW FiT, 5.5GW FRP, 5.16GW AD), Annual Installation connected: 34.5GW, almost 100% YoY increase. It was mainly caused rush order effect of 1H’16, when people hurried to build projects for 2015 FiT rate. What a twist, but this is how it works! Other figures unknown.
2017: annual target not announced yet. Estimates set Annual Installation Connected at least 30GW. As despite authorities try to cut FiT related projects, FRP and AD projects should see large increases. Moreover, other unlimited projects, especially DB systems, seeing a lot support policies, should have large boom going forward.
Finally we should note a fact. NEA declared in late Mar. that due to great pressure from local authorities to help finished PV projects in their regions get 2015 FiT rate (around 15% higher than 2016), they have had to allow projects of capacity around 11GW registered into 2016 annual target. That said, 2016’s annual target 23.83GW has got 11GW short before it practically started.
I made a brief chart illustrating these figures in various schemes.
3, Major issues around China PV installation
As large as its staggering capacity(~30GW annually), and as convoluted as all the figures above stated, China PV project business presents the following challenges (but not limited to):
1) FiT rate at increasing cuts every year, bidding mechanism more and more popular, fueling price competition drastically.
2) Transfer curtailment. A fact not much discussed in public but tormenting many PV companies to near death. Most solar forms are built in north part of China, where power excessive and grid infrastructure fragile. Power transfer curtailment, not only upon PV but to all sorts of renewables, gets increasingly serious in recent years. 2016 data shows, PV project transfer curtailment was average 19% in north China, highest rate 43% in some provinces.
3) FiT payment delays. Process of such amount of funds flowing from central govt to local projects is complicated and extremely slow, especially after domestic PV project got exploded since 2014 and FiT due payments went sky high. This problem is truly killing many PV companies. Latest report of end 2016 was that accumulative FiT payment delays had come to staggering figure of RMB100bil (~$15bil), large number of project companies got overdue of over two years.
So I never lose any chance to emphasize: when looking to a Chinese PV company for partnership, it's definitely a big minus if it claimes highly exposed to Chinese PV projects.
Finally we can make a list of reasons hopefully explaining why 1H’17 rush order has not appeared yet as people expected:
1) First and foremost, the supply glut. 2017 clearly sees worsening, if not worsest.
2) Despite cent’l government has made enormous efforts, those major issues around China PV installation still remain as acute pain for most project companies.
3) As above stated, 11GW of 2015 installation has been registered into 2016 FiT quota.
4) An accountable compensation for last year’s frenzy of rush installation. Many local companies have got good finance reports after last rush effect, but only with A/R piled up and cash running even lower. Now for many it becomes a matter not of whether they want to, but of whether they can or dare.
4, Why does China project seem to provide no opportunity to foreign development companies.
Because of above challenges of #3, plus:
1) Price competition over those bidding projects are brutal. Recently tender has come to range of $5c-6.2c/KWh, without subsidies. More importantly, many none-product criteria are added when looking to bidding tenders, like commitment of building local PV factories (cell, module, inverter, etc.). Development companies are prone to be trapped in heavy finance burdens to win one single project.
2) We did see some skilled foreign EPC companies (i.g. juwi, Wirsol, SunEdision, First Solar etc.) try to set footprint in China PV project but most have faded out. As insight people suggest, getting project permission from NDRC is something much more than about product and quality. It’s more like political plays, involving both company itself and local political entities working together to put delicate influence upward to central government (NEA or NDRC). As far as it’s a subsidy reliant business, PV project never escapes easy prey for corruption and dark play. Nobody admittedly says it’s a closed circle, but latent lids as widespread and tight as fortress of secret feast needs to have. When they manage to work through local partnership, foreign companies are faced with new dilemma. That said, those who appear to be highly capable of obtaining project permissions do not seem to have quality products, or more importantly, do not seem to be interested in partnership strategy (their only strategy is government relationship). Meanwhile, an apparently good company with competitive products do not necessarily provide assurance of winning PV projects in China.
3) Trade-off business a perpetual fashion in Chinese PV society. You get module order from a project company only with long term credit guaranteed, or preferably, taking equity in the project. EPC companies win contracts by paying most expenses by themselves, and in the end possibly get paid by stocks of modules, cells, or whatever. Similar along the chain, cell makers win orders from module factories by guarantee of buying back certain module stocks (instantly they become module maker, and price dumping). And so on and on.
Before you have workable solutions to all those problems, China PV project is just like the moon in water.