Getting out of the shade (3)

In the final section of a three-part article, Julian L. Wong discusses how China can jump-start the solar industry by reorienting toward a domestic market.

There will certainly be challenges to deploying a scaled-up solar programme in China. The true value economics of solar may be difficult to convey to the average end-user. While PV installations offer the advantage of upfront cost certainty due to zero fuel costs and minimal operating and maintenance costs, it is also true that the upfront costs are significant. Given the choice between heavily subsidised retail rates of electricity and making a hefty upfront investment in a solar installation that will only pay itself back in 20 years or more, it is easy to guess which option usually wins out.
Reorienting China’s solar industry towards the domestic market will require broadened competencies across the solar value chain compared to one geared towards exports. Solar panels are just one of various components that make up an installed solar PV system. Non-panel components, also called “balance of system” (BOS) components, include devices such as batteries, controllers, inverters and monitoring devices. Due to the export focus of the Chinese solar industry, there has been far less emphasis on building production capacity on BOS components. For instance, it is reported that at current rates of solar PV use, most of the controllers and inverters needed for stand-alone and medium-scale grid-connected solar systems are domestically sourced, while a larger portion of controllers and inverters for larger-scale grid-connected solar systems are imported. Should the domestic solar market be significantly expanded, current domestic BOS production capacity will not be sufficient.
Deploying distributed solar PV will also require a skilled workforce to market, sell, install and maintain PV installations. A warning shot has been sounded by China’s wind power industry, where a boom in wind farm development domestically has led to a shortage of skilled labor to maintain the wind facilities. Similarly, the installation of PV, especially of the distributed sort, is a relatively labour-intensive process, which requires technical competence. All the financial incentives and appropriate technologies will be of little use if there is no one to physically deploy the solar systems. That said, there are measures that the government can take to address these concerns as it seeks to promote the domestic solar market.

The time to jump-start China’s domestic solar market is now. Given the financial malaise in the United States, it is by no means certain that US demand will pick up soon despite its recent enactment of financial incentives for solar. Rather than depending on foreign markets to drive down the production costs of solar, China can do it by itself. A coordinated scaled-up investment programme in developing solar resources at this time is not only consistent with the public government statements that environmental protection and new energy technologies should be a focus of the recently announced four trillion yuan economic stimulus package, but would also take advantage of the current historically-low prices of solar PV panels. Such a programme would involve a mixture of internalising the externalities of fossil-based power; providing financial incentives to recognise the non-financial benefits of clean, distributed solar power; and the development of technical capacity to create a domestic solar market.

[Encouragingly, since the first publication of this article, China has begun its journey out of the shade: China’s Ministry of Finance and the Ministry of Housing and Urban-Rural Development has launched a solar roofs programme to subsidise qualifying PV systems at 20 yuan (US$3) per watt, while some provinces, particularly Jiangsu, are poised to offer significant financial incentives to increase local capacity in PV manufacturing and deployment.]
One of the more direct ways for solar energy to move towards “grid parity” is to accelerate retail electricity price reform. The recent massive infusion of funds by the government into the “big five” power generation companies to stem their record losses in 2008 reflect the fact that retail power, which is fixed by the government, is priced below its cost of production.The reforming of energy prices towards more market-based mechanisms has become a theme in recent energy policy documents, and has already made its effect felt with the upward adjustment of retail electricity rates last July, and reports that further increases may be imminent. The sooner prices are made to reflect even just their current costs of production (let alone negative externalities), the quicker solar power can compete with coal-fired power on a level playing field. As a longer term goal, the complex task of varying electricity rates throughout the day according to demand levels should be undertaken so as to more effectively harness the “peak shaving” value of solar power.
The government should also implement comprehensive feed-in tariffs, which would require grid companies to purchase solar power at preferential tariff rates and which have been proven in Germany and elsewhere in Europe to be the most effective policy instruments in promoting renewable energy utilization. The premium that these tariff rates represent over the tariff of conventional fossil fuel electricity should be fixed, but also gradually decreased over a period of 10 or 20 years. These premiums should be paid by the grid company to the solar power producers and passed down and shared across all end-users, in accordance with the landmark Renewable Energy Law that was enacted in 2006 but has hitherto received selective implementation. Such a system also directly rewards production of solar power rather than merely installed capacity, which says nothing about how much electricity is actually generated. A related mechanism, net metering, should be implemented to allow smaller scale users to offset their electricity bills by feeding back any excess solar power not used back into the grid.
Another way to ramp up demand for solar is through government procurement. The initiation of mass deployments of solar panels in central and provincial government facilities and commercial facilities of large state-owned enterprises creates a strong market signal for the scaling up of PV deployment and subsequent lowering of costs. The government can also act as a lever for demand by accelerating its rural electrification program through the purchase and deployment of solar systems where they are feasible, and require its state-owned utility companies to take advantage of their relationships with end-users to roll out distributed solar programs.
With respect to end-users, financial innovation can positively alter the cost perceptions of solar. Third-party financing arrangements – whereby a third-party financier purchases, installs and continues to own the solar panels, but sells the solar-generated electricity to the facility owner just like a utility – relieves the facility owner of prohibitive upfront costs of installing and owning the solar panels. Due to the nascent development of consumer credit, such third-party financing institutions should target commercial and industrial entities, rather than the residential sector, and perhaps with the support of provincial and municipal governments, which have energy efficiency and renewable energy goals to meet.
Meanwhile, policies should be made to develop the necessary capacity and technical expertise for all steps of the PV value chain, especially the manufacturing of peripheral components, and for downstream solar activities such as systems integration, installation and after-sales services, such as performance monitoring, system repairs and upgrades. Another area of attention is the upgrading of the electrical grid so that it can accept interconnections from distributed solar systems. This will require significant investments in education and infrastructure, but also lead to significant positive externalities such as job creation and spill-over benefits to other electrical engineering sectors.

A group of major Chinese PV manufacturers recently submitted an industry white paper to the government expressing optimism that solar power can achieve price parity with conventional fossil fuel power as early as 2012. This will not happen, however, without the weight of more aggressive government policies, which China’s planners should adopt in order to seize current opportunities and enhance national security. The national security proposition of solar energy is rooted in the unique economic and non-economic benefits of its distributed nature and shorter supply chain. Clean, distributed solar power can enhance the resilience of China’s power supply; produce clean power in urban and rural areas alike; and provide high-skilled jobs. Instead of shipping China-made solar modules to distant western markets, deploying them domestically would further enhance the benefits of shorter supply chains. The unique confluence of lower productions costs and decreased overseas demand means the cost of going solar is lower than ever and makes it an opportune time to make a policy push for domestic solar deployment.

Julian L. Wong is an energy analyst based in Washington, DC.  He recently completed a Fulbright Fellowship at Tsinghua University in Beijing on renewable energy policy and is the author of The Green Leap Forward (, a blog on China’s energy and environmental issues.  

This article first appeared in the Winter 2008 edition of China Security magazine. A full version of the article with references and graphics can be accessed here.

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