China’s introduction earlier this month of a national feed-in-tariff for installing solar panels is a long-awaited move expected to boost domestic demand and address an export imbalance.

China has been the world’s number one producer of solar photovoltaic (PV) panels for the past four years. Chinese solar panels last year accounted for an overwhelming three quarters of the global PV output of electricity. This is the energy equivalent of 10 gigawatts (GW), according to the China Wind Power Outlook 2011, a report released by Greenpeace and the China Renewable Energy Industries Association (CREIA) in June.

In stark contrast, however, China installed only a relatively modest number of solar panels at home equivalent to 900MWp. This left an overwhelming 95% of the country’s PV production output flowing into the overseas market. This small percentage of domestic solar installation stems largely from the absence of a robust, domestic policy that supports the domestic use of solar electricity. In this light then, the announcement of the feed-in solar tariff by China’s National Development and Reform Commission on 1 August is expected to give the domestic-focused PV industry a much needed shot in the arm.

Workers at Dafeng Solar Power Station

大丰太阳能电站的工人

If the rapid growth of wind energy in China provides any lessons for solar, a clear development target is the key to boosting the use of renewable energy in China. The country’s solar energy industry has been heartened by the renewable energy component of the country’s 12th Five-year Plan, announced in March. The plan calls for the domestic installation of solar panels to be raised from “5GW” to “at least 5GW.”

The introduction of the solar feed-in tariffs, along with the enhanced installation target in China’s major economic blueprint, represents a solid step forward for domestic solar energy in China. It shows that the government is confident and determined to develop this important industry. This major milestone recognises that a stable and competitive long-term investment return rate is the key driver of market incentives.

The new regulations indicate that “an initial rate of 1.15 Yuan/kWh will be paid to projects approved before July 1, 2011 and completed by the end of the year.” Industry calculations indicate this rate will generate an Internal Rate of Return, a financial measure of investment profitability, of about 7 to 8%. This provides a reasonable profit space for solar energy developers. The feed-in tariff policy also provides a clear timeline for project implementation. To enhance their profits, developers are encouraged to push forward examination and approval processes, along with their development and installation of PV panels. The second half of the year then represents the golden time for solar projects in China. I think that the domestic solar energy market will receive a big, short-term boost – a promising development indeed.

However, there are still questions surrounding some aspects of the solar feed-in tariff policy. The tariff rate is not differentiated according to different locations. Developers will rush to provinces which are rich in the resource of sunshine, such as the provinces of Qinghai, Tibet and Xinjiang. Since these relatively remote areas are located far away from areas of base load energy, their connection to major energy grids represents an issue of major concern. Improved coordination will be required between the solar PV industry, provincial governments and electricity grid corporations. We can only hope that the grid corporations are preparing carefully for this new development.

High costs represent a big and constant challenge for the solar industry. Leading companies could cope with an Internal Rate of Return or about 7 to 8%. For some younger companies, however, rates of 1.15 rmb/kWh and 1 rmb/kWh could cause them to struggle to survive.

How then to reduce the cost of developing and installing solar panels? The key addressing this question is research and development. Seeking greater efficiencies through business management represents one way of lowering costs. Without R&D, however, any cost reductions made will not be sustainable. The budget that Chinese companies allocate to R&D is generally much smaller than that of international companies. If Chinese companies can move to better incorporate R&D into their operations, they will be able to find a way to discard the tag of “high energy consuming and polluting industry”.

The introduction of the solar feed-in tariff policy then represents a major boom to China’s domestic development of solar energy. We should also recognize that there are potential risks as well. Savvy corporate players and stakeholders are needed to convert the challenges into opportunities, so as to make the whole solar industry both more profitable and sustainable.

Solar power represents a major pillar of relieving China’s electricity shortage woes and as a key driver to shift the giant country’s energy structure from the unsustainable use of highly-polluting fossil fuels. It has been reported that within five to 10 years, the price of solar power will reach parity with fossil fuel energy. This corresponds to the inexorable rise of non-renewable energy costs. What is more, the competitiveness of solar power and other forms of renewable energy is being boosted not only by gains in economic efficiency but also by the Chinese public’s burgeoning demand for a cleaner environment and for ways to stop global warming.

(Originally published 2011 August 12 on China5e.com.)