Why you should care

The world may be on the verge of a fresh trade war — this time over solar panels. 

“They call it the solar-coaster.”

The remark by Dan Whitten of the U.S. Solar Energy Industries Association summed up a sector reeling this week after a decision by China to eliminate subsidies for most of its solar projects. Beijing’s new policy to reduce feed-in tariffs and limit subsidies for new solar generation will slash demand in the world’s largest solar market and increase volatility in an industry that has been prone to boom-and-bust cycles.

Global solar installations are now expected to drop, and the sudden contraction will place even more pressure on panel prices and on producers, who in many cases were already struggling. Global energy consultancy Wood Mackenzie expects that 20 gigawatts will be shaved off China’s installations this year as a result of the new policy — equivalent to a fifth of last year’s global demand.

“2018 is likely to be the first-ever year seeing negative annual [worldwide] installation growth,” says Yvonne Liu, solar analyst at Bloomberg New Energy Finance.

Whitten adds that with regard to prices, the solar-coaster “only really goes down,” a summary backed by the market this week. Share prices of the leading panel makers dropped, alongside downgrades for photovoltaics (PV) producers from Shanghai-based Jinko Solar to Arizona-based First Solar.

Beijing’s move was aimed at curbing runaway growth in the country’s solar generation, which had boomed under generous subsidies and created a deficit of more than $15 billion in a fund set up to pay for the higher tariffs. The new policy sets a strict quota for solar installations and eliminates subsidies for any projects outside the quotas, which are so low that most of the quotas were filled within the first five months of this year.

If China really clamps down, there is no market, no combination of markets in the rest of the world, that can actually compensate for that.

Edurne Zoco, head of solar research, IHS Markit

Analysts immediately cut their forecasts for panel prices, with Bloomberg New Energy Finance changing its outlook from a 25 percent price decline to a 34 percent drop between January and the end of the year. Forecasts for solar installations in China this year were also reduced, with BNEF revising its down by between 5 GW and 15 GW.

“If China really clamps down, there is no market, no combination of markets in the rest of the world, that can actually compensate for that,” says Edurne Zoco, head of solar research at IHS Markit.

The prospect of Chinese manufacturers now flooding the world with ever-cheaper panels comes at a time when trade protectionism has been rising in the solar sector. India is considering an import tariff of 70 percent, and in the U.S., a 30 percent import tariff took effect this year on top of anti-dumping penalties already levied on certain manufacturers.

Cheaper panel prices could help offset these tariffs, particularly in the U.S., where developers have complained that President Trump’s trade war on panels has delayed billions of dollars’ worth of projects, but the impact would probably not be felt until 2019 given the planning time needed for new projects.

While cheaper panel prices will benefit solar developers who thrive on low prices, the policy shift in China underscores the volatility of the industry.

“For us it is only good,” says Nick Boyle, chief executive of Lightsource BP, a solar developer.

For some it is just the latest blow in a series of setbacks. Yingli Green Energy, the world’s eighth-largest panel maker, has been struggling to restructure its debt for several months in an effort to avoid bankruptcy. The company has been unprofitable for the past seven years.

U.S.-based First Solar, the world’s ninth-largest panel maker specializing in thin film solar panels, also saw analysts cut their target price for the group earlier this week, due to increased competition from the expected drop in Chinese demand. “The price declines will accelerate market consolidation across the supply chain,” says Zoco, adding that PV module makers and cell manufacturers were likely to be the hardest hit.

In China, panel makers are still scrambling to figure out exactly how the new rules will be implemented and whether or not there might be any assistance from local governments who have traditionally looked more favorably on solar projects. The new policy represents an about-face after years of generous feed-in tariff subsidies for solar, which had been initially introduced as a lifeline for domestic manufacturers suffering from reduced subsidies in overseas markets such as Germany.

Chinese solar power investors had rushed to install huge solar farms to tap the subsidies, resulting in growth that exceeded the government’s plans, as new solar installations surged 55 percent last year. The deficit in the subsidy fund was around 100 billion RMB ($15.6 billion) at the end of last year, and would have reached more than 250 billion RMB by 2020 if policies were unchanged, according to estimates from Wood Mackenzie.

In addition to the growing deficit, much of the solar power installed in China in recent years is “curtailed,” or unused, as provincial grid operators choose to dispatch electricity from local coal-fired power plants instead. Curtailment for solar and wind power in Xinjiang, in China’s far west, stood at more than 20 percent by the end of 2017, an improvement compared with nearly one-third of installed capacity that stood idle the year before.

Solar panel manufacturing is a highly fragmented industry, with no single manufacturer accounting for more than 10 percent of global market share. Executives and analysts expect that smaller “tier two” groups will feel the most pain from the coming squeeze.

“It will have more negative effects on the smaller players,” says Lightsource’s Boyle. “The larger ones have taken a beating, but they are the ones who have already gone through significant growth.”

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By Leslie Hook & Lucy Hornby

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