New solar subsidy in China — On Tuesday, China’s Ministry of Finance announced
a new solar subsidy program (“Golden Sun”) including 50% of up-front investment
costs for on-grid solar systems. This program is capped at ~600MW cumulatively
over the next two years and is aimed at larger-scale (>300kW) installations.
Either/or but not both — This new subsidy runs alongside the existing program
announced in late March (see our note dated 3/26) which provides 15 RMB
(~$2.20)/W for smaller rooftop and 20 RMB (~$2.93)/W for BIPV applications.
With respect to the large-scale installations targeted in the new “Golden Sun”
program, the Ministry of Finance is still negotiating a final feed-in-tariff (FIT) rate
anywhere from ~1.1 RMB (~$0.16)/kWh up to 2.0 RMB (~$0.29)/kWh.
Importantly, for these large-scale installations, developers must choose between
this new up-front subsidy OR the to-be-determined FIT rate. Based on our math,
installed cost has to be ~$2.50/W (a level where very few vendors can make
money) to drive >10% project IRR even for Western China (sunniest region). If a
developer chooses to take the FIT, installed cost again has to be at the $2.50 level
to drive outsized returns unless the FIT ultimately comes in >$0.20-0.22/kWh.
~$2.50-3.00/W has to be the sweet spot; more evidence of profitless prosperity for
vast majority of vendors — Based on these programs we can see how China
ultimately installs 1GW or more by 2011 provided that module vendors can hit this
~$2.50-3.00/W sweet spot on installed cost to drive out-sized project returns and
thus market growth (see the charts in the details of this note). Given today’s cost
structures and even assuming healthy cost reductions, it is tough to see many
vendors – even leading Chinese suppliers like STP – making more than ~15%
gross margin at these sorts of prices. Notable exceptions are FSLR and WFR, both
of which should be able to achieve ~40% gross margin at these prices. If these
prices become the global target for subsidies, it becomes next to impossible for
high-cost vendors like SPWRA and ENER to compete.
None of this changes the supply realities — While we are increasingly convinced
China could be a >1GW/yr market by 2011, we are still hard-pressed to come up
with global demand numbers much better than ~7-7.5GW for 2010 and ~11GW
for 2011. While this is ~55-60% Y/Y growth in volumes each of the next two years,
even in a very conservative supply case, we still see ~13GW of module supply in
2010 or more than a full year ahead of our ~11GW demand number in 2011. WFR
remains our favorite solar name and we see the market still overly focused on
China volume and under-focused on the ultimate profitability of this business.