More on China's RMB 1/kWh Roadmap

Dylen Liu/February 16,2009

21st Century Business Herald reported last week that Chinese solar giants -- including Suntech (NYSE:STP), LDK (NYSE:LDK), Trina (NYSE:TSL), Solarfun (Nasdaq:SOLF) and Canadian Solar (Nasdaq:CSIQ) -- have recently proposed a RMB1/kWh pricing roadmap to the Chinese Ministry of Science and Technology and are lobbying the government to provide more support to the industry.

According to a Solarzoom post that came out two days before the news report, the pricing scenario would look like this from 2008 to 2012:



So, is it reasonable?

First of all, the polysilicon price has dropped more than 70% to RMB 1,000/kg, including a 17% value-added tax (VAT), since September of last year, and first-tier polysilicon makers are producing at a very low cost of about $20-30/kg. It's hard to say whether the polysilicon price will drop to RMB 700 by year end, but module prices have already dropped to the 2009 target of RMB20/W.

As for 2012, it's possible for polysilicon to hit RMB 300/kg, or $37/kg excluding VAT. That was the spot price before 2004 and will be a reasonable price when supply exceeds demand and costs for second- and third-tier polysilicon manufacturers drop gradually to the RMB 300/kg level.

Assuming a 6g/W silicon usage rate in 2012, polysilicon cost per watt should be $0.22; the non-silicon manufacturing cost from poly to module should be $0.8/W -- this is possible as Yingli (NYSE:YGE) achieved $0.85/W in Q308 when the utilization rate was high; and the total cost for modules should be about $1/W. A module selling price of RMB 12/W offers an extremely high gross margin for vertically integrated companies such as Yingli, and I think this price can be achieved even earlier than 2012.

Given a RMB 12/W module price, I believe systems and electricity prices of RMB 18/W and RMB 1.02/W, respectively, are reasonable targets for 2012 in most regions in China. Also, with lower prices in site, the government is likely to seriously consider boosting domestic demand, which is already booming.

At a solar forum about a year ago, vice president of the NDRC's Energy Research Institute, Junfeng Li, said that at about RMB 4/kWh solar electric costs were too high. He said once the cost was lower than RMB 2/kWh, the government would be happy to bolster the domestic market with subsidies, much as it has done for wind power.

The government has agreed to subsidize two solar power plants in Shanghai and Inner Mongolia with RMB4/kWh and just approved a 10MW project in Gansu Province, which has attracted 38 solar companies to join project bidding. Insiders say the target price for the Gansu project will probably be RMB 2.5/kWh. Large, state-owned solar companies have also recently announced a 166MW solar plant in Shilin, Yunnan province; a 20MW project in Binzhou County, Yunnan; and a 30MW project in Qinghai province that is expected to reach 1GW in the future.

While Chinese subsidies may be on the way, it should be noted that similar policies in European counties are much more favorable as the overseas market offers higher margins. At the same time, European countries are likely to consider lowering feed-in tariffs as costs continue to drop.

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