Friday, June 4, 2010

China Overtakes U.S. In Clean Energy Investments

by Donna Howell, Investor's Business Daily

China's formidable power in solar energy is growing.

With potentially huge export and domestic markets, low-cost factory labor and government backing, China's clean energy sector attracted more investment last year than any country, knocking the U.S. to second place.

"One of the main reasons is obvious, looking at the unquenchable thirst of China for electricity," said Lux Research analyst Ted Sullivan. "Look at the rate at which demand is growing, the rate at which they're adding new dams and electric and hydroelectric plants."

Wanting to ensure it's an ally, the U.S. stressed clean-tech collaboration in a joint U.S.-China statement on energy security cooperation issued last month.

The Chinese government's focus on fostering alternative energy has "given investors a place to go and invest" by offering predictability, said Phyllis Cuttino, a Pew Charitable Trusts project director.

A recent study she led says China topped the world last year with $34.6 billion in clean energy investments, public and private. The U.S. followed with $18.6 billion.

China has stepped up aid to its solar companies. Many foreign firms build solar parts there too, drawn by labor as cheap as 3% of manufacturing's cost in the U.S.

"Solar is generally a commodity business, and companies with low manufacturing costs generally have an edge; longer term they can price attractively," said Wells Fargo analyst Sam Dubinsky. "China has the lowest manufacturing costs."

While China has been lending billions to solar firms, and doling out other incentives, U.S. and European perks are waning.

China's Trina Solar (TSL) recently signed a deal with China Development Bank that will bring it $4.4 billion in loans through 2015 so it can boost production. Analysts expect the firm will lift revenue 122%, to $332.9 million, this quarter.

Canadian Solar (CSIQ), which despite the name is a China player, won contracts in Ontario, Canada, for 176 megawatts of solar gear.

Suntech Power (STP), China's largest maker of solar cells and panels, in April inked a deal with the China Development Bank for up to $7.33 billion.

The euro's fall, however, is weighing on Chinese solar stocks of late. And with prices for conventional energy sources relatively low, governments might be even less inclined to apply solar stimulus measures.

Subsidies are key to supporting the solar industry until that theoretical grid-parity day when it's advanced enough to pay its own way by matching the cost of conventional energy. But just how far a government should go to prop up the industry is a matter of great debate.

"Looking at all countries that continue to be real leaders, or are emerging, almost all of them have a strong national policy framework," Cuttino said. "One reason we think a lot of capital is sitting on the sidelines in the U.S., or is going to China, is because we don't have those policies."

Subsidies are generally sliding outside China and rising in China, says Broadpoint AmTech analyst John Hardy — although German lawmakers on Friday took steps to put off a planned solar subsidy cut of as high as 16% and are looking at more modest trims.

"There is the likelihood that sometime in the not-too-distant future we'll hear about a feed-in tariff (where energy generators can sell power to utilities at a premium) for solar in China," he said. "You read a lot about Germany cutting feed-in tariffs. Italy's set to decide what they want to do with their feed-in tariff as we move into 2011."

Reducing subsidies is necessary for the industry, Hardy contends.

"Ultimately it's good and forces companies to reduce costs" and head toward grid parity, he said. "But it creates volatility."

Hardy sees U.S.-based First Solar (FSLR) as best positioned with its lead at reducing costs via its thin-film modules.

SunPower (SPWRA), another U.S. firm, is "in the bucket of benefiting from more demand coming domestically over the next couple years as some utilities start to ramp up their projects," he said.

U.S.-based solar wafer and polysilicon provider MEMC Electronic Materials (WFR) is in the same bucket, says Hardy.

After a lull, China's market is recharged. "There are a lot of politically well-connected Chinese oligarchs" leading solar firms, Sullivan said. "And the downturn has spurred them to start developing the domestic market."

Two years ago, 80% to 90% of China's domestic solar sales were residential, notes research firm Freedonia Group, with utilities negligible. This is set to change through 2013, it says; utilities, with government incentives, are expected to rapidly increase investment to as much as 4% of total sales.

"Export sales growth is naturally going to decelerate. Meanwhile, domestic demand for PV modules is going to really take off," Freedonia analyst Ryan Martinson said by e-mail. "The net effect is that Chinese firms are going to be selling a lot more of their output locally."

China's starting to take direct investments in Chinese producers, and subsidizes up to half of costs for large-scale domestic solar projects via its Golden Sun program.

Chinese sovereign wealth funds hold a large position in GCL Solar Energy, Sullivan says, while the Jiangxi provincial government has a stake in LDK Solar (LDK).

"Both GCL and LDK were looking shaky as polysilicon prices crashed," he said.

With all this, China will emerge as the world's largest solar market in 2015, with 5.5 gigawatts of capacity newly installed that year and a cumulative total of 18, Sullivan says. Global capacity that year should hit 26.4 gigawatts. For 2010, China's adding about 580 megawatts vs. 9.3 gigawatts worldwide. "The Chinese are building a strategic overcapacity so they don't get caught in a trap like 2005-09," he said, adding that Polysilicon went from $23 a kilogram in 2003 to $400 by 2008.

With overcapacity, China can keep prices low, Sullivan says, but can turn on the spigot if prices go up, giving Chinese exporters preferential access to raw materials. He sees U.S. firms as likely able to compete with China, but says some fear First Solar could lose its price edge.

Hardy names JA Solar (JASO) as a rare China firm that hasn't overlevered itself short term.

"Pretty much across the board, China-based component manufacturers have relied on short-term financing to build out capacity," he said. "It's difficult to say whether that support continues to exist. If it should slow for any reason, that would be favorable to non-China-based companies."

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