China's checks on solar quality could spur more consolidation

[BEIJING] China's National Energy Administration is pressing local governments to inspect and report how much power the nation's solar panels are producing in an effort to crack down on defects.

The inspections come as flaws found in some Chinese solar panels continue to compromise efficiency, reducing the amount of electricity the panels produce.

Here's what the crackdown may mean.

1. Inspections to Target Quality of Solar Equipment

According to Bloomberg New Energy Finance, China's solar capacity has surged almost fivefold since the end of 2012, making it one of the fastest-growing clean energy markets for the past two years. A plunge in panel prices is helping make solar power more commonplace - both in China and elsewhere. Critics argue the price drop forced panel makers to reduce costs, compromising quality.

Inspections will look for flaws in the construction and operation of solar power projects and the quality of key equipment such as solar panels, inverters and junction boxes, the NEA said on April 20.

Local authorities have been asked to investigate the quality of equipment connecting solar-power plants to electricity grids, along with power generation and how solar projects are managed.

2. New Standards or Regulations Expected

China has called for stronger planning and management of photovoltaic power stations. The nation is expected to issue new technology standards or regulations for solar products or power projects after evaluating results of the investigations.

Building procedures, including design and testing, will be checked to see if criteria are met and whether key equipment meets technology standards, according to the NEA. Inspections will analyze major factors that affect the return from the plants and typical problems and potential pitfalls in construction and operation.

3. Consolidation of Solar Equipment Manufacturers

Expected Consolidation of solar equipment manufacturers is expected as part of a broader industry shakeout.

"Inspections will benefit companies with high-quality products and good technology," said Nick Duan, a Beijing-based analyst with Bloomberg New Energy Finance. Manufacturers found to be underperforming face being eliminated, he said.

China's government has sought to weed out outdated capacity by encouraging solar companies to consolidate through mergers and acquisitions or restructuring. The ability of global manufacturers this year to produce panels outstrips expected demand by 60 percent, BNEF estimates.

Last year's record installations of PV panels sucked up some industry oversupply, with gross margins at Trina Solar Ltd., the world's biggest solar panels maker, and JinkoSolar Holding Co. widening to more than 16 percent, according to Bloomberg data.

4. A Precursor to a Cut in Preferential Power Prices

The inspections are seen as a precursor to a cut in preferential power prices for solar projects.

China has held its subsidy for ground-mounted projects at the current level since September 2013.

The rate solar plants get for selling their power to the grid is as low as 0.9 yuan a kilowatt-hour. The subsidy for distributed projects where the energy generated is used by nearby consumers has been kept at 0.42 yuan a kilowatt-hour since its introduction.

Meanwhile, solar panel prices have plunged 15 per cent since the subsidies were introduced, leaving room for incentives to be cut.

5. More Quotas or Less

China uses a quota system before approving solar power projects. The nation aims to approve as much as 17.8 gigawatts of PV plants this year. Only projects allocated under the quota system qualify for renewable energy subsidies.

China has a total of 33 gigawatts of solar-power supply, the NEA said on April 20. The nation targets 100 gigawatts of solar power by 2020.

Using the inspection results, China will be able to determine the regions able to show they can build better projects at a quicker pace. The decision will then be whether those regions should qualify for a larger slice of the quota.

6. Acceleration of Solar Installations Possible

The government is cracking down on developers that sold their projects before quality problems appeared. The crackdown will also ensure that projects that qualify for subsidies actually get built and begin operating.

"This is positive for the industry and may accelerate installations," said Karl Liu, a Hong Kong-based analyst from Bank of China International Ltd.

BLOOMBERG