A Look At Trina Solar’s Downstream Business

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Trina Solar (NYSE:TSL), one of China’s largest solar panel manufacturers, has been gradually increasing its exposure to the downstream solar business. For this year, the company expects to build roughly 400 megawatts (MW) to 500 MW of solar projects, accounting for about 12% of its megawatts realized for the year. [1] In comparison, the company’s projects accounted for less than 5% of its overall business last year. In this note we take a look at how the company’s solar project development business is progressing.

Trefis has a $14 price estimate for Trina Solar, which is about 20% ahead of the current market price.

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An Attractive Business with Some Challenges

While the solar panel business has become quite commoditized, with panel prices falling by over 50% since 2011, the projects business has been thriving as lower prices have allowed developers to capture additional value, building out solar farms that are increasingly competitive on price with some conventional sources of energy. The panel business offers solar companies better margins since it involves providing value-added services such as design and construction. For example, according to our estimates, First Solar (NASDAQ:FSLR), one of the world’s largest solar companies, has near single-digit gross margins for its panel business, while the margins for its projects business stand at over 30%. Although the business is lucrative, it comes with some challenges, such as securing financing for projects at reasonable terms and interfacing with government and other authorities for the requisite approvals, permits and grid connections.

Focus On Chinese Market

Close to 80% of Trina’s downstream project pipeline comes from China. Earlier this year, the company sold its first large-scale solar project in China – a 50 megawatt (MW) Solar Power Plant in Wuwei. The company is also working on the first phase of its 1 gigawatt  (GW) ground-mounted solar project in the Xinjiang province in western China. While the plant will take four years in total to build, the company had said that it would commence construction of the first phase of the project in June.

The utility scale solar market in China is meaningfully larger than the distributed solar market, and government incentives are abundant.  Over the first half of the year, around 2.3 GW of utility solar capacity was added in the country, while just about 1 GW of distributed capacity was installed. Some of the incentives provided by the Chinese government include feed-in-tariffs and free grid connectivity for small and medium-scale distributed photovoltaic solar power producers. The feed-in-tariffs for large-scale ground mounted power plants stand at between 0.9 yuan ($0.15) and 1 yuan ($0.16) per kilowatt-hour (kWh) of energy generated, based on the radiation levels at the location of the plant. These subsidies are valid for the next 20 years and this is likely to be a positive attribute for project developers, since it would safeguard the rate of return on their PV projects. The government is targeting about 6 GW of utility based capacity for this year.

Overseas Projects

Trina is also scaling up its downstream business overseas. During Q1, the company completed two solar power plants with a total capacity of around 23.8 MW in the UK.  The company also received €17 million from the China Development Bank to fund 16 MW of utility-scale solar power projects in Greece. The company has also been partnering with other entities in markets such as Japan and the U.K. to gain access to project resources and obtain the necessary certifications to build out projects. Overall, the company expects countries such as the U.K. and Japan to account for about 30% of its total downstream projects in 2014. However, competition is likely to be more intense overseas, since other vertically integrated project developers such as SunPower (NASDAQ:SPWR) and First Solar (NASDAQ:FSLR) have considerably more experience.

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Notes:
  1. Trina Solar’s (TSL) CEO Jifan Gao on Q1 2014 Results – Earnings Call Transcript, Seeking Alpha, May 2014 []