Yingli Could Be Hit As China Mulls Subsidy Cuts For Utility Scale Projects

The Chinese government could end some subsidies for utility scale solar power plants choosing to divert funds towards incentives for developing smaller projects in areas with power shortages. ^[1] The cuts are likely to be directed at the one-time capacity based subsidy that is available to project developers. While we don’t see the move impacting the overall attractiveness of the Chinese solar market, it could have a short-term effect on firms such as Yingli Green Energy (NYSE:YGE) and Trina Solar (NYSE:TSL) that have been supplying panels to utility-scale projects under China’s Golden Sun program.

Solar Subsides In China

Incentives for solar installations in China have been attractive. The government provides one-time subsidies that are based on installed capacity of utility solar plants and also provides feed-in-tariffs, which guarantee above market rates for the power generated. At present, utility project developers who are selected by the government can avail at least 5.5 yuan ($0.88) per watt of capacity installed under some government programs if the project execution meets certain deadlines. Feed in tariffs on the other hand stand at around 1 yuan ($0.16) per kilowatt hour in most parts of the country.

One-time Upfront Subsidies Not Effective

The one-time subsidies have received some flak since they provide developers funds before the projects are completed. They are also viewed as being less efficient since they incentivize installed capacity rather than the quality and productivity of the solar power plants. Now, the move to offer incentives based solely on electricity generation could make it easier for the government to administer incentives and would also encourage power plant developers to focus on building higher quality power plants that generate more electricity.

Long Term Impact Will Be Negligible

China’s government has been a strong proponent of solar power viewing it as a means to increase the country’s energy independence and cutting down on carbon emissions. The government has repeatedly increased its solar power installation targets. Recently, the government proposed to raise the target for 2015 from around 21 Gigawatts (GW) to 35 GW. We see the potential subsidy cuts as a step in streamlining the country’s incentive structure and making it more effective. While some firms and project developers could be impacted in the short term, we don’t believe that this will impact the industry as a whole in the long run since the enhanced incentives to smaller projects would offset any potential decline in utility projects.

Among the solar stocks that we cover, we think that Yingli Green Energy could be impacted marginally in the short term. The firm has been an active participant in China’s Golden Sun program, having supplied panels to nearly a quarter of all projects under the program to date. In the second round of the program which was announced late last year, Yingli won contracts to supply around 10% (around 288 MW) of panels for the projects, making it the single largest supplier.

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1. Bloomberg [↩]