Thanks to the policy blessing from the Chinese government, solar equipment makers are rushing to build new production facilities in a bid to strengthen their foothold in the sector. However, a recent study indicates that capacity in the pipeline already far exceeds the government’s target.
According to data released by research institute Solarzoom, the capacity of solar projects that are underway and those that have seen preliminary agreements reached 130 gigawatts in total as of August last year. The figure is almost four times the 35-gigawatts installation target set by the government earlier for 2015.
Perhaps not all projects will go ahead finally, but the sheer scale still points to trouble in the making.
The solar industry has just started to stand on its own feet after the oversupply nightmare, but will history again repeat itself?
Solar product makers are becoming more vertically integrated after years of consolidation. Many solar equipment manufacturers are building photovoltaic plants as well.
The engineering, procurement and construction (EPC) model is popular in the industry. The contractor designs the installation, procures the necessary materials and builds the project all by itself.
The model is sought after as building solar farms is seen as one of the most profitable business segments within the industry. The China Securities Journal has reported that the internal rate of return could be as high as over 10 percent.
However, this is the case only when the EPC contractor can sell the project in the end.
As much as 45 percent of the solar farm market in China was in the hands of the ten largest solar EPC players, according to a report released by another industry research institute Solarbuzz.
Some of the big names in the sector include TBEA Co. (600089.CN), Power Construction Corp of China (601669.CN) and Zhongli Science and Technology Group (002309.CN). And they are all expanding.
Xinjiang-based TBEA is enjoying a geographical advantage. The group has more than doubled the scale of its solar farm to 1000 megawatt last year, as a new ultra-high voltage power transmission line in Xinjiang which links up the western part of China has started operating.
State-owned Power Construction Corp competes on the strength of its solid financial resources. It can initiate construction even without receiving any advance payment. This helped the firm obtain orders and expand rapidly in the past year.
There is concern of oversupply amid the construction wave. If the industry ends up building too many solar farms, buyers will be difficult to secure, as subsidies and grid capacity, among other things, may not be able to catch up.
The Journal quoted sources saying that industry leader Shanghai Aerospace Automobile Electromechanical (600151.CN) has been seeking to sell its stakes in two solar plants in the past four months. However, no deal has been sealed as of the end of February.
A solar power plant usually costs billions of yuan. If the EPC contractor is unable to sell the project quickly, it will be forced to run the plant, which will further lengthen the payback period. That will put the firm’s financing ability to serious test.
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