Chinese Government Gives Solar a Boost (JASO, JKS, LDK, TSL, STP, YGE, TAN)

The government of China has just authorized what amounts to a feed-in tariff on the country’s grid operators, who will have to pay $0.16- $0.18/kWh to solar PV developers which supply power to the grid. This is good news for the country’s solar PV suppliers like JA Solar Holdings Co., Ltd. (NASDAQ: JASO), JinkoSolar Holding Co., Ltd. (NYSE: JKS), LDK Solar Co., Ltd. (NYSE: LDK), Trina Solar Ltd. (NYSE: TSL), Suntech Power Holdings Co. Ltd. (NYSE: STP), and Yingli Green Energy Holding Co. Ltd. (NYSE: YGE).

Under the new rule, solar PV plants that had been approved for construction before July 1, 2011, will receive 1.15 yuan/kWh (about $0.18) when the solar-generated electricity is sent to the grid. For projects approved after July 1st and before December 31, 2011, the feed-in tariff will be 1 yuan/kWh (about $0.15). The new policy and prices will be applied to solar PV projects that were approved under single-source contracts as well as competitive tender offers.

Bloomberg New Energy Finance notes that the new tariff is “much higher” than prices existing from earlier bidding and that the new tariff will “guarantee margins and will encourage more companies to participate in the industry.”  The internal rate of return on non-competitive solar projects could be as high as 8%.

Last year the government provided massive loans to its solar PV companies for capacity expansion. Now that manufacturing supply outstrips demand, the government is trying to make an adjustment to soak up some of the excess. To its credit, the government is also using the feed-in tariff to encourage a move away from coal-fired generation.

Unlike what might happen in the US, there is not likely to be much pushback to the new tariff, but that doesn’t mean that the national grid operator will take this lying down. The country has plenty of wind generation already spinning that is not connected to the national grid, and which the grid operator has declared “rubbish electricity.”  The locations of new solar PV installations could impose significant costs on the grid operator, leading to yet another government mandate to try to fix that issue. All this calls to mind a game of whack-a-mole, except for bigger stakes.

Chinese solar stocks didn’t get any kind of bounce from this new tariff announcement, which was published in China on July 24th. Over the past month, none of the stocks mentioned here has done better than fall by at least -6%. The Guggenheim Solar ETF (NYSE: TAN) is down for the month by nearly -10%, about the average for all these stocks.

Paul Ausick