The Chinese government’s announcement of a sudden policy makeover on Jun 1, involving a significant cut down in subsidies offered to the nation’s solar projects, dealt a major blow to the solar industry worldwide. Since China is the largest solar market in the world, such an upheaval had a rippling effect on the global solar industry.
The Zacks Solar industry has declined 10% since the announcement. Not only did the policy reform result in a decline in solar stocks but also prompted analysts to reduce their projections for 2018 solar installations in China.
Details of the Policy Reform
China’s National Development and Reform Commission (NDRC), the Ministry of Finance and the National Energy Administration (NEA) jointly released the 2018 Solar PV Power Generation Notice that might totally change solar market dynamics in China. Per the new policy, feed-in tariffs (FiTs) related to utility-scale solar projects will be cut and distributed generation (DG) projects will be capped until further notice.
In terms of utility-scale projects, the Chinese administration abolished its deployment target of 13.9 GW and announced that no new projects will be given feed-in tariff contracts under the old 2018 rules. However, DG projects that received grid connection till May 31, 2018 will be eligible for FiTs (feed-in tariffs).
In the context of DG programs, China has decided to put a cap of 10 gigawatts (GW) on new solar projects in 2018, down from 19 GW installed in 2017.
Analysts across the globe have expressed their skepticism regarding the latest policy changes through reduction in expectations for the nation’s solar projects. Asia Europe Clean Energy (Solar) Advisory (AECEA) lowered its forecast for China’s solar capacity addition for 2018 from 40-45 GW to 30-35 GW in response to these policy changes.
AECEA also lowered its forecast for the remaining years of China’s 13th Five Year Plan (2016-20) to 20-25 GW annually. Other analysts like Roth and Daiwa Capital have also reduced the 2018 forecast to 30-35 GW.
Impact on Chinese Solar Stocks
The policy changes are expected to significantly impact Chinese solar panel manufacturers as well as those involved in solar projects in the nation. This is because the cap on solar projects will restrict construction of any new project in the country, while falling panel price will hurt revenues of Chinese panel manufacturers, at least in the near term. Shares of China-based solar stocks like Yingli Green Energy have declined 6%, while that of ReneSola (SOL - Free Report) declined 5% since the news of the policy reform. JinkoSolar (JKS - Free Report) has plunged more than 20%, in the same time frame.
Impact on International Solar Stocks
This policy change is anticipated to be detrimental for a few international solar stocks, especially the ones that are set to expand their footprint in China, have increased commitments to ship modules or are set to construct new projects. For instance, since the United States slapped a tariff of 30% on import of solar panels earlier this year, many solar players have increased their focus on China’s solar market.
In line with this, Canadian Solar (CSIQ - Free Report) had earlier announced the shift of its module shipment toward China and away from the United States. It expects to witness significant volume shipment in China during the second quarter of 2018 and beyond. However, with the recent policy change, it is difficult to predict whether the company will be able to duly expand its realm in China. In fact, following the announcement of subsidy cut, this Zacks Rank #1 (Strong Buy) stock suffered a loss of more than 20.7%, much more than the industry’s decline of 10%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Another renowned solar stock in the international market, First Solar (FSLR - Free Report) witnessed a steep decline in its share price, after China cut down solar subsidies. However, the rationale behind this Zacks Rank #3 (Hold) stock is a bit different. With First Solar being a prominent U.S. module manufacturer, a price fall in China may result in a decline in module price in the United States, to compete in the global market. This, in turn, will hurt the company’s financials. First Solar’s shares have lost 15.8% since the Chinese policy reform news compared with the industry’s decline of 10%.
Is the Policy Reform a Blessing or a Curse?
The Chinese government has justified the policy makeover decision with the agenda to promote the solar energy sector’s sustainable development as well as reduce the $17 billion subsidy bill, that the country is incurring. However, considering the aforementioned discussions, the impositions made in the reform may hurt the solar market, at least in the near future.
FiTs are the contracted rate that developers get for solar power sent to the grid. Therefore, a cut in the same is likely to directly hit each Chinese solar project's revenue. Moreover, the sudden cap on building solar projects will hit demand in the market, thereby creating oversupply of panels, which in turn will drag down the prices. As per GTM Research, oversupply pressure will likely push panel prices down 32-36%. This in turn should wind down revenue generation for solar panel manufacturers, in the near term.
Nevertheless, the oversupply situation in China along with subsequent fall in panel price may prompt Chinese manufacturers to sell their panels in other booming solar markets like Japan and India. International solar players may also follow suit. So, all might not be lost in terms of global solar market’s growth prospect, although only time will reflect the ultimate impact we of the policy reform.
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