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FEATURE STORY: Spanish Solar Specialist Eyes up the Chinese Energy Market
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It seems like a match made in heaven. Spanish solar veteran Isofoton SA has linked with Tianjin-based battery maker Lishen to create a joint venture- Isofoton Lishen New Energy which will build solar installations around China and make solar power equipment at a USD 300 million new factory to be built by 2014. 
 
The parternship between Madrid-based Isofoton and Lishen, a subsidiary of oil giant CNOOC, allows the two to tap the increasingly vibrant Chinese solar power market. Isofoton, says company CEO Angel Luis Serrano, originally wanted to cooperate with Lishen on battery technology but saw that working with the firm would allow Isofoton to “enter China through the front door and take advantage of the favourable regulatory framework set up by the government of China.”
 
Serrano’s comments refer to policies like subsidised feed in tariffs to China’s power distributors as well as subsidies to solar power installers to encourage the growth of solar power in China. The Beijing government has said it will install a massive 3GW of solar capacity in the three years up to 2015. This would see China become the world’s number one installer of solar power, ahead of traditional nations like Germany, which used subsidies and laws to encourage power generation companies to use solar-powered electricity.
 
Spain, Isofton’s home market, was also a leading producer of solar power until the government axed subsidies. Hence leading players like Isofoton were forced to relocate further afield for opportunities. The latter looked to China. Aside from the Lishen deal it has also teamed up with GCL Poly Energy, a Hong Kong listed firm specialising in power plant construction and management. It plans to develop 1GW of solar farms globally with Isofoton.  
 
As a designer and manufacturer of solar equipment, like solar panels, Isofoton will provide the equipment for the projects, which will be built in China, Africa and Latin America, while GCL will provide the project finance. “By capitalising on our strong experience in developing solar projects and in manufacturing, we are confident the partnership will add value to both firms… this partnership confirms Isofoton’s strategy of investing in emerging solar markets, such as Latin America, Africa, and the US, which will lead the development of the PV market for the next decade.”
 
The solar equipment market appears to be rebounding after a difficult period in the wake of subsidy cuts in key markets like Germany and Spain. Part of the new optimism is thanks to China’s plans to use solar power to power remote villages and industries. Building-mounted solar panels are growing fast. Originally founded by researchers at the Polytechnic University of Madrid, Isofoton has plenty of experience in installing large-scale solar installations on the roofs of industrial and public buildings, currently a priority for China’s policymakers. Energy official from Beijing were impressed by an Isofoton project which covered the roof of the new terminal at Barcelona Airport with solar panels, making it one of the biggest solar installations in Europe.

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The Chinese government’s Golden Sun programme of subsidies to the solar power project installers ensured a surge in installations in remote but sunny regions like Qinghai, Ningxia and Xinjiang. Key developers of solar power projects include China Power Investment Corp and China Datang Corporation: these two power generation companies buy solar equipment from providers like Isofoton but also buy solar power generated by third party project managers. Other Chinese energy companies, including CNOOC, have also been looking beyond traditional fuel sources like oil and coal towards solar.
 
While it may be only now catching up on installations of solar power generation projects, China already dominates the global market for solar equipment, with firms like Yingli and LDK manufacturing solar panels and related technology like power-storage batteries and inverters at prices lower than European or US peers could offer. While the quality of the Chinese products have improved significantly, over-investment in manufacturing capacity and over-dependence on developed nations markets, especially in the EU, meant that China had to develop demand at home for its solar equipment or risk the collapse of firms like Yingli.
 
Hence there was a ramp-up in Chinese installations. Yet China’s solar companies have not been able to replace slower EU demand with alternative markets. Even while Isofoton looks to cash in on demand in China (and elsewhere), leading Chinese player LDK Solar, the world’s top manufacturer of solar wafers, a key component of solar panels, reported a loss of USD185 in the first quarter of 2012. 
 
Isofoton made a profit of almost USD10 million in 2011, a considerable slow down on busier years in the last decade. However the long-term fundamentals for Isofoton’s expansion into China appear obvious. Paul Curnow, environmental markets partner at Baker & McKenzie, points out that China will have to install more solar power to meet its target of getting 15% of all energy from renewable energy sources by 2020. In fact, Beijing has pledged to generate 20GW of solar energy by 2020 – that means a significant speed up in installations in the coming years given that current capacity is less than 6GW. 
 
Naturally there will be a huge competition to supply that new capacity. Chinese solar equipment makers currently supply a third of global demand but the sector is very fragmented, with over 200 independent PV manufacturers of various size and quality fighting for market share. 
 
The obvious answer to over-capacity in China is a rise in exports to the wider region. Around 900 million people in developing Asian countries have no access to electricity, according to the Asian Development Bank, while over-priced power generated from traditional means like coal-fired power stations is keeping millions of others in poverty, according to the vice-president of the Asian Development Bank, Zhao Xiaoyu. 
 
Zhao oversees the Asia Solar Initiative, an ADB programme that wants to increase the use of solar power - particularly in remote, rural Asia – to improve economies and living conditions. Money, however, is the barrier to this happening. Given China’s much-reported USD3 trillion in foreign currency reserves and the quest for overseas investment opportunities by state-run China Investment Corp and energy companies here, it’s not unlikely that the alliances which Isofoton has been making in Tianjin and other parts of China make sound commercial sense.   
 
Up to now solar power systems have not been extensively deployed due to the comparatively high prices of panels. However, at an increasingly common installation cost of USD1.25 per watt (half the rate only two years ago), the cost of a solar energy installation is cheaper than conventional energy sources such as coal through its life span. Solar advocates argue that once the initial cost of the system is paid for, taking around 20 years, the cost of running a photovoltaic system is almost zero.
 
To date solar power systems have not been extensively deployed due to the comparatively high prices of panels. The affordability of solar will in turn drive demand for solar panels. The falling cost of solar panels – on average half the cost of a photovoltaic system – has been driven by manufacturing technology improvements and economies of scale, largely in companies like Yingli, which mix international capital and technology with a low Chinese cost base. Cheaper panels, and subsidies for solar power by key markets like Germany, helped ensure an average annual growth of 25% in installation of solar panels over the past decade.
 
altIndeed the decreasing cost of solar power equipment, along with increased the efficiency of solar panels, means that the cost of solar power is fast reaching parity with other energy sources like coal in key markets where solar power has been extensively applied. Australia, one of the first countries to reach 'grid parity' has proven to be a key growth market for Chinese solar panel makers like Yingli and Jinko who supply half of the world’s solar panels. Grid parity is expected to be achieved in the US and German markets in 2012 and will have been achieved in half of the world by 2015, according to predictions by Zhengrong Shi, boss of Suntech, the world’ s number one maker of solar panels in volume terms. 
 
Yingli competes on price but also quality- its panels have hit quality levels comparable to those of German and US solar equipment makers as certified by independent bodies like Munich-based TUV. The Yingli business model looks compelling. However, it is a model which also leads to overcapacity problems which are distorting the long-term outlook for Chinese industries. 
 
A recent victim of overcapacity in the solar industry is Zheijiang Xiechang Silicon Industry Co which filed for bankruptcy last year. It’s only the first of the players in silicon to go under because overcapacity in the industry is sustained by local governments who loath to let firms (many of them owned by or invested in by local government) go under. China has 40% of global capacity for refining silicon into poly silicon, the most expensive component in solar panels. But a third of that capacity is currently on idle until the industry recovers from a 60% slump in prices. 
 
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Just as Chinese regional officials are often unwilling to kill off zombie capacity in industries like solar energy, their national counterparts have also been unwilling to spend money on soaking up some of the excess product. Subsidies are too often based on encouraging exports. While the potential in sales that grid parity brings is obvious, for firms like Yingli and Isofoton/Lishen they need to put more money into making solar a mainstream part of the energy mix. Strangely, given its promotion of solar panel exports from China, Beijing has recently cut subsidies. Under the Golden Sun Program, subsidised by government, investors will receive just CNY 7 (about EUR 0.60) per Watt for new photovoltaic installations- a cut of CNY2 per Watt for crystalline modules most commonly installed. 
 
Likewise, the country’s new feed in tariff (government subsidies to make solar competitive with coal-fired power), not even a year old, is to be cut by 13 percent. Nonetheless, the falling cost of solar panels and additional subsidy support from regional government, the industry estimates that 5GW will be added in China in 2012, compared to 2GW in 2011. The price of panels has dropped to such an extent that China will be the biggest installer of solar power by 2015, in part due  to provincial governments using solar to drive rural electrification. All of which suggests a bright future for Isofoton and its Tianjin partner. 
 

By Mark Gao 
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