China Solar market update: 280MW second-round bidding details, Golden Sun Program update

According to an analysis by Lazard Capital, power prices ranged from RMB 0.80-1.30 / KWh across various provinces, with the lowest bids around RMB 0.80-0.85 / KWh in Qinghai, Inner Mongolia, and Gansu, and RMB 0.90-0.95 / KWh in Ningxia, Xinjiang, and Shaanxi. These prices are ~10%-15% lower than our prior expectations of RMB 1.00-1.05 / KWh across a well diversified solar generation portfolio. We estimate returns from these projects to be similar to those for mature solar markets such as Germany, with unlevered IRR of 6.5% and levered IRR of 9.5%. Depending on the province, EPC margins could range from 5.0%-10%, and vertically integrated / semi vertically integrated module manufacturers could generate module Gross Margin of ~14%.

While the current round benefited the lowest cost bidders, we continue to believe that the solar bidding process should evolve along the lines of the wind industry. Later rounds of wind bidding did not necessarily benefit the lowest bidder (top 2 and bottom 2 bids eliminated), but focused more on bids that provided developers with a reasonable return. A solar FIT could eventually be introduced after multiple rounds of biddings, now more likely in 2011 than 2010.

Amendments Golden Sun Program
The Ministry of Finance also amended the existing Golden Sun program. Key changes to the program include greater government oversight in quality of key components used (modules, inverters, etc.), an additional subsidy of RMB 4 / W (BIPV RMB 6 / W) for 2010, and elimination of the 20MW cap for each province. As detailed in our prior research, the existing Golden Sun program did not provide for attractive pricing and returns (5%-6% unlevered returns). We see the additional RMB 4 / W ($0.60 / W) as improving returns on these projects to attractive levels (double digit levered returns), which can support $1.50 / W + module pricing; 200MW of projects are expected to be bid in the upcoming round.

While a large number of solar projects have been approved in China (1GW+), solar installations thus far in 2010 have been slower than expected. This can be attributed to strong international demand for solar modules, along with a lack of clarity on long-term project economics. There could be potential for ~300MW downside to our current estimates of 700MW for the China market in 2010, which should be more than offset by strong demand from Europe.
While market growth potential remains large in China, a few key challenges need to be overcome to achieve sustainable growth over the next 3-5 years. Currently there is a lack of good, reliable metrological data to accurately estimate solar insolation, along with a lack of reliable monitoring systems. Current project returns of ~6%-7% are also not attractive for private capital and certain state owned capital funds, which would require higher FiTs.