Regulators in China have become clearer, and have started offering lucrative return metrics. Citi Research analysts Timothy Lam and Pierre Lau believe that China is all set to become the next big growth driver in the solar sector. Improving end-demand, capacity expansion and new solar project developments in China and Japan will ensure more stable margins in 2014.
China’s favorable policies to help solar sector
In August 2013, China increased the Renewable Energy Fund, and brought in encouraging bank financing policies to boost domestic solar demand. Based on the government’s policies on solar farm projects, distributed solar tariff and current installation costs, the project’s unlevered IRR is likely to touch 12%, good enough to speed up solar project developments. Citi analysts consider the project IRR an important profitability metric as solar farm projects generate steady cash flows. There is negligible fuel cost. Most adjustments are limited to maintenance and degradation of the projects. So, it provides clear power generation data.
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Though there are different kinds of players such as industrial users, solar manufacturers, solar farm operators and EPC owners, Citi says that solar farm operators are most likely to emerge as dominant players. That’s because they can scale up rapidly without a balance sheet overhang. In recent months, there has been concern about China’s air pollution, which could affect the solar farm return metric. But developers say that the impact is only marginal because sunlight isn’t reduced significantly. The particulate matter in polluted air affects sunlight, but only to a limited degree.
A closer look at China and Japan
Citi analysts recently visited Chinese solar farm projects. They found that project developers are installing solar projects on rooftops and building solar farms. To control upfront costs, they are utilizing fixed installs. Software monitoring at Chinese solar projects has also improved with a clear record of hourly power generation data.
Over the past six months, China and Japan both have seen a consistent increase in end-demand. Policy rate in Japan is favorable to solar project developments. In the first half of 2013, the country reported 3.4GW of new installations. Citi estimates that end-demand would rise to 7GW in Japan, and 10GW in China by the end of 2014. Global end demand is expected to grow 20% from 35GW at the end of 2013 to 42GW by the end of next year.
Strategic investment opportunities
Citi Research has a Buy rating on GCL-Poly Energy Holdings Limited. (HKG:3800) (OTCMKTS:GCPEF), Oci Co Ltd (KRX:010060) and Motech. GCL-Poly Energy Holdings Limited. (HKG:3800) (OTCMKTS:GCPEF) manufactures polysilicon and wafers for the solar industry. The company plans to ramp up its self-supply power plant early next year. That should reduce the polysilicon production costs from $17/Kg to $2/Kg, improving its bottom line. It is also investing in Same Time Ltd to focus on solar farm developments in China.
Seoul-based Oci Co Ltd (KRX:010060) has seen its utilization recovering in recent months, which should reduce its production costs. Its solar project developments (41MW in China and 20MW in South Korea) are on the right track. On the other hand, Motech is focusing on the U.S. and Japanese markets. The company continues to enhance the efficiency of its cells. Today, more than 50% of its sales come from China and Japan. As solar sector is likely to see strong demand in 2014, Motech is increasing its capacity in line with the overall market growth.