China Aims to Clean Up in Solar Power

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"Right now, China's solar industry relies on foreign imports for its raw materials and exports most of its finished products overseas," said Meng Xiangan, secretary general of the China Solar Energy Society. "The foreigners have, in their hands, the power to direct which way our solar industry is heading."

For instance, German Chancellor Angela Merkel is steering her country toward a policy of reducing its reliance on imported energy—and that includes "made in China" solar cells. "The German market continues to be the largest market in Europe. Its growth, however, appears to be slowing down over time," said Kevin Wei, chief financial officer of Shanghai-based SolarFun Power Holdings (SOLF).

Polysilicon Monopolists

Another huge obstacle to China's solar power industrial ambitions is the current shortage of polysilicon. Seven companies—including Germany's Wacker Chemie (WKCMF), Mitsubishi Materials (MIMTF), Sumitomo Titanium (SMOEF), and Renewable Energy Corporation ASA—hold a monopoly over the world's polysilicon supply.

Chinese solar cell makers have to pay dearly for the stuff, which has somewhat undercut their huge labor cost advantage. "Access to polysilicon serves as barrier to growth and entry for many Chinese companies," says Sanjeev Chaurasia, vice-president with the Credit Suisse's Energy Group. "If they have unfettered access to polysilicon, they'll be able to compete on cost and not necessarily on access to raw materials," she adds.

China is now trying to level the playing field by developing its own polysilicon supply. At least 11 new polysilicon projects are in the pipeline. China hopes to be able to produce 12,660 tons of polysilicon and break its dependence on foreign supplies by 2011, according to THT Research.

Little Incentive to Invest

However, whether these Chinese polysilicon suppliers can actually produce so much polysilicon remains to be seen. "It can be a problem to obtain the technology. Foreign technology suppliers are not so willing to sell them know-how and technology," points out Frank Haugwitz, a technical consultant with German Agency for Technical Cooperation. Chinese polysilicon suppliers have been using Russian technology to make polysilicon but have yet to replicate their German and Japanese rivals' scale of production.

Then there is the fact that Chinese power companies, which rely heavily on coal, have little incentive to invest in more expensive solar energy capacity given that electricity prices are fixed and they can't pass along the cost to consumers.

China's Renewable Energy Law, which went into effect January, 2006, ordered power companies to use a certain amount of renewable energy but failed to provide any financial incentives to do so. Beijing Corona Science & Technology's Zhu points out "The government needs to have a good policy to allow the solar industry to develop because the cost of solar power is too high right now."

Subsidies Not a Given

Chinese solar power companies have been lobbying the government to adopt a "feed-in tariff" system modeled after Germany's. Power companies would be forced to buy solar-generated electricity at a fixed rate and the government would kick in a subsidy to encourage them to use clean energy.

"There's not a big chance of such a policy coming out in the short-term," said Li Junfeng, secretary general of the Chinese Renewable Energy Industries Assn. He added that it would be difficult for the Chinese government to provide as much in subsidies as their German counterparts.

If these problems can be worked out, there is certainly plenty of demand for cleaner energy sources in the world's second biggest energy consumer behind the U.S.

So far, most of China's demand for solar power has come from government rural electrification projects in sparsely populated areas in Tibet, Qinghai, or Xinjiang provinces, where it does not make economic sense to build power stations.

Roof Panel Push

However the real growth in China's solar power market will continue to come primarily from these rural, off-grid, solar projects. China still has 30 million people—30,000 villages—with no access to electricity. German government official Haugwitz predicts that 180 megawatts of the new solar power in the coming years will be set up in these rural areas.

In addition, some local governments in high-power-consuming urban cities in coastal China are starting to encourage the use of solar energy. Right across the border from Hong Kong, the southern metropolis of Shenzhen now requires all new buildings 12 floors or higher to install solar water heaters on their rooftops. Experts predict that one-fifth of all rooftops in Shenzhen will be covered with solar panels by 2010.

Shanghai has announced plans to invest 10.5 billion yuan to install solar panels on top of 100,000 rooftops by 2015. The Shanghai municipal government will start by subsidizing half of the cost and gradually reduce subsidies as the price of solar panels drops.

Chi-Chu Tschang contributed this article to BusinessWeek Online from Beijing.