Beijing ready to see PV firms fail or merge to tackle overcapacity

China’s central government is to ban protection of solar companies by local governments and encourage mergers and bankruptcies, in a series of new measures aimed at reducing overcapacity in the country’s struggling PV industry.

The measures – agreed on yesterday at a meeting of the executive committee of the State Council (China’s cabinet) – sent solar stocks soaring as investors saw potential benefits to the largest companies in the sector.

Shares in Suntech were still up almost 18% to $1.26 at midday Beijing time today. LDK Solar was up more than 13% to $1.43. Canadian Solar, Yingli, Trina and JA Solar also all surged more than 10% after the news emerged.

Analysts say, however, that it is still too early to assess the real impact of the measures, which also outlined new pricing mechanisms for distributed PV projects and a preferential tax rate for solar farms.

The goal is to “accelerate industrial restructuring and technological progress” in an industry considered to be one of China’s ‘strategic emerging industries’ but currently facing “severe overcapacity and declining overseas demand”, according to a report of the meeting on the State Council’s website.

The meeting was chaired by Prime Minister Wen Jiabao, who has previously called for a curb on excessive expansion in the solar sector.

“This very high-level meeting shows the Chinese government is really concerned about the future of this industry,” says Sebastian Liu, investor relations director at Jinko Solar.

The report stressed the need to allow for market mechanisms to play a greater role in the industry, showing a recognition of the negative impact caused by government intervention to date.

Local governments have stepped in on a number of occasions this year to bail out companies, including LDK Solar, the most high-profile case. LDK has received funds from the municipal Xinyu government and sold a 20% stake to state-owned firm HengRuiXin Energy in October to help improve a balance sheet weighed down by $3.6bn in debt at the time.

The State Council is urging “full use of market mechanisms to encourage mergers and consolidation and eliminate backward production capacity” and wants to “prohibit local government protection”.

It is not clear yet how the government will implement the new rules. The State Council’s measures need to be followed up by relevant ministries who are charged with working out the details.

But bankruptcies are rare in China and many companies continue to raise debt – despite lacking the cash flow to pay down the borrowings. LDK is currently seeking consent from shareholders to extend its debt by several hundred million dollars.

The industry may have about 50GW of production capacity, estimated a report by Barclays analysts in September, to meet global demand of around 30GW.

The State Council has also called for “strict control of capacity expansion of polysilicon, cells and modules”.

It outlined other plans to boost demand for solar panels domestically, including offering solar PV projects preferential value-added tax policies similar to those given to wind farms.

It also plans to offer a feed-in tariff adjusted to the resources of a project’s location, possibly boosting the rate for less sunny areas, and will encourage development of distributed solar projects supported by a feed-in tariff.

Beijing has already rushed through the approval of 2.8GW of new rooftop projects this month, as it attempts to help the sector reduce some of its excess inventory.

Wang Sicheng, a solar expert previously with the government’s National Development and Reform Commission (NDRC), says the Golden Sun projects will have little impact on manufacturers’ huge overcapacity, but plans to promote distributed projects may be more beneficial, with the National Energy Administration (NEA) targetting 15GW of new distributed capacity in the next three years.

Wang says the new policies outlined by the State Council are “very, very encouraging” and the decision to offer a feed-in tariff to distributed projects will “make everyone happy”.

NEA had previously proposed a subsidy to the retail electricity price, but this was not popular with grid operators.

A feed-in tariff will be “more stable and has proven to be very effective in markets like Germany,” he says.