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Will China Gloom Darken Global Alternate Energy Prospects?

There are a host of factors plaguing the global economy, China being one of them. The slowdown in China would likely aggravate a tedious global economy and generate lower revenues for U.S. companies. For the S&P 500 members, more than 30% of revenues come from foreign shores. Hence, a global slowdown may have a major impact on the bottom line and stock prices of major companies.

Gross domestic product or GDP in the world’s second-largest economy grew at just 6.8% in the fourth quarter of 2015 and 6.9% in 2015. The annual number is the slowest in 25 years and the quarterly figure is the weakest since the first quarter of 2009, adding to fears over the health of the global economy. In 2014, economic growth was 7.3%. The government is expected to target economic growth of at least 6.5% in 2016.

The Chinese economy has been struggling and its stock market saw a terrible sell-off last year. As the world’s biggest producer of solar panels is now contending with decreasing exports along with industry overcapacity as well as the ongoing decline in the stock market, its solar industry may also be at risk.

Beyond the China factor, the sector as a whole -- and solar stocks in particular -- have taken a beating ever since oil prices began to tumble in June 2014. This weakness persisted all through 2015.

While the long-term potential of the solar energy space is undeniable, the industry is faced with a number of near-term challenges that will likely keep these stocks under pressure. That said, the demand for solar energy is strengthening at a rapid clip and analysts see no fundamental correlation between the oil plunge and solar share losses. It is important to note that in 2015 only 1% of U.S. electricity was oil-generated.

Apart from the crumbling oil price scenario, other weaknesses that can impact the renewable industry at large are discussed below.

China Factor: China’s solar industry is not immune to the current downturn in the economy. The country’s economic situation has sparked apprehensions that the government could shift asset resources away from investment in renewable energy in order to fuel its stock market. One of the most prominent effects of the economic slowdown in China has been relatively weak demand for electricity.

China's installed photovoltaic solar capacity was 43 gigawatts (“GW”) by the end of 2015, up about 15 GW from 2014, as per media reports. Although the country is likely to have surpassed Germany in the fourth quarter with the most solar capacity, China missed its own target for 2015. The Chinese National Energy Administration had set a goal of 17.8 GW of newly installed solar capacity for the year. This puts China well behind its own set goal. 

Per the United Nations Environment Program, China exhausted a record $102.9 billion in green energy investments in 2015, up 17% from 2014. A major portion was most likely targeted at the solar and wind market. However, as the economy slips into a slower growth phase, the Chinese government could pull strings on renewable subsidies.

Trina Solar Ltd. (TSL), the largest Chinese manufacturer, derives about two-thirds of its revenue growth from China. So far this year, its share price dropped over 27% while Yingli Green Energy Holding Co. Ltd. (YGE) saw its shares plummet about 28%.

YieldCos Go Awry: A YieldCo can be defined as a dividend growth-oriented public company formed to hold operational assets, which produce an expected cash flow based on long-term power purchase contracts. The impact of YieldCo financing on solar developers and plant operators has been huge.

It is basically the adaptation of the REIT program to renewable energy, by forming an independent power producing corporation to operate primarily renewable energy assets comprising water, wind and solar. The company is publicly traded, yields a predictable cash flow, and distributes income to its shareholders.

After a strong 2014 that saw a series of IPOs and surging valuations, 2015 turned out to be a difficult year for solar YieldCos. The Global YieldCo Index is down by over 25% in the last one-year period and many YieldCos that held IPOs in 2015 have witnessed share losses. 8Point3 Energy Partners (CAFD) lost 30.16% since its listing last June, while TerraForm Global Inc. (GLBL) has declined 81.14% since Aug 2015.

The downturn can mainly be attributed to falling crude oil prices as well as the China slowdown.

High Cost Burden: Since the recession began in 2008, the solar industry has experienced both ups and downs, but the main trend has been a sharp fall in the prices of solar panels due to a supply glut. This has forced many solar firms to go bankrupt leaving only low-cost producers, comprising mostly Chinese players.

Solar stocks were beaten badly around mid-May 2015 following a brutal plunge in the highflying Chinese thin-film solar manufacturer, Hanergy Thin Film Power Group. The company lost nearly half of its market capitalization in a day’s trading in May.

The rout was followed by sluggish trading by Yingli Green Energy on looming bankruptcy concerns. Shares collapsed as much as 80.76% in the last one year.

Yingli Solar has been struggling to survive amid a pile of debt. Importantly, the company has failed to generate profits since 2011. In this scenario, the company may find it difficult, if not impossible, to pay down its outstanding debt. This could lead to cross-defaults, putting it at liquidation risk. The company was once the leading module manufacturer in the world between 2012 and 2013.

In Apr 2016, SunEdison Inc., once the fastest-growing U.S. renewable energy company, filed for Chapter 11 bankruptcy protection after a short-lived but aggressive spree of debt-fueled acquisitions proved disastrous. However, SunEdison's two publicly traded subsidiaries, TerraForm Power Inc. (TERP) and TerraForm Global, are not part of the bankruptcy.

Subsidy Rollback: Budgetary constraints have caused the prime global solar markets to roll back a portion of their grants. Earlier, solar players had witnessed a sharp rise in sales in many countries, mainly fueled by the rush to complete projects ahead of subsidy rollbacks.

Chinese PV manufacturers are suffering from delays in subsidy payments. If governmental incentives for solar power keep on coming much later than expected, it would put off many sector investors and consequently hurt the industry. Trina Solar's finance head Teresa Tan expressed concerns that apart from hurting the cash flows of renewable energy firms in China, delayed China Feed-in Tariffs (FiT) payments could also cause international investors to lose interest in the market.

Per recent media reports, China’s National Development and Reform Commission has announced to cut FiTs offered to solar power and wind developers in 2016 to reflect the new market conditions. Reductions on the FiT tariff for new solar power projects could be as much as 11%.

Again, under German regulations, the FiTs are adjusted monthly depending on new capacity and additional factors. Germany is expected to cap subsidy payments after generation capacity reaches a certain target. Germany is consistently evaluating changes to the German Renewable Energy Law, or the EEG.

In Aug 2015, the U.K. government’s Department of Energy and Climate Change released a consultation on proposed changes to its FiT scheme and a FiT expenditure cap of between GBP 75 million and GBP 100 million by 2018/2019. An 87% reduction in support for domestic solar and an up to 82% cut in FiTs for commercial rooftops were expected to be in place from as early as Jan 2016.

Japan was one of the brightest solar energy markets owing to the attractive FiTs launched in Jul 2012. However, in Feb 2016, the Ministry of Economy, Trade and Industry (METI) proposed an 11% cut in the solar FiT.

Solar companies in Japan shipped over 1.73 GW of solar modules in the third quarter of fiscal year 2015, which ended Dec 31, 2015, according to Bloomberg citing data from the Japan Photovoltaic Energy Association (JPEA). This represented a 21% decline year over year. JPEA has also revealed that shipments for PV projects over 500 kW dropped 32% in the third quarter of fiscal 2015, while the residential and commercial segments registered a decrease of 12% and 9%, respectively.

Anti-Dumping Duties: The move from the U.S. Department of Commerce (“DOC”) to impose import duties on solar panels and other related products from China and Taiwan could escalate the U.S.-China trade conflict.

The decision addresses one of the main charges in a petition brought by SolarWorld Industries America, a German solar manufacturer with major operations in the U.S. A complaint lodged by SolarWorld brought to the fore a loophole that the Chinese solar product makers were exploiting to evade duties imposed by the Department of Justice in 2012.

The higher tariffs came at a time when the solar industry was on the whole recovering after a two-year supply glut.

The Commerce Department in Dec 2014 set anti-dumping duties at about 52% on most module imports from China and at 19.5% on most imports of Taiwanese cells. It has also slapped 39% anti-subsidy tariffs on most China-made panels.

New Emerging Technologies: The alternative energy industry remains an emerging sector with a steady focus on the lowest-cost technology. This may prove disastrous for existing companies riding the solar boom should a cheaper alternative emerge. The industry also has to deal with cost-competitiveness from traditional means of electricity generation.


Globally, China leads the world in total electricity generation from renewable sources, helped by its increased allegiance in recent times to the alternative path. It is followed closely by the U.S., Brazil and Canada.

All leading solar cell manufacturers are looking for opportunities in the emerging markets. These markets primarily comprise the Asia-Pacific region with China, India and Japan being the key destination for the global solar giants. The long-term outlook on the whole looks bright. This is especially true as global warming and high fuel emission issues have proven how inevitable clean energy sources will be for the future.

However, the global economic turmoil, China's slowdown and the consequent subsidy rollback in the prime global solar markets are appearing to be a major headwind for the renewable energy industry on the whole. Again, if we are to expand renewable manufacturing infrastructure worldwide to fight the climate crisis, the U.S. as well as the Chinese manufacturers should try to settle their dispute before the industry is hurt at large. Measures to reduce the inflow of Chinese solar panels may hamper the battle against climate change.

Finally, the drop in oil prices and varying market conditions have raised questions as to how the market will re-balance. This involves implications for markets, policies, competitiveness, investment and the fuel mix if lower oil prices persist.

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YINGLI GREEN EN (YGE): Free Stock Analysis Report
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