HONG KONG China's loss-making solar panel makers believe they may have found a way out of their nightmare - by becoming one-stop renewable energy shops with their own solar farms.
Manufacturers of solar panels, hit hard by the scaling back of solar-power subsidies in Europe, are taking advantage of a new package of government subsidies at home and diversifying into solar-power generation.
In an apparent bid to prop up its ailing solar panel sector that has been hit by overcapacity, as well as price and trade wars, Beijing unveiled a plan in July to quadruple solar generating capacity to 35 gigawatts (GW) by 2015. Construction costs are estimated at $50 billion.
Spurred by a package of initiatives from tariffs to tax breaks, and continued low panel prices due to global oversupply, many of the country's panel makers are now looking to invest in solar farms to help return to profitability, industry officials say.
"Definitely the trend is Chinese manufacturers will make more downstream investment," said a senior official at Chinese solar panel maker Canadian Solar. "Now the domestic market seems to be particularly exciting."
For manufacturers, generating projects mean a predictable source of demand for their panels. Manufacturers are still mostly losing money, although panel shipment has improved this year on orders from China, Japan and the United States.
Solar plant development is a more lucrative business. They offer an annual gross return of around 10 percent, depending on the proportion of debt financing and project location.
As solar panel prices tumbled following the 2008 global financial crisis, many Chinese wafer, cell or modules makers, like GCL Poly, Canadian Solar and Hareon ventured into solar power generation projects at home or abroad to offset manufacturing losses.
Overseas rivals such as SunPower and First Solar Inc, have also diversified into the higher-margin business as solar panel prices remain weak.
SHUNFENG EXPANDS CAPACITY
China's panel makers, among the world's biggest producers, were lured back home this year by the government's plans to expand the solar power producing industry. The policies have set off a scramble by the likes of state power producers China Huaneng Group and China Merchants New Energy Group as well as manufacturers like Shunfeng, Yingli Green and JA Solar.
JA Solar said in August it planned to develop 300 MW of generating projects in northern China's Hebei province, in what its CEO Jin Baofang said was a major step "to increase the role project development plays in our overall revenue mix".
Shunfeng Photovoltaic, a small Chinese solar cell maker listed in Hong Kong, has said it will enter agreements to develop 1,079 megawatts (MW) of solar power projects and have 600 MW in operation or under construction by the end of 2013.
To ramp up its own manufacturing capacity aimed at catering for the expansion of its solar generation business, Shunfeng last week announced a plan to purchase the main unit of Chinese solar maker Suntech Power.
Shunfeng has offered 3 billion yuan ($492 million) to take over bigger rival Wuxi Suntech, the bankrupt unit of Suntech Power. Wuxi Suntech filed for bankruptcy protection in March, after its parent defaulted on a $541 million convertible bond - one of the biggest defaults by a Chinese company.
The deal could increase Shunfeng's solar cell capacity by five times to over 2,000 MW.
Analysts warn of financial, regulatory and technical risks. Previous investments in Chinese projects have been hurt by issues like delays in subsidy payments and poor infrastructure.
Like their overseas peers, Chinese panel makers may eventually spin off their power plants by listing them or selling them to funds and insurers to take profit and alleviate potential funding strains, analysts say. China's top 10 solar makers have 100 billion yuan in debt, with an asset to debt ratio above 70 percent on average, state media say.
"What we may see is an increased level of listings and spin-offs into Hong Kong and elsewhere to try to build up some sort of vehicles to house these type of assets," said an energy banker at an international bank. ($1 = 6.0992 Chinese yuan)
(Editing by Jeremy Laurence)