By Francois Perrin, Portfolio Manager at East Capital
China’s leadership in clean energy is transforming the economics of our global energy system, with benefits that extend far beyond its borders. Solar power is finally going mainstream as the global capacity continues to rise exponentially, with an expected 90 per cent of delivery by countries at grid parity by 2022, up from 50 per cent in 2019.
There has been a rapid growth in solar power installation globally in the past decade, and in only seven years, from 2011 to 2018, the cumulative installed capacity increased by about 600 per cent. The total global installed capacity is now 77 times greater than it was at the end of 2006.
Over the last decade, and thanks to its climate ambitions, China has been the main driver behind the surge in solar power installation. In 2018, China led the world as the largest solar power installation market for the sixth consecutive year, with more than 44GW of installation, and the cumulative solar power generation capacity in China grew from 2.1GW in 2011 to 175GW by the end of 2018, representing a CAGR of 88 per cent. Such rapid growth is largely attributed to a favourable regulatory environment and supportive policies related to the implementation of the China Blue Sky Antipollution plan and related PM2.5 reduction targets, in addition to continuous improvements in and declining cost of solar power technologies.
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The costs associated with solar power generation have been rapidly declining in recent years due to technological advancement and economies of scale. Since 2011, the cost associated with photovoltaic (PV) systems in China decreased from RMB 17.5/W to RMB 4.5/W in 2018, while the cost of PV modules fell almost four-fold during the same period. The issuance by the Chinese government of its PV grid parity policy in May 2018 only accelerated this trend, and in 2019, the PV installation cost in China is reaching RMB 4/W.
The grid parity policy has major implications for China and abroad. It implied installation cost reductions of 50 per cent over the last 12 months, and it is also positioning solar energy nowadays as the cheapest energy source in many countries on a global basis, beyond coal or any other conventional carbon-emitting primary energies. This year, grid parity has already been achieved in 10 of the 23 provinces in China, and from 2019 onward, emerging market countries like India, UAE, South Africa and Mexico, and developed countries like Australia, will also be benefitting from China’s achievements in solar cost reduction, with solar installation costs for utility power projects falling below their coal generation costs.
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After 20 years of investments in the PV industry, 2019 will therefore be remembered as the year PV installation finally took off. From 104GW additional capacity delivered in 2018, we expect global solar installations to reach 130GW in 2019 and 150-170GW in 2020. The proportion of the global PV market that will be delivered by countries at grid parity will gradually increase from 50 per cent in 2019 to more than 90 per cent in 2022, and it offers sizeable investment upside.
Overall return at project level could reach eight per cent to 10 per cent in the coming three years, and we would continue to favour Chinese solar manufacturers over Chinese solar developers due to their increasing dominance along the value chain and their ability to further consolidate it. At current pricing levels, Chinese domestic leaders continue to generate positive free cash flow and they offer very attractive structural investment opportunities, in particular in polysilicon and mono-solar technology cell and module production. Leveraging on the cost of production achieved by Chinese producers we would also expect solar developers in emerging markets like India, South Africa and the Middle East to offer attractive investment opportunities. These markets will be the next areas to watch in order to seize the full set of opportunities offered by the photovoltaic industry under the grid parity scenario.
