China’s Ministry of Finance, Ministry of Science and Technology and the National Energy Administration of the National Development and Reform Commission, recently announced the second national solar subsidy program, the “Golden Sun” program, which provides upfront subsidies for qualified demonstrative PV projects from year 2009-2011. The first solar subsidy program, the BIPV subsidy program announced in March this year, provides upfront subsidy for grid-connected rooftop and BIPV systems.

Below is a summary of some key features in the two programs.

These two subsidy programs are the most concrete form of policy support for PV offered by China national government so far, and they clearly demonstrate China’s determination to support the adoption of PV. In addition, a nationwide Feed-in Tariff (FIT) subsidy for large-scale PV systems is also anticipated. However, the timing and details of the FIT subsidy is still quite uncertain. It is certain that all national subsidies are mutually exclusive. A PV project can only qualify for one of them.

How much installations can these national subsidies drive in the next two or three years? The Golden Sun program sets a cap of 20MW for each province, which also includes installations under the BIPV subsidy. Assuming all 34 provinces (including autonomous regions and municipalities directly under the central government) will participate in this program, we can expect the total subsidized installations by year 2011 will be capped at 680MW.

With today’s system cost, national subsidy offered by either program alone is not enough to ensure a reasonable return on investment. Thus, PV developers will have to rely on additional subsidy from regional and local governments. So far, Jiangsu Province is the only province that has announced detailed subsidy schemes to supplement national subsidy. A number of other provincial and municipal governments are also planning to roll out financial incentives to subsidize PV installations.

Since the beginning of this year, we have heard many PV projects being planned across the nation. Some projects are even in the gigawatt level. Some analysts predict 3GW installations in the next three years.

However, how real are these projects? Recently, Mr. Zhipeng Liang, a government official representing China’s National Energy Administration stated that PV is still in the beginning phase in China. The government will probably set an installation target of 1GW in the next two to three years, and will probably not encourage the development of PV projects that require long distance electricity transmission in the near future.

Mr. Liang’s statement may seem quite disappointing to many, however, it is actually in line with the 20MW cap per province set by the Golden Sun program and the program’s emphasis on the on-site consumption of PV electricity. Moreover, it is not hard to see the rationale behind it.

First, China currently still lacks experience in the design, installation, maintenance, and operation of grid-connected PV systems. In addition, the country is in urgent need of developing technical guidelines and standardization for system integration. Grid operators and many government officials may not be familiar with PV technology. Government needs to establish an efficient planning and permitting process. The Golden Sun program demonstrates China government’s commitment in expediting the development of PV, but also indicates that government wants to take cautious steps and to gain experience from these demonstrative projects.

Second, China still has over one million households that live without basic electricity services. Bringing electricity to these people through small hydro, wind, biomass and PV is still one of China government’s priorities. And this priority is clearly demonstrated in the Golden Sun program—70% upfront subsidy for off-grid PV systems in rural areas.

Third, China government wants to learn a lesson from the development of wind electricity. In recent years, China has taken big stride in increasing the country’s wind capacity, but the wind industry is facing tough challenges. Most wind system operators are struggling to make a profit and about a quarter of installed capacities are not connected to grid, mostly due to technical difficulties with grid connection, lack of experience in grid operation, and lack of standardization.

Last, China government has realized the importance of developing a modern grid system for the long-term success of renewable energy. Over-heated installation without a balanced development of the grid infrastructure is not a sustainable practice. The national grid authority is planning to invest up to RMB 4,000 billion in a Smart Grid system by year 2020.

Earlier this year, SEMI and SEMI China PV Advisory Committee issued a Recommended China PV Policy Roadmap. The roadmap lays out a recommended PV installation roadmap and detailed government subsidy spending up to year 2020. It also recommends that China government should learn from international best practices and establish a PV incentive mechanism that best fits China’s unique situations.

The Roadmap urges that China government implement direct investment subsidy (upfront subsidy) to open up China’s domestic market for PV. Both the BIPV subsidy and the Golden Sun subsidy fall into direct investment subsidy model. However, it is somewhat disappointing to see that neither program offers enough subsidy to ensure a profitable operation given today’s system cost. PV developers need to seek additional help from regional and local governments.

Even though the Feed-in Tariff has been very successful in driving PV installations in many countries, it may not be the best fit for China’s current situations. As mentioned earlier, the installation of grid-connected PV systems is still in the very early stage in China. China faces many challenges and lacks a solid foundation to establish an effective national FIT system. The vast differences between China’s regional electricity tariff and cost of PV electricity only add to the problem.

It is important to learn a lesson from the wind industry. After struggling for many years and with 12GW installed capacity, China’s wind industry was finally able to welcome a new FIT for wind power plants announced by the central government at the end of July. Whether or not the new FIT will boost investment in wind is yet to be seen. As for PV, the Chinese government still needs to build solid groundwork to establish a national FIT system. It will take some time for the policies to evolve. In the near term, a national upfront subsidy combined with localized FIT subsidy by provincial and municipal government could be an effective approach.

Download copy of China’s Solar Future, A Preliminary Report on a Recommended China PV Policy Roadmap.