China’s May 31 New Policy: How Can Taiwan’s Solar Industry Survive the Shock?

Mao Zedong transformed the traditional Chinese concept on reform based on the change of course when things become extreme into adventuring in perpetual turmoil.～Jonathan D. Spence, 1936 - , Renowned International Historian Specialized in Chinese History

　　In 2018 this year, on the second day after the close of the Shanghai International Photovoltaic Power Generation and Smart Energy Conference and Exhibition, China’s National Development and Reform Commission, Ministry of Finance, and National Energy Administration jointly issued the Notice Regarding Matters Related to 2018 Photovoltaic Power Generation. The so-called “May 31 New Policy” limited the size of solar power plants set up in China and slashed solar power subsidies. Following 3 days of vibrant and energetic display of passion at the solar power showcase, tens-of-thousands of solar power companies cannot believe what they saw in the statement on the new policy issued shortly after the event.

　　Using Spence’s words, the bewildering feudal lord China, after experiencing a decade-long “happy hours” made possible by subsidies and Feed-in-Tariff (FIT) without upper limits, successfully lowered the production cost of solar power modules as it takes advantage of the global trend emphasizing carbon emission reduction. It was able to create products which meet international certification standards and reduce the per-unit-KwH price by 90-percent. Through the process, it became the global leader in solar power and defeated all competitors in the global photovoltaic industry – including Taiwanese companies.

　　Yet, regardless of how drunk you get during the party, there comes a time when you have to wake up to reality. The May 31 New Policy came fast and without warning, but it is not something unexpected. Through the new policy, the Chinese government seeks to weed out the weak ones from the supply chain and speed up the pace of integrations and mergers, bringing the price of solar power to the same level of standard electricity and quicken its steps in entering the electricity market for buying and selling. This is actually a great opportunity for the reconfiguration of industry chains and carrying out mergers and acquisitions.

　　In light of the drastic changes in the mainland market, Taiwan’s solar photovoltaic industry – or more precisely “silicon photovoltaic cell manufacturing industry” – is subjected to a different degree of impact. An example is the sudden resignation of Motech’s Chairman Chang Ping-Heng a few days ago. Everyone looks forward to seeing actions from the government. That is why the Ministry of Economic Affairs took steps to begin negotiations, hoping that banks will not proceed too quickly in calling in loans at this critical moment and extend the loans by a reasonable 6-month to 1 year. Everyone seems to believe that if local industry can survive the year, the competitivity gap between Taiwan’s PV industry and their counterpart in China will narrow down significantly.

　　It is quite unfair to ask the government to intercede every time someone runs into trouble. Currently, no one knows how the situation in China will develop, and the global solar energy market is changing by the second. For example, India kicked-off a new round of protectionist moves on solar power tariffs on July 31, 2018. Even if the industry ask for additional support from the government, the policy makers cannot determine the correct move within such short period of time.

Finance is the true “energy” that fuels solar power development. In fact, the PV industry has more similarities with the real-estate industry than the manufacturing industry

　　You would probably think that given the endless supply of power from the sun, developing the PV industry is a no-brainer. The government should give it all possible support it can muster, right? However, if we take a look at this issue from the standpoint of technology, the progress in solar power energy conversion efficiency is not what something you would call hi-tech. Over the past 2 decades, the energy conversion efficiency of single crystal silicon PV modules only improved from 22.7% to 24.4% (*1). This forces the PV cell manufacturing industry to rely heavily on government subsidies. If you only consider module products with factors such as single junction material, no CPV component, and capable of mass production, the top 5 ranking as of June 2018 is listed below:

1. GaAs 25.1% (Alta Devices, US): A type of material similar to LED. It could be equipped with condenser lens and is often used on satellites.
2. Mono-silicon 24.4% (Kaneka, Japan): The material is made from common sand processed to the highest purity. It is a material with monocrystalline attributes.
3. Poly-silicon 19.9% (Trina Solar, China): Likewise processed from sand, this material comprises polycrystalline attributes.
4. CIGS 19.2% (Solar Frontier, Japan): CIGS is the abbreviations for “Copper, Indium, Gallium, and Selenide”. It is a thin-film compound material comprising 4 chemical elements.
5. CdTe 18.6% (First Solar, US): Cadmium Telluride is a compound containing cadmium made using proprietary technology.

　　In principle, the energy conversion efficiency of all the single junction materials on this list is capped by the Shockley-Queisser limit. The maximum energy conversion efficiency of solar cell is roughly 33.5%. Due to the limits of physical properties, the solar industries’ pursuit of improving conversion rate is obviously not a sound long-term plan.

　　Fortunately, with the government’s support over the past few years, Taiwan’s solar industry has entered a new stage where developers collaborate and devise commercial arrangement with financial partners, thereby creating an industry with strong domestic demand. If we look at its fundamental essence, this arrangement has evolved beyond the mindset of manufacturing industry and become more similar to those of real-estate industry. No matter whether your stance is pro-nuclear or anti-nuclear, anyone can clearly see that using reasonable subsidies to gradually create a free market for electricity trading will help the development of solar industry which has a financial essence. We can possibly expect the creation of a brand-new commercial model based on virtual power plants which integrates solar power (renewable energy) generation, energy storage, power dispatch technology, and finance in the next phase of the evolutionary process. Small-scale experiments based upon such concepts have been conducted. In the future, one can expect to see the expansion of such scheme to industrial parks, science parks, and even regular households. This is the unlimited possibilities which can emerge from the structure of smart grids which we have discussed in previous articles.

　　At this time, you would probably say that you think the idea of a PV industry operating on a commercial model similar to those of real-estate industry is quite innovative, and that the vision of a smart grid is great. However, the foundation of our nation lies upon manufacturing, so are you trying to suggest that we should give up silicon photovoltaic cell manufacturing industry?

　　As I said before, at this point it is still too early to come up with a remedy. However, we would suggest considering the following points:

1. Banks should have a little more patience. While extending the loan period for solar PV companies by 6-month to 1 year is not exactly a great plan, it is still better than getting nothing back.
2. Only as a last resort should the solar industry consider horizontal integration. Otherwise, their focus should instead be on vertical integrations and mergers among solar power and energy storage industries.
3. If we were to look at this issue from a broader perspective, you would realize that the commercialization model logic of the vastly popular circular economy concept can be applied to the silicon photovoltaic cell manufacturing industry. We can establish a comparatively short cycle following this trend – for example, a commercial model spanning 10 years for replacing and recycling modules. This could be adopted as a replacement for solar power module certification which continues to seek product warranty extending to 20 years and beyond. Through a gradual approach of improving modular efficiency, we can prolong the life expectancy of generator systems and lower the cost of encapsulating materials, as well as achieving cradle-to-cradle, circular economy effectiveness.
4. In the long run, with the establishment of a healthy electricity market, there could be a stable green economy which helps Taiwan’s technological talents concentrate their efforts on improving power generation efficiency – an area where the island has an edge. Furthermore, this could work hand-in-hand with Taiwan’s strengths in software and IC design to develop technologies on smart grid development.

　　The solar industry was able to survive the financial crisis of 2008; and they also weathered unpleasant conditions during the European Debt Crisis of 2011. Naturally, you would expect further transformation and development of the industry after the May 31 New Policy, paving the way first with green energy!
 

Note 1: According to semi-annual statistics published by Professor Green of the University of New South Wales in Australia on international journal between 1999 and 2018, over the past 20 years the energy conversion efficiency of single crystal silicon PV modules only saw a rise from 22.7% to 24.4%. The figures do not consider the effect of the modules’ size.

Note : The quote in the beginning of this article is from 《胡鬧領主「毛澤東」—永不休止的顛覆與冒險》