Risky clouds hover over solar project funds

Domestic power sector may not be ready for building plants on speculation

With its launch of a new locally based fund for solar power construction, Canadian Solar Inc has joined a growing field of Chinese solar panel makers entering the risky business of speculative development in China.

The move follows the establishment of self-financed vehicles for similar speculative construction by rivals Trina Solar Ltd, Yingli Green Energy Holding Co Ltd and wind power equipment maker China Ming Yang Wind Power Group Ltd, as they try to create more demand for their products.

Under such a strategy, solar panel makers typically provide some or all of the money for new plant construction, and then sell their panels to the project. They later recoup their money by selling off the plants upon completion to long-term institutional buyers.

This model has often worked well in the West, where power station developers are familiar with their industries and know they can easily sell completed projects to sophisticated long-term institutional buyers that understand the business. But such speculative development could be much riskier in China, where most solar panel makers have limited experience with plant construction, and few experienced institutional buyers can step in to own and operate such facilities over the long term.

That mix could become a recipe for disaster over the longer term, potentially leaving solar panel makers with huge debt if they cannot find buyers for projects that may have design flaws and other logistical problems. Accordingly, Beijing should take steps to cool such speculative construction, or at least offer guarantees and guidelines that could lower the risk.

Canadian Solar made headlines earlier this month when it announced it would launch a new solar power investment fund with Sichuan Development Investment Management. The fund would have 5 billion yuan ($810 million) in investment, making it one of the largest to date to focus on solar power development in China under Beijing's ambitious plans to clean up the country's air.

Canadian Solar and Sichuan Development would each contribute equal, unspecified amounts to the new fund, with the remainder coming from other investors. That means Canadian Solar could probably expect to provide at least $200 million and possibly more, equaling more than a quarter of its current cash reserves.

Canadian Solar's plan follows a similar move by Yingli, which in April announced its own new fund with local partner Shanghai Sailing Capital. That fund had an initial target of 1 billion yuan, a more modest figure than the Canadian Solar plan but still sizable for a company like Yingli, which had just $150 million in cash at the end of June.

Trina embarked on a similar plan recently when it announced a partnership with three local partners to build the largest solar power plant in Yunnan Province, with a massive capacity of 300 megawatts (MW). Under that deal, Trina is providing 90 percent of the project's financing, again stretching its own limited cash resources. Ming Yang also joined the speculative development team in June, when it announced its own plans to build and co-finance a massive 300 MW wind farm in Jiangsu Province.

This kind of short-term self-financing for new projects works well under healthy economic conditions in mature markets. It has served Canadian Solar well in Canada, where the company frequently finances and builds new plants using its own solar panels, and then sells the projects after completion to local institutional buyers who understand the returns they will get.

But such speculative development proved ruinous two years ago for former industry pioneer Suntech, which launched its own fund for speculative development in Europe. Conflicts involving that fund set off a downward spiral that ultimately led to Suntech's bankruptcy last year.

Beijing is eager to foster more clean power generation under its plan to build 35 gigawatts of capacity by the end of next year, in a bid to clean up the country's air and support the development of companies like Trina, Yingli and Canadian Solar. Thus it's likely to support the establishment of these new funds, and perhaps even provide them with some money.

But central policymakers also need to ensure these speculative new projects are economically viable and can find long-term buyers once they are complete. Failure to do so could spark a new crisis in the sector if these projects turn out to be lemons and cannot find long-term buyers, creating new financial woes for manufacturers just as they start to recover from the recent downturn.