By staff reporter Li Qiyan and intern reporter Ma Jingying

(Caijing Magazine) China's largest photovoltaic solar power project, the 10 megawatt Dunhuang station in Gansu Province, is getting under way with a set price for electricity that may become a new, ultra-low benchmark and a ticket to success for the growing industry.

A consortium of three companies, including a Belgian firm, won the Dunhuang Project tender with an on-grid bid of 1.09 yuan per kilowatt hour.

Although the consortium's bid was not the lowest, it was unprecedented for China's solar energy sector. Previous, on-grid prices for four solar projects in China were fixed at 4 yuan/kwh.

The winning Dunhuang bid submitted by the consortium partners -- Jiangsu BEST Solar Energy High-tech Co. Ltd., China Guangdong Nuclear Energy Development Co. Ltd. (China Guangdong Nuclear Energy), and Belgium's Enfinity -- is expected to have a long-lasting effect on the Chinese photovoltaic (PV) industry.

"The Dunhuang Project is a bellwether for price-setting," an official from the National Development and Reform Commission (NDRC) told Caijing. "A host (of projects) will follow."

That "host" would include several, soon-to-be-launched PV projects. NDRC officials predict that setting 1.09 yuan/kwh as a benchmark and launching a new batch of solar programs will force upstream PV enterprises to lower their prices for supplies and raw materials. The long-term goal is to drive on-grid solar prices lower, to below 1 yuan/kwh, and thus promote the industry's development.

NDRC, the National Energy Administration (NEA), the State Council Research Office and other agencies recently conducted intense research on PV enterprises. Based on that research, NDRC submitted a proposal for developing the industry to the State Council. If the proposal is approved, more PV programs are expected to be launched in the near future.

This strategy differs from those found in a number of developed nations, where subsidies are offered to promote the application of solar energy.

"Comparatively speaking, it is more realistic for China to drive the development of the PV industry through market competition," the NDRC official told Caijing.

If additional solar energy projects are launched soon after Dunhuang, market competition is expected to push down prices for polysilicon – a key material used in solar panels.

But uncertainty about the feasibility of this pricing strategy remains. An on-grid price of 1.09 yuan/kwh is still much higher than the cost of traditional, fossil fuel-generated electricity.

PV plants that generate power using solar cells, for which polysilicon is a core material, to convert sunlight into electricity. Compared with traditional fossil fuels, solar power generation has the advantage of emitting fewer greenhouse gases and pollutants. However, high costs have limited solar power's development.

Bidding Process

Potential bidders for Dunhuang were invited to make offers last December. The project -- China's largest PV power plant demonstration -- calls for a required investment of 500 million yuan and annual generation of up to 16.37 million kwh. NEA said the winning bidder should finish construction in 18 months and operate the franchise for 25 years.

The competition began in late March with a shock: A partnership of Yingli Green Energy (NYSE: YGE) and SDIC Huajing Power Holdings (SSE: 600886) submitted the lowest bid of 0.69 yuan/kwh.

A source at SDIC Huajing told Caijing the companies decided to try their luck but had few advantages in the industry. Their offer, based on the price of wind power, represented their hope to gain market experience through the project, the source said.

Current, on-grid prices for thermal power ranges between 0.30 and 0.40 yuan/kwh, while wind power costs about 0.50 yuan/kwh.

Ma Xuelu, chief strategy officer at Yingli Group, told Caijing that, based on PV module production costs, it would be possible for the companies to break even at 0.69 yuan/kwh.

Other bids ranged from near 1 yuan/kwh to 2 yuan/kwh. But the consortium led by Guangdong Nuclear won with the second-lowest offer, 1.09 yuan/kwh.

That winning price stirred controversy and drew criticism. As a likely benchmark, some feared it would have a chilling effect on future competition, slowing the industry's development.

Different opinions were expressed at NDRC. "The price is much lower than expected," one tender participant told Caijing. "But we intended to find the lowest price through project bidding."

Under pressure, SDIC Huajing withdrew from bidding in early June, prompting NDRC to accept the consortium's bid. Around the same time, however, SDIC Huajing successfully bid for another PV project, offering an on-grid price of 1.09 yuan/kwh.

Polysilicon Bubbles

The PV industry is optimistic that solar power generation costs will fall. At the annual industry meeting in Luoyang in April, 13 PV enterprises including Suntech Power Holdings (NYSE: STP) announced the on-grid PV price would be controlled at 1 yuan/kwh by 2012. Yingli's Ma claimed some domestic enterprises including his company would reach that goal as early as 2010.

China is the world's largest producer of PV products and relies heavily on imported polysilicon as a raw material. Meanwhile, 98 percent of Chinese-made PV modules are exported.

In 2007, global polysilicon production capacity had reached 45,000 tons, while demand in that period reached 52,000 tons. The price of polysilicon jumped in 2002 to US$ 20 per kilo from US$ 10, and then soared to US$ 400 per kilo by the end of 2007. It got as high as US$ 450 per kilo last year.

Spurred by these rising prices, the global PV industry expanded rapidly. China was no exception. NDRC data showed that China's PV industry capacity climbed to 5 gigawatts, accounting for 37 percent of global output and putting China in the global lead for PV production capacity.

Meanwhile, Chinese enterprises have expanded production of high-purity polysilicon. Several announced in the first half 2008 aggressive plans to produce more than 10,000 tons combined every year.

According to the investment firm Great Wall Securities, China's polysilicon output was only about 4,100 tons in 2008, accounting for only 6.7 percent of global output. But polysilicon production capacity was as high as 11,600 tons and, with new capacity coming on stream in 2009, output could reach 20,000 tons, producing enough solar cells to generate 2.5 gigawatts.

The 2008 financial crisis caused demand for polysilicon to slacken, turning a shortage into oversupply. Great Wall analyst Zhou Tao estimated that global demand for polysilicon will be just 55,700 tons in 2009, creating a surplus of 81,500 tons. Since the fourth quarter 2008, polysilicon prices have plummeted to below 100 dollars per kilo, down more than 80 percent.

With the decline in polysilicon costs, PV module prices fell as well. An executive at Yingli said the average PV modules price slipped to US$ 3.19 in the fourth quarter 2008 from US$ 4.11 in the first quarter.

NDRC expert Hu Runqing said the burst of the polysilicon bubble created an opportunity to promote PV power generation in China. She told Caijing the price slump has led to a decline in PV power plant installation costs since then, creating a rare opportunity to reduce on-grid solar power prices.

"The PV industry is experiencing a turning point now," Hu said. "A rapid cost decline is conducive to the introduction of policy support."

Yingli's Ma previously said the cost of high-purity polysilicon produced with new technology would be controlled at US$ 24 to US$ 28 per kilo, far below the present price of about US$ 60.

David Renné, vice chairman of the International Solar Energy Society, said at the Asian PV Summit in mid-June that PV module prices should be slashed.

Subsidy or Market?

A China Electricity Council (CEC) expert said the
Dunhuang tender should give PV power generation a welcome "push." Help is needed because, at present, new energy development mainly focuses on wind power, and PV programs have lagged due to high costs.

"If PV power generation costs can be reduced to 1 yuan/kwh, the PV industry will have a limitless future in China," said the CEC expert.

But what's the best way to stimulate business for power generation enterprises and end-users?

High costs for solar power have prompted many governments to subsidize the industry. Germany and Spain, for example, are applying a method of "fixed on-grid power prices" to support solar power systems that equally divide extra costs among users.

China has tried subsidies as well. Jiangsu Province, home to most of China's PV industry, announced in June a large-scale financial support policy that set a fixed price for PV generation. According to the policy, Jiangsu will create a special subsidy with funds raised by collecting fees from electricity users. The subsidy will be mainly used to support PV power generation projects and desulphurization projects at coal-fired plants in the province.

But Jiangsu's move may be an exception in China. For that reason, market competition methods, such as the Dunhuang bidding process, have more support as a catalyst for solar power in China.

"It is impractical to promote Jiangsu's subsidy policy across the country," a source close to NDRC told Caijing. "Subsidies can support the development of renewable energy in the short term, but in the long run, the sound development of the industry should be achieved through market competition."

1 yuan = 14 U.S. cents