China solar: On-grid tariffs of Rmb0.73-0.99/kWh likely

From DB

Overwhelming interest from state-owned power gencos
According to Caijing today, the final outcome of China's second round bidding
for 13 on-grid solar PV projects (280MW in total) is expected to be announced soon. The on-grid tariffs for winning bids are likely to be between Rmb0.7288/kWh (US$0.11/kWh) to Rmb0.9907/kWh (US$0.15/kWh), 9-37% below the tariffs for earlier projects. According to Caijing winning bidders are likely to be state-owned IPPs (Huaneng, Datang, Huadian, Guodian, China Power Investment Group, and Guangdong Nuclear) and China Energy Conservation Investment.

Mid-single digit project IRR on our estimate
Based on the above tariffs, project IRR is likely to be around mid-single digit. We believe such a low level is mostly driven by the “land acquisitive" mentality of state-owned companies which are willing to accept a relatively low
return so as to establish presence. Project construction period would be c.
2 years, which could allow some scope for return enhancement if module
and balance of system costs decline in the coming quarters. However, a
high-single digit project IRR would still be challenging in our view.

Remain positive on the China solar PV market longer-term
At such level of tariffs, margin for supplying solar PV modules in China would
likely be less attractive vs. to European countries. However, we believe a
lower module production cost of less than US$1/W in 2011E would allow
integrated players such as Yingli and Trina to still earn a reasonable margin.
Through supplying modules and establishing a long-term relationship with
state-owned power gencos, we think Trina, Yingli, and Suntech are likely to
capture major market share when the market becomes more scalable in the
next 3-5 years. We expect aggregate on-grid solar installed capacity to reach 5GW by 2015 and 20GW by 2020 (from less than1GW in 2010).