You've got to give it to China. When it sets its mind on something it goes big, and right now its putting a lot of time, energy, and money into dominating the solar industry.
According to a recent report from China's National Energy Administration, the country connected 5.04 GW of solar capacity in the first quarter this year. That's nearly as much as the 6.20 GW installed in the U.S. during 2014; and China is planning to install as much as 17.8 GW this year alone.
A desperate need for clean energy
While the solar industry in the U.S. is caught up in a debate about subsidies, net metering, and the impact on the grid, China is just looking for as much clean energy as it can find. Many of the country's most populous cities are literally choking on polluted air from an explosion in coal electricity generation and they're trying to find a way to reverse that trend.
Beijing is shutting down all of its major coal power plants in 2016 and wind and solar energy are ways to fill the gap in generation.
China's solar market is complicated
For companies trying to take advantage of the booming Chinese solar market, getting in isn't as easy as it seems. First Solar and SunEdison have virtually no presence there despite being two of the largest project builders in the world.
Instead, Trina Solar (NYSE: TSL), Yingli Green Energy (NYSE: YGE), JinkoSolar (NYSE:JKS), and other Chinese panel manufacturers have been the early movers in China. They were able to navigate the regulatory environment to get projects built, something U.S. companies haven't been good at so far.
SunPower (NASDAQ:SPWR) is making a big attempt to penetrate the Chinese market through two joint ventures with large Chinese companies. It was through these ventures that it signed the 40 MW deal with Apple in China earlier this month.
While the booming Chinese market is tough for U.S. companies to crack and has been dominated by China's domestic manufacturer it does have some interesting side effects in the solar industry.
The law of unintended consequences
When I see a country like China installing 5 GW in a single quarter the first thing I think of is the effect on solar panel prices. In 2011 and 2012 the industry struggled to survive as 70 GW of capacity was built to serve about a 35 GW global solar market.
Today, the market still has plenty of supply but demand is picking up; and with the U.S. and China set to install nearly 20 GW between the two of them there's hope for higher panel prices. There's also a premium on high quality products that are reliable for power plants and capacity is running thin. SunPower has been sold out of solar panels for over a year and has been able to maintain margins around 20% despite higher costs than commodity competitors.
If the trend continues, the next tier of manufacturers like Trina Solar, Canadian Solar, and Kyocera are going to be able charge higher prices and increase margins as 2015 goes on. There have even been predictions that the industry will be undersupplied of solar panels by late 2015 or 2016.
All of this is great for panel manufacturers, but it's not great for installers. SunEdison, SolarCity (NASDAQ:SCTY), and Vivint Solar (NYSE:VSLR) all buy panels from third parties, making them dependent on the market's pricing. That's why SolarCity is building its own manufacturing plant in upstate New York -- it saw this unintended consequence of solar growth coming.
China's solar boom will have worldwide impacts
I don't see any end in sight to China's desire to grow its solar industry. As it grows, I would expect China to be a leader in new technologies like energy storage that take some of the intermittency out of solar and make it more reliable to the grid.
China's growth will have an incredible big effect on the solar industry as a whole and solar manufacturers the world over should be cheering these developments. Installers will have to adjust and watch how margins unfold in 2015 to see if the industry's growth is a help or hurt to their income statements.