Fraud Plagues Major Solar Subsidy Program in China, Investigation Suggests

Industry insiders fear that China's "Golden Sun" project will not only be ineffective, but will strangle many of the solar firms which blindly signed up

Apr 17, 2011

Image: Rooftop solar PV panels in China/Credit: Matthijs

"Golden Sun" is a Chinese solar subsidy scheme, set up with the primary objective of preventing the closure of 10,000 domestic solar PV businesses during the early days of the financial crisis. But the system has lacked rigorous oversight. Moreover, small and medium-sized firms that have rushed to take advantage of the subsidies risk being burned by the project that promised to save them. In this report, Yuan Ying winner of the "biggest impact" category at the 2011 China Environmental Press Awards investigates.

At the end of March 2010, the second round of bidding for China's Golden Sun scheme came to a close. Since then, close to 10 billion yuan worth of subsidies has been paid by the Chinese government to the domestic solar photovoltaics (PV) industry. Almost all the money in the scheme has now been allocated.

In July 2009, the Ministry of Finance, Ministry of Science and the National Energy Board launched the Golden Sun Demonstration Project. Under the scheme, the government said it would pay 50 percent of the investment for qualifying solar-power plants and transmission and distribution projects. For projects in remote regions not connected to the grid, the subsidy would rise to 70 percent. Today, subsidized schemes in planning have reached around 642 megawatts.

This round of subsidies can be seen as the Chinese state's strongest ever show of support for the solar PV industry.

When Golden Sun first started, an application round was launched in each province, stirring a frenzy of activity. According to the terms of the policy, each province was allowed to apply for financial support for a maximum of 20 megawatts of solar power, but this was not strictly adhered to. Shandong, for example, applied for finance for more than 100 megawatts, while large solar companies such as the Yingli Group put forward projects of up to 50 megawatts.

In the midst of the "first-come, first-serve" boom, businesses engaged in false bidding and used low-quality products.

According to an industry insider, a relatively high proportion of businesses in order to boost the subsidies they received from government declared their material costs to be higher than they actually were, a fraud that pushed up the cost of the whole system.

Moreover, the use of low-quality products (even including discarded returns from abroad) meant subsidy requirements were not being met. It is understood that some factories supplying crystalline silicone components declared costs of just 9.5 yuan per watt, and, for thin-membrane batteries, just 6.5 yuan 20 percent lower than the current lowest production cost.

There are two key reasons for this. First, in order to generate maximum business, the enterprises contracted under the Golden Sun project have done their utmost to keep prices down, and suppliers have not hesitated to take a loss in order to obtain orders. Second, some suppliers have allowed second-class components and defective stock to be absorbed within Golden Sun projects.

Wu Haijun, director of the energy department at the Ministry of Finance's economic planning division, said: "Anyone found perpetrating fraud, will be prosecuted."

By the end of this year, a spate of Golden Sun construction projects is likely to be completed, and all participating businesses will face a thorough inspection of their schemes.

Struggling to Pay

Large-scale solar firms and small to medium-sized enterprises had different reasons for rushing to take part in Golden Sun.

"We mostly made use of Golden Sun as a demonstration project for the purposes of reporting," said Yao Feng, director of public relations at Chinese solar giant LDK. "It is an exercise where the significance of the demonstration is greater than the impact of the actual project."

LDK's production capacity is 2,000 megawatts; under this round of Golden Sun, the company applied for funding for four schemes, totaling less than five megawatts. This is modest in comparison with its enthusiasm for Solar Roofs, Golden Sun's predecessor.

Yao Feng explained: "In the Solar Roofs Plan, the standard subsidy from the Ministry of Finance was 20 yuan per watt, which was profitable for us."

At present, the cost of solar-power generation is still higher than thermal-power generation and the Chinese government has not yet fixed a pricing regime for solar electricity coming onto the grid. Under these circumstances, the industry anticipated from the start of the Golden Sun project that firms would struggle to make a profit.

Zhang Fusheng, marketing manager at Richang New Energy Technology Company made a calculation: If you include the equipment, maintenance, construction and material costs, at the current commercial market price of 0.9 yuan per unit, then the payback period for one Golden Sun project is 21 years. Taking into account the 50 percent investment subsidy from the state, the payback period can in theory be shortened to 10.5 years.

"However, this is only a theoretical calculation, which does not take into account the number of days where electricity generation will not be possible because of rain or snow, or the fact the sun isn't shining. In the real world, there aren't even 200-days worth of power generation in one year, and peak electricity generation in one day only lasts around four hours. This makes the project payback period even longer," Zhang Fusheng sighs.

"No matter how you calculate it, Golden Sun projects will sustain a loss."

Richang New Energy, where Zhang Fusheng works, manufactures 50 megawatts of solar capacity a year. It is a typical small to medium-scale solar PV business. In China, there are thousands like it, following behind the star enterprises like Suntech and LDK. They have contributed to the "boom" in China's solar PV industry.

These smaller firms are in a very different situation to the big hitters. To them, Golden Sun schemes are not just dispensable demonstration projects, but "a lifeline," said Zhang Fusheng. In 2009, the financial crisis caused a significant decline in the export market for PV products. "We need state support. Golden Sun at least lets us get our machines up and running, so that our workers can afford to eat," Zhang Fusheng bluntly stated.

And so a large number of small to medium-sized solar PV firms have become the building blocks of Golden Sun. Through the construction process, the firms themselves bear most of the costs. But the requirements are beyond their means. Richang New Energy, for example, has registered capital of 10 million yuan, while building an ordinary solar PV power station costs tens of millions of yuan, far beyond Richang's capacity.

One way to plug the shortfall is to sell products.

"According to the Golden Sun regulations, procurement of materials for project construction should happen through an open bidding process, but if another firm's components are selected over ours, then all our efforts have been wasted," Zhang Fusheng said.

And so the bidding is a sham, and there is a tacit understanding that this is the case within projects participating in Golden Sun. In the absence of an effective bidding process, and facing a project that will certainly make a loss, many solar PV firms look for ways of economizing, cutting corners and using low-grade materials resulting in shoddy work.

A Real Helping Hand?

On July 21, 2009, the day after the Golden Sun subsidies were introduced, the value of shares in Suntech Power rose to $17.80. For large, listed companies like Suntech and LDK, there is no doubt that this was a timely helping hand, as they struggled with the impacts of the global financial crisis.

However, for the bulk of firms involved the small to medium-sized enterprises it is still unclear whether Golden Sun was a timely intervention, or merely a case of "drinking poison to stem thirst."

On March 22, Xue Liming, chairman of the Zhong Hai Yang Energy Technology Company, went on a flying business trip from Fujian to Beijing. His firm had applied for subsidies for four Golden Sun projects, among them a scheme to build a solar PV power station in Fujian province, which had already broken ground.

At that time, Xue's greatest worry was that his firm would not secure the subsidy. According to information published online by the Ministry of Finance, the Fujian project is 3 megawatts in size, meaning total required investment of around 87 million yuan ($13 million). At present, the 50 percent government subsidy close to 43 million yuan ($6.6 million) is being transferred step-by-step from central to provincial to municipal and county treasury. Xue Liming has already personally put up 20 million yuan ($3 million), and he is still waiting for the government funds.

It is the same situation as at Richang New Energy. The registered capital at Zhong Hai Yang does not exceed 40 million yuan ($6 million) and yet it wants to press ahead with four Golden Sun projects at the same time.

There is no doubt this is a risky investment for Xue Liming. 

Xue Liming hopes that he can turn his shares in Zhong Hai Yang into funds worth 1 or 2 billion yuan. In reality, even if the financial subsidies were to reach the participants more quickly, the only gain would be to keep the project schedule on track. It seems likely that to "gain both reputation and profit" in any meaningful way, these firms will have to wait for a clear pricing regime for solar-generated electricity to be introduced.

"I do not know who we should sell the electricity to, I do not know who will pay for it or what the price of electricity will be," Xue Liming said bluntly. His own savings are only sufficient to support the project for one year. It is generally believed within the industry that it will be at least another two to three years before the state proposes a grid price for solar PV-generated electricity.

At present, among the 200-plus Golden Sun projects that the Ministry of Finance has publicized, perhaps only half of the enterprises involved have production capacity in the region of 50 megawatts. That is to say, close to half are small to medium-sized enterprises facing the same dilemma as Zhang Hai Yang and Richang New Energy.

And so it is likely that the Golden Sun project will not only be ineffective, but will also strangle many of the businesses which blindly signed up to take part.

Waiting for Industrial Policy

"We hope that the state will develop a better industrial policy to lead the development of this industry," Yao Feng said.

Shi Zhenrong, chairman of Suntech, said that the policy he hopes to see the government implement is a solar feed-in tariff where solar power operators are guaranteed above market rates for the power they produce. Such incentives in countries like Germany have caused explosive growth in the solar industry.

However, at the moment, the focus of Golden Sun subsidies is on installation, rather than resolving the substantive issue of grid prices.

One industry analyst observed: "Our government holds in its own hand the right to approve each project."

From the Golden Sun experience, however, it is easy to conclude that the introduction of industrial policy can merely end up offering "paper progress." Golden Sun subsidies are divided up around the country based on a standard of 20 megawatts per province. But if you compare China's regions, it is clear that the east does not have the same advantages in terms of open land and sunlight as the west.

Beijing and Shanghai, for example, want to establish 20 megawatts of solar-energy production. But surely, this will be very difficult to achieve anywhere other than the deserts of western China. An industry expert asked: "Why does it have to be 20 megawatts in each area?"

Moreover, a lack of coherent regulation for implementing industrial policy the imperfect mechanism for approving Golden Sun projects is an example of this failure leaves large holes in the system.

An industry source said: "Introducing policy is a good thing, but some of the officials calling the shots lack a proper understanding of the solar industry and make the wrong decisions, serving only to confuse the market."

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