How China Could Drive More Solar Installations After a Record 2017

China will likely have installed over 50 gigawatts (GW) of solar power in 2017, enough to power 8.2 million American homes, and accounting for over half of all solar installed worldwide. Installations have been driven by favorable policies, something the country could decide to cut back in 2018 if it thought the solar industry had gotten too big.

But that doesn't appear to be the case based on recently released feed-in tariff rates in China. Rates are being cut 12% to 15% from 2017 levels -- significant reductions, but lower than some analysts projected. And they're high enough to likely lead to strong economics on solar developments, which could drive an even bigger year in 2018.

China's feed-in tariff rates for 2018

New feed-in tariff rates for utility-scale solar will be 0.55 yuan per kilowatt hour (kWh), or about $0.08 per kWh, with Class 2 and Class 3 regions getting a rate of 0.65 yuan and 0.75 yuan per kWh, respectively. The zones are based largely on the solar intensity and cost of construction in different parts of China.

Cutting tariffs may seem like bad news for the solar industry, but a rate of $0.08 per kWh is still artificially high for a developed country. Bids in the Middle East have come in below $0.02 per kWh, and bids in Mexico have consistently been under $0.05 per kWh, with the lowest under the $0.02-per-kWh mark.

The implication is that it will remain economical to build solar projects in China, and developers like Jinko Solar (NYSE: JKS), Canadian Solar (NASDAQ: CSIQ), and Trina Solar will continue to do so.

There could also be a rush to build projects in the first half of next year because the National Development and Reform Commission (NDRC), which sets rates, decided to grandfather approved projects into 2017 feed-in tariff rates as long as they're completed by June 30, 2018.

Given China's ability to install solar at an incredibly rapid rate, I wouldn't be surprised to see a rush of installations in the first half of 2018, driving another record year of installations and leading to a shortage of solar panels worldwide.

Can a U.S. company grab a piece of the Chinese market?

One company I'm watching in China is SunPower (NASDAQ: SPWR). It formed a joint venture with Dongfang Electric Corporation and Tianjin Zhonghuan Semiconductor to manufacture mono-PERC solar cells and P-Series solar panels in China. There's already 1.2 GW of mono-PERC manufacturing in operation in China, with an equivalent amount of P-Series capacity being built, but the ultimate goal is to build 5 GW of capacity by 2021 or 2022.

The joint venture will send at least one-third of its solar panels to projects in China, where SunPower also has project development joint ventures. If these are able to leverage the existing manufacturing capacity and the Oasis power block -- a pre-engineered solar power system that includes racking, inverters, design, and cleaning systems -- it could be a boon for the U.S. manufacturer. But time will tell if a U.S. company can make even the slightest inroads in China.

What does this mean for solar investors?

The big takeaway from China's tariff announcement is that solar panels will likely remain in short supply in 2018. We've seen a traditionally oversupplied market suddenly become undersupplied in 2017 as Chinese and U.S. demand has surged and manufacturers have consolidated market share. The result was higher margins for manufacturers and even small profits -- something investors should hope will continue.

If higher margins are sustainable because demand is growing faster than supply, it could finally make the solar industry worth investing in again. I've long thought that a handful of manufacturers would eventually consolidate power and use their scale and technology lead to build a sustainable solar business, and in 2017 and 2018, we may finally be seeing that happen, driven by China's generous feed-in tariff scheme.

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Travis Hoium owns shares of SunPower. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.