The Chinese Ministry of Finance proposed its “Solar Roofs Program” on March 23, 2009, in order to jumpstart the domestic Chinese solar market that has until now been virtually non-existent. By our estimates, demand in China was about 70 MW in 2008, or less than two percent of the 4.5 GW of worldwide demand. The project would offer financial incentives up to CNY 20/watt (depending on technology and degree of integration with the building) of installed PV capacity for projects that meet the following standards:

• Installed capacity for projects must be at least 50 kWp.

• The systems must meet efficiency standards of 16 percent for monocrystalline products, 14 percent for multicrystalline, and six percent for amorphous silicon.

• Priority will be given to “building-integrated PV applications,” grid-connected applications, and projects involving schools, hospitals, and government agencies.

The proposed subsidy is significant, for it will represent over 50 percent of the total cost of installation of a panel. CNY 20/watt is about the average cost of a solar panel (just under $3.00 per watt), so a project developer would only have to pay for installation, which generally costs slightly less than the panel itself. This subsidy would differ from the feed-in tariff structure, made popular by Germany and Spain. While feed-in tariffs require utilities to purchase electricity from solar power plants at a higher-than-market rate, the Chinese subsidy will be a capital-cost subsidy, in which the government provides a fixed amount of money per watt or kilowatt installed.

The terms of the subsidy tell us a few things about what the Chinese government is aiming to achieve. A 50 kw system is a fairly large system for a rooftop application, since a mid-level solar panel is generally in the 150-200 watt range and a project of that size would require over 300 panels. This seems to indicate that the subsidy will promote larger-scale rooftop projects, which rules out residential applications and likely targets the commercial market. The government also seems to be promoting technological advancement by setting minimum efficiency standards. Yingli Green Energy (NYSE: YGE), for example, only sells a handful of models of its multicrystalline panels with over 14 percent efficiency. Finally, there has been some discussion as to the exact meaning of “building-integrated” applications. BIPV in the US generally refers to solar panels that are built directly into new construction, rather than simply mounted on rooftops. We think that the reference in the subsidy proposal most likely does not refer to BIPV applications in the US sense, since the market for building integration in China is very small and crystalline products are not generally used. However, if it does in fact refer to such applications, they may simply receive priority over rooftop-mounted projects, rather than the latter being disqualified from the subsidy entirely.

Still unclear, however, are the limitations of the subsidy. Firstly, the government has not set a time schedule for designing the program, so it is still unknown when the program will be finalized and when incremental demand will be seen. Secondly, the funding budget for the program has not yet been determined, and no cap has been decided upon, so the number of MW to be supported is still unknown. We think it is unlikely that the program will have no cap, especially after Spain’s rush of installation in 2008 before the country capped its 2009 capacity. There have been rumors of a cap of 180 MW (representing a budget of CNY 2.5 billion), which would significantly limit the scope of the program.

Overall, the subsidy is a generous one, and when it is finalized it will surely be a positive development for China-based solar module producers like Suntech (NYSE: STP), Yingli, JA Solar (NASDAQ: JASO), and Trina Solar (NYSE: TSL). At the least, it is an indication of the Chinese government’s support of the solar industry. However, we think there is likely to be a cap, and we estimate demand in China growing an incremental 200 MW in 2009 as a result, which is not very substantial in a worldwide demand pool of about four gigawatts.