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July 2014

Issue 7

Asia Pacific
Power & Renewables
BMI's monthly market intelligence, trend analysis and forecasts for the power & renewables industry across Asia Pacific

ISSN: 2054-1430

ASIA

Power Ratings Stable Amidst Modest Revisions

BMI View: Our power Risk/Rewards (R/R) ratings for the majority of Asian states remain unchanged this quarter, with minor revisions to
the scores of just four countries. Three of the four revisions were prompted by changes in the economic or political landscape, while the last
revision was brought on by the completion of a major power project.
The key themes and trends identified throughout our Asia Power Risk/Reward (R/R) ratings can be summarised as follows:

Economic activity continues to soften across Asia, particularly in Japan and China. We expect industrial production and electricity
consumption in these countries and their major trade partners to remain weak.

There were several major political developments in the region, such as the lower house elections in India, and the military coup in
Thailand. These developments affected India positively and Thailand negatively.

China maintains its top place ranking in the regional ratings, owing to its unrivalled market size (in terms of capacity, generation and
consumption) and its substantial growth prospects.

Ratings Relatively Stable This Quarter

The majority of our power R/R ratings for the Asian states remain unchanged this quarter, with minor revisions to the scores of just four
countries. Three of the four revisions were prompted by changes in the economic or political landscape, while the last revision was brought
on by the completion of a major power project.
We highlight that the Country R/R scores are an important metric in our overall R/R ratings as electricity generation and capacity
investments are highly linked to the economic activity - such as investment spending and industrial production - and the political
environment.
Stratified Ratings, China Remains On Top
Asia Power Risk/Reward Ratings, Scores Out Of 100

*Higher score = lower risks. Scores out of 100. Source: BMI

Japan: Down On A Deteriorating Economic Outlook

We had moderated our R/R ratings for Japan in the previous quarter due to heightened political risks and potential downside to economic
growth. This quarter, we have once again revised the ratings down as the country's economic outlook deteriorates further. Growing evidence
of an 'Abenomics' hangover prompted our Country Risk team to downgrade both their short- and long-term forecasts for the Japanese
economy in April 2014, and culminated in similar moderations on our power forecasts (see 'Power Landscape Evolving For Asian Giants',
June 30). We now expect electricity consumption in Japan to grow at an average of just 0.5% per annum between 2014 and 2023 (down from
0.9% previously), leading us to revise down the market rewards scores for Japan.

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CONTENTS

Asia ........................................................................................................................................................................ 1
Power Ratings Stable Amidst Modest Revisions ................................................................................................................ 1
Table: ASIA POWER RISK/REWARD RATINGS .................................................................................................................... 3

Power Landscape Evolving For Asian Giants .................................................................................................................... 3

Table: FACT BOX: KEY STRATEGIES OF FOURTH BASIC ENERGY PLAN ...................................................................................... 4

China ..................................................................................................................................................................... 5
Power Views In Play ................................................................................................................................................... 5
Table: Fact Box: Statistics Provided By President Xi in June 2014 .............................................................................................. 5

Carbon Cap Would Supercharge Power Sector Diversification .............................................................................................. 8

New Tariffs Address Loophole, But With Widespread Ramifications .................................................................................... 10

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Real Wages In Relentless Decline

Japan - Real Household Income, % chg y-o-y

Source: BMI, Ministry of Internal Affairs and Communications

We highlight that the level of political risk faced by the power sector has also increased over the last quarter, in line with our expectations.
On May 21, the District Court of the Fukui Prefecture ruled in favour of a lawsuit by 189 plaintiffs to block the restart of two reactors at the
Ohi nuclear power plant. We previously highlighted the risk local communities and governments pose to reactor restarts, and see this risk
coming to the fore. This is because the ruling by the Fukui District Court creates a legal precedent for local communities across Japan to try
to prevent or at least delay reactor restarts (see 'Reactor Restarts Threatened By New Legal Precedent', May 23).
Thailand: Heightened Political And Economic Risks
We have revised down the R/R scores for Thailand due to the political turmoil that has gripped the country since November 2013, and its
increasing impact on the economy. Thailand's economy is clearly reeling from the strain of the political unrest, with real GDP growth
contracting by 2.1% quarter-on-quarter in Q114. The manufacturing and construction sectors have been hit particularly hard, contracting by
3.1%year-on-year (y-o-y) and 12.4% y-o-y respectively (see 'Economic Resilience Fading Fast', May 21). This will act as a clear drag on
electricity consumption, and we have moderated our forecasts and ratings for the Thai power sector as we see no end in sight to the crisis.
Construction Sector Acting As A Major Drag
Thailand - Real GDP Growth, % chg y-o-y

Source: BMI, BoT

While we continue to expect an eventual return to civilian government, we note that the military appears to be in no rush to hand over power,
and this poses a risk to our Long-Term Political Risk Rating. The head of the military junta General Prayuth Chan-ocha has refused to give a
timeline for the eventual handover of power, and such a move seems unlikely to happen within the next 12 months. We note that the longer
the junta remains in power, the more likely it is that a fully functioning democracy will not be formulated anytime soon. Such a scenario
would negatively affect policy continuity and clarity over the long-term (see 'Risks Rise That Military Could Outstay Its Welcome', June 25).
India: Optimistic On Modi Victory
We believe the victory of Narendra Modi and the Bharatiya Janata Party (BJP) in India's lower house elections in May 2014 will have a
positive impact on the business environment for the power sector, and have revised up our ratings accordingly. Modi is keen on addressing
the country's chronic shortage of electricity due to its detrimental impacts on economic growth, and his administration has already taken a
number of direct and indirect steps to boost growth in the renewables sector (see 'Solar: State- And Federal-Policies Increasingly
Conducive', June 24). The BJP will also look to reduce red tape for power projects, improve the fuel availability for thermal projects, and
possibly privatise certain parts of the sector to improve competitiveness and access to capital (see 'Power Sector To Be Modi-Fied', May 22).

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Singapore: Greater Energy Security

We have slightly revised up our R/R scores for Singapore following the completion of the country's first LNG-fired power plant. The plant
allows the country to diversify its energy sources and reduce its reliance on piped gas from Malaysia and Indonesia. Singapore currently has
to import nearly all its fuel as it has no known domestic hydrocarbon reserves, with piped gas from Malaysia and Indonesia accounting for
more than 90% of the electricity generated in Singapore. This heavy reliance on Malaysia and Indonesia for gas is not ideal as it exposes
Singapore to supply shocks and geopolitical risks. The LNG-fired plant helps to reduce these risks as LNG can be sourced internationally,
prompting us to revise up our ratings for Singapore's power sector (see 'New LNG-Fired Plant Furthers Hub Ambitions', June 4).
Table: ASIA POWER RISK/REWARD RATINGS

Industry
Rewards

Country
Rewards

Industry
Risks*

Rewards

Power R/R
Ratings

Country Risks* Risks*

Rank

China

88.0

52.4

74.3

50.7

63.4

56.2

68.0

Australia

52.0

56.6

53.8

77.4

80.0

78.5

62.4

South Korea

67.5

44.0

58.5

56.6

76.9

65.3

60.9

India

72.3

50.8

64.0

53.1

56.1

54.4

60.6

Malaysia

53.3

66.6

58.4

62.4

66.6

64.2

60.4

Vietnam

71.3

56.4

65.5

40.3

54.1

46.2

58.8

Indonesia

63.5

57.2

61.1

43.2

56.1

48.7

56.8

Japan

56.5

27.4

45.3

72.1

69.9

71.1

54.3

Singapore

36.0

44.8

39.4

75.6

83.9

79.2

53.3

Taiwan

58.0

40.0

51.1

56.4

57.8

57.0

53.2

10

Thailand

57.5

47.0

53.5

49.9

53.8

51.6

52.8

11

Philippines

40.3

58.8

47.4

49.5

58.0

53.1

49.4

12

Sri Lanka

41.5

62.0

49.4

35.8

51.6

42.6

47.0

13

Cambodia

44.5

62.2

51.3

27.1

36.9

31.3

44.3

14

Hong Kong

30.8

33.0

31.6

65.1

71.0

67.6

44.2

15

Pakistan

40.3

49.8

43.9

38.3

38.2

38.2

41.9

16

*Higher score = Lower risks. Source: BMI.

Power Landscape Evolving For Asian Giants

BMI View: We have slightly revised down our 2014 forecasts for electricity generation in Asia this quarter due to deterioration in the
economic outlook for several countries in the region. Our forecasts for Japan experienced the most significant revisions due primarily to a
slowing economy and a new energy plan. We also see growing upside risks to our power forecasts for India, while our long-term outlook for
the broader Asian power sector remains unchanged and positive.
The near-term economic outlook for Japan and China continues to deteriorate, which is a trend we had highlighted and incorporated in our
previous analysis of the Asian power sector (see 'Slowdown In Major Asian Economies Hurts Regional Power Outlook', April 1). While we
have maintained our forecasts for China this quarter, we have moderated our forecasts for Japan due to a worse-than-expected deterioration
in its economy (see 'China, Japan: Further Signs Of Weakening Growth', May 6).
Japan: Economic Risks At The Fore
We had highlighted signs of an economic slowdown in Japan in our previous analysis of the sector, and said that this could lead to a
slowdown in electricity consumption and generation growth. This risk has materialised, with growing evidence of an 'Abenomics' hangover
prompting our Country Risk team to downgrade both their short- and long-term forecasts for the Japanese economy in April. We now expect
the Japanese economy to grow at a real rate of 0.9% in 2014 (down from 1.3% previously), with recent weakness in purchasing managers
index readings, still-negative real wage growth, and the ongoing widening of the trade deficit all contributing to the revision (see
'Downgrading Growth As Abenomics Hangover Kicks In', April 24). We also tapered our long-term growth expectations for Japan on the
back of negative developments in the business environment and the increasing likelihood for authorities to redouble stimulus efforts to the
detriment of wealth creation and financial stability.

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Disappointing Wage Growth

Japan - Real Wage Growth, % chg y-o-y 6mma

Source: BMI, Ministry of Health, Welfare and Labour

These revisions have also translated into similar moderations in our power forecasts, and we now expect electricity consumption in Japan to
grow at an average of just 0.5% per annum between 2014 and 2023 (down from 0.9% previously). We also moderated our forecasts for the
various components of generation. Gas- and oil-fired generation experienced the most aggressive moderation, with coal and nuclear energy
generation receiving less aggressive revisions. This is in line with the country's fourth Basic Energy Plan. The plan, approved by the Cabinet
on April 11, highlighted coal as an important baseload source, and reversed a plan to phase out nuclear energy (see 'Nuclear Proves Critical,
Coal Remains In The Mix', April 15).
Table: FACT BOX: KEY STRATEGIES OF FOURTH BASIC ENERGY PLAN

Generation type

Policy Change

Nuclear

This new policy reverses the previous administrations' plans to gradually phase out nuclear energy, and defines nuclear energy as an 'important
baseload power source' without specifying the share of nuclear in the nation's energy mix.

Conventional

Coal and hydropower were highlighted as important baseload sources, with coal set to play a major role in the policy over the long-term.

Renewables

The new policy said that Japan would aim to surpass renewable energy targets in past plans, but did not set any specific targets. The previous
target was for renewable energy to account for 13.5% of total power generation in 2020 and around 20.0% in 2030.

Energy Mix

Minister for METI Toshimitsu Motegi told reporters after the cabinet meeting that the government might decide on an ideal energy mix within
two or three years.

Source: Ministry of Economy, Trade and Industry

We note that Japan's nuclear sector continues to present significant risks to both our outlook for the country's broader power sector. On May
21, the District Court of the Fukui Prefecture ruled in favour of a lawsuit by 189 plaintiffs to block the restart of two reactors at the Ohi
nuclear power plant. We previously highlighted the risk local communities and governments pose to reactor restarts, and see this risk coming
to the fore. This is a major risk to reactor restarts in Japan as the local authorities must give their approval for reactors in their jurisdiction to
be restarted (see 'Reactor Restarts Threatened By New Legal Precedent', May 23). There is also a risk for a greater-than-expected number of
reactors to be restarted, and this poses an upside risk to our forecasts (see 'Core View In Play: Nuclear In The Mix', March 18).
India: Upside Materialising
We had said in our previous analysis that the outcome of India's lower house elections in May 2014 posed an upside risk to our forecasts, and
this has materialised. We expect the election of Narendra Modi and the Bharatiya Janata Party (BJP) to have an impact on the power sector
as Modi is keen on addressing the country's chronic shortage of electricity due to its detrimental impacts on economic growth. Modi himself
had introduced several reforms during his time as Chief Minister of Gujarat (2001-2014), which are widely credited for helping the state
avoid persistent power shortages.
We believe that Modi will try to implement regulations and reforms that are conducive for growth across all parts of the power sector. The
Modi administration has already taken a number of direct and indirect steps to boost growth in the renewables sector (see 'Solar: State- And
Federal-Policies Increasingly Conducive', June 24). The BJP will also look to reduce red tape for power projects, improve the fuel
availability for thermal projects, and possibly privatise certain parts of the sector to improve competitiveness and access to capital (see
'Power Sector To Be Modi-Fied', May 22). That said, we have refrained from revising our forecasts for the Indian power sector this quarter as
we are waiting for the administration to make progress in passing legislation on the sector.
Beyond 2014: Outlook Stable And Sanguine
Our outlook beyond 2014 remains relatively stable and we are forecasting electricity generation in the region to grow at an average rate of
5.1% per annum between 2014 and 2023. This is notably higher than the global growth average, which we attribute to several reasons:

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Economic and demographic growth: We believe that emerging Asia is set to outperform the global economy over the medium- to longterm due to positive demographic and structural factors, and this is set to drive electricity consumption growth over the long-term.

Low electrification rates: Electrification rates in Asia are relatively low, and are set to increase alongside economic and technological
development in the region. Several countries in the region have already initiated programmes to improve electrification rates, with
Myanmar's first 500kV line being a key example (see 'Myanmar Transmission Project Desperately Needed', March 6).
Electrification Rates Still Low
South East Asia - Electricity Access In 2009, %

Source: IEA

Positive regulatory developments: The majority of governments in Asia are pushing for greater competition, transparency and
sustainability in their power sectors through various reforms. A number of countries have already allowed electricity prices to increase,
and we see room for price increases and reforms in the future (see '2014: Upward Pressure On Electricity Tariffs In Asia', January 10).

CHINA

Power Views In Play

BMI View: The shift towards energy efficiency and lower emissions, particularly through an emphasis on nuclear and renewable
energy, has been reaffirmed by the top echelons of the Chinese government. This validates our forecasts for the evolution of the Chinese
energy mix, with nuclear and renewable energy set to gain the largest shares from coal over the coming decade.
During a meeting of top-level Chinese government officials on June 14, President Xi Jinping presented some key growth statistics on the
country's energy sector, and said that the country 'should lose no time in constructing nuclear power projects in eastern coastal regions'. He
emphasised the importance of a diverse energy mix, and how the clean and efficient use of coal and development of other energy sources
were crucial to continued development. Xi also said that the nation would have to 'rein in irrational energy use and control energy
consumption by fully implementing energy-saving policies'.
Table: Fact Box: Statistics Provided By President Xi in June 2014

Energy Mix (End-2013)

Generation and fuel consumption growth in 2013

Solar Generation Growth

122%

Thermal

80.4%

Wind Generation Growth

35%

Nuclear

2.1%

Gas Consumption Growth

Coal Consumption Growth In 2012

15.4%

Hydropower

15.0%

1.9%

Renewables

2.5%

Source: Chinese Media

The statements and statistics announced by President Xi on June 14 reaffirm our outlook for the Chinese power sector, particularly with
regards to the need to diversify the energy mix and improve energy efficiency. As we have said previously, the government faces a
tremendous challenge in finding ways to grow energy supply at the same rate as demand, while contending with factors such as fuel
availability, the cost of generation, and environmental impacts. This has led the government to focus on the development of cleaner energies,

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with the country's 12th Five-Year Plan (2011-2015) outlining plans to boost the share of non-fossil fuels in primary energy consumption and
installed generating capacity to 11% and 30% respectively by 2015.
A Growing Pollution Problem
Global - Increases In Energy-Related C02 emissions by fuel type (non-OECD), 1990-2040 (billion metric tons)

Source: EIA

Some of our major views on the sector include:

Bullish nuclear: We have been bullish towards the growth prospects for China's nuclear generation industry since the country resumed its
new build programme in 2012 (see 'Third Generation Reactors Usher In A New Atomic Age', August 29 2013), and said that the country
was on track to exceed its 2020 target of 58GW capacity (see 'Nuclear Sector On The Path To Criticality', March 13). Our outlook is
based on the scalability, efficacy, and environmentally friendly nature of nuclear energy, which makes it an extremely viable source of
energy for China. We note that nuclear energy accounted for only 2.1% of the country's generation mix at the end of 2013, and we see
tremendous upside for the sector if private capital were to be brought in (see 'Nuclear IPO: Economic And Environmental Motivations',
May 7).
Ambitious Nuclear Plans
China - Nuclear Capacity Data And Forecasts (GW)

Source: f = BMI/Government forecast. Source: BMI, EIA, World Nuclear Association, CNNP, CGN

Bullish renewable energy: We have also been extremely optimistic on the growth prospects for the renewable energy sector, and find
President Xi's statements in line with our expectations. We correctly predicted there would be several regulatory changes in the sector in
2013 (see 'Renewables Outlook Stable Despite Major Developments', November 4 2013), and highlight that our 2013 growth estimate for
solar generation (of 120%) was accurate (122%). We note that the political and operating environment for renewable energy developers
and operators remains conducive (see 'Mega Solar Project Highlights Continued Sector Attractiveness' January 7), and are forecasting
strong and sustained growth in 2014 and beyond.

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Wind And Solar Still Growing Aggressively

China - Non-Hydropower Renewable Capacity By Type, GW

e/f = BMI estimate/forecast. Source: BMI, EIA, UN Data

Conventional to grow as well: We had said in May 2013 that coal-fired generation will remain integral to the Chinese power sector, and
that the sector would have to find ways to reduce emissions intensiveness (see 'Pollution In China: Clean Coal The Key', May 16 2013).
This is in line with statements and statistics (coal consumption grew only 1.9% in 2012, compared to an annualised growth rate of 8.3%
between 2002 and 2011) provided by President Xi. We had also predicted that gas-fired generation would grow aggressively - forecasting
generation to grow at an average annual rate of 16.2% between 2014 and 2023 - and the growth of demand for natural gas in the past two
years (15.4% in 2012 and 13.9% in 2013) reaffirms our expectations.
China Already At The Top
Global - Thermal Coal Exports (LHS) & Imports (RHS) By Geography (2012e)

e = World Coal Association (WCA) estimate. Source: BMI, WCA

Energy efficiency: We highlighted the increasing momentum behind smart grid and meter development in China in February, and this
could help improve energy efficiency and reduce the rate of electricity consumption growth in the country (see 'Smart Grid: New Highs,
But Early Adoption Woes', February 20). We believe that the rate of development is likely to accelerate as China is behind its energy
efficiency targets based on President Xi's statements. According to President Xi, China aims to reduce energy consumption per unit of
GDP by 16% from the 2010 level by 2015, but this had only dropped 9% between 2011 and 2013, accounting for only 54% of the overall
target.

We note that Chinese officials had, at the start of June, made mention of plans to introduce a cap on carbon emissions (possibly an
incremental cap), and that this has the possibility to create huge opportunities for investment (see 'Carbon Cap Would Supercharge Power
Sector Diversification', June 6). While we are unsure about the efficacy and enforcement of emissions reduction targets in China, we believe
that even the discussion of such targets highlights the growing political pressure on Beijing to address the issue of pollution, and thus the
need to further diversify its energy mix.

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Carbon Cap Would Supercharge Power Sector Diversification

BMI View: The introduction of a cap on carbon emissions in China would not only advance global efforts to tackle climate change
exponentially, but would supercharge our already-strong forecasts for growth in gas-fired, nuclear and renewables generation. While we
emphasise that coal will retain its primacy in the energy mix even if a cap is implemented, pollution in China is dominating the political
discourse and government efforts to address the issue will create huge opportunities for investment.
While we greet reports that China will follow the US and announce a cap on carbon emissions in 2016 with caution, the implementation of a
cap would supercharge our forecasts for power sector expansion in non-coal sectors. While there would inevitably be questions about the
efficacy and enforcement of emissions reduction targets in China, even the discussion of such targets highlights the growing political
pressure on Beijing to address the issue of pollution - which is at crisis levels in urban areas.
While details are scarce, we note that the timing of the Chinese announcement is relevant from a geopolitical perspective - the day after the
US Environmental Protection Agency (EPA) announced it would cut emissions from domestic coal-fired power plants by 30% by 2030 (see
'EPA Regulations: Winners And Losers', May 30 2014). While we adopt a cautious approach to reports China will introduce a target and
concede that it may be part of an effort by Beijing to project its soft power ahead of climate change negotiations (we also highlight that
Reuters attributes the quotes to a government adviser), China is clearly under pressure to tackle emissions.
Burning Through The Black Stuff
Increases In Energy-Related C02 emissions by fuel type (non-OECD), 1990-2040 (billion metric tons)

Source: EIA

When looking at diversification of the Chinese energy mix, we emphasise that, although we forecast that the rate of coal capacity expansion
may decelerate (in part due to slowing growth in electricity demand), coal capacity will continue to expand at a rapid pace. Under our current
forecasts we expect coal-fired generation to grow at an annual average rate of 5.2% between 2014 and 2023. Attempts at diversification although staggering in terms of the volumes of gas needed and the number of nuclear facilities in the project pipeline - will have a limited
impact on the overall generation mix.
Coal To Remain King In China
Planned Coal-Fired Power Plant Capacity Additions (MW)

Source: World Resources Institute

Nevertheless, we believe that efforts at energy mix diversification are already gaining added impetus and the scale of expansion of non-coal
capacity will create numerous opportunities for investors. As such, if the aforementioned cap on emissions is ultimately implemented, certain

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segments of the power sector would receive much greater attention. This would boost our forecasts for non-coal-fired generation
considerably. Areas we highlight as critical to diversification include:
Gas: Although gas only accounts for 1.5% of China's electricity generation mix in 2014, Beijing is ramping up its efforts to utilise greater
volumes. Despite infrastructure, pricing and supply constraints, this is clearly underscored by the recent deal with Russia - under which
China will receive 38 billion cubic metres (bcm) of Russian gas for 30 years (see 'Geopolitics Takes Centre Stage In Sino-Russian Gas Deal',
May 22 2013). We forecast that gas-fired generation will grow at an annual average rate of 16.2% between 2014 and 2023 - creating
opportunities for growth in midstream and liquefied natural gas (LNG) infrastructure expansion, as well as China's nascent shale gas
industry. A cap on emissions would accelerate growth across the gas sector.
Nuclear: China has the biggest nuclear expansion plans globally and has 31 nuclear reactors under construction and more than 100 under
early consideration. The scalability and efficacy of low-emissions nuclear creates major upside to our forecasts and we have recently
highlighted that we believe sentiment in the nuclear industry is improving as concerns about safety begin to dissipate four years on from the
Fukushima disaster in Japan. A carbon cap would boost already-robust sentiment in the world's biggest nuclear market and - by extension support our long-term bullish view on uranium (see 'Long-Term Bullish On Uranium As Pockets Of Growth Drive Demand', May 30 2014).
Ambitious Nuclear Plans
China Nuclear Capacity Data And Forecasts (GW)

Source: f = BMI/Government forecast. Source: BMI, EIA, World Nuclear Association, CNNP, CGN

Renewables: We currently forecast average annual growth in renewables capacity of 11.3% per annum and a carbon emissions cap would
boost our robust outlook exponentially - particularly in the solar sector. Continued government support for renewables companies and the
sheer scale of installed capacity already make China an outperformer in the renewables space, and we believe an emissions cap could lead to
aggressive revisions to solar installation targets.
Huge Opportunities In Diversification
China - Power Generation Mix, 2023

Source: BMI Forecasts

In addition to power generation segments noted above, an emissions target would generate added momentum behind China's pilot carbon
markets (see 'Carbon Trading Pilot Schemes Gaining Momentum', November 29 2013). We have highlighted in our previous analysis that
China is rolling out seven separate pilot carbon markets with a view to integrating them in 2015. We believe that placing a cap on carbon
emissions would boost the credibility of such schemes, support their wider rollout across China and ramp-up the pressure on state-owned
companies to take part in cap-and-trade schemes.

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New Tariffs Address Loophole, But With Widespread Ramifications

BMI View: The new tariffs proposed by the US government on Chinese solar panel makers will effectively seal a loophole used by these
manufacturers to circumvent tariffs imposed on Chinese solar cells in 2012. These companies will now have to move production of both
solar cells and panels overseas in order to avoid tariffs. We believe that US solar manufacturers stand to gain the most from these tariffs, but
their gain will be to the detriment of US-based project developers, investors, and consumers.
On June 3 2014, the US Department of Commerce announced its preliminary decision to impose steep import duties on Chinese solar panel
makers, asserting that these manufacturers had benefited from unfair subsidies. The key details of the tariffs are as follows:

Preliminary duties of 35.2% and 18.6% would be imposed on imports of Suntech and Trina Solar respectively, while other Chinese solar
producers will immediately receive tariffs of 27%.

The duties will be levied on solar photovoltaic (PV) panels and the cells used to make them. This is in contrast to the 2012 tariff, which
only affected Chinese solar cells.

US Customs have started collecting cash deposits on imports based on the duty rates, and these deposits will be repaid if the tariffs are not
confirmed.

The Commerce Department is still conducting an investigation on the dumping issue (a separate issue from unfair subsidies), and could
decide to increase or introduce new tariffs. A decision is due on July 25 2014.

The tariffs will be reviewed by the US International Trade Commission (ITC) in October 2014 before a final decision is made.

This ruling will effectively seal a loophole that Chinese solar manufacturers have allegedly used to circumvent tariffs imposed by the US on
Chinese solar cells in 2012, when the US government imposed tariffs of between 18% and 250% on Chinese solar cells (see 'Changing
Dynamics Of Renewables Manufacturers', October 18 2012). However, Chinese producers were able to evade these tariffs by purchasing
solar cells or moving their production overseas (with the most common alternative being Taiwan) before shipping these cells back to China
for assembly into solar panels. In many instances, the cells manufactured outside of China were derived from components - namely solar
ingots and wafers - from China. The new tariffs will mean that Chinese companies will not be able to exploit this loophole any longer, and
will have to move production and assembly of both solar cells and panels overseas in order to avoid tariffs.
Effects Of The Tariff
We believe that the imposition of these tariffs will have effects on several parts of the US solar sector:

Domestic manufacturers: Solar equipment manufacturers with sizeable production bases in the US - such as First Solar, Sunpower and
Germany's SolarWorld - will benefit from these tariffs as the prices of panels imported from China will increase. It is estimated that at
least half of the solar equipment (and up to 70% of the rooftop solar market) installed in the US in 2013 was sourced from China.
International panel manufacturers may also benefit from these tariffs on Chinese manufacturers.

Domestic project developers, investors, and consumers: Developers, investors, and consumers in the US are likely to be negatively
affected by elevated project development costs arising from higher panel prices. The elevated project costs will reduce margins for all
three groups, increasing the length of time needed for solar projects to breakeven. This could negatively affect growth in solar capacity,
and poses a significant downside risk to our solar forecasts (see 'Solar Forecasts Boosted As Market Conditions Strengthen', June 5).
Growth Already Set To Slow
US - Solar Capacity, MW (LHS) and %y-o-y (RHS)

40,000

75

50
20,000

2023f

2022f

2021f

2020f

2019f

2018f

2017f

2016f

2015f

0
2014f

2013e

25

Solar Capacity, MW (LHS)

Solar Capacity, % y-o-y (RHS)

e/f = BMI estimate/forecast. Source: BMI, UN Data, SEIA

We note that some of the larger solar developers in the US have taken steps to reduce their exposure to solar trade disputes and price
fluctuations. One of the country's largest developers, SolarCity, announced that it would be purchasing solar panel manufacturer Silevo on

10

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CHINA

Asia Pacific

Power & Renewables

June 17 2014. SolarCity currently obtains its solar panels from China's Yingli and Trina Solar, but announced plans to build a massive solar
panel factory in New York on the day of the Silevo acquisition. This will give SolarCity a greater control over its supply and protect it from
price fluctuation that can vary greatly as a result of trade disputes or market forces governing supply and demand.

Analyst: Marina Petroleka

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Subscriptions Manager: Lucinda Morek
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