China’s rush to bail out Suntech Power Holdings and other solar panel makers is condemning its solar sector to a worsening glut, as demand remains stubbornly stagnant, both at home and abroad.

As prices crumble in the once high-flying solar panel industry, Chinese authorities fear that letting uneconomic manufacturers collapse will destroy tens of thousands of jobs and increase the potential for unrest.

On the other hand, throwing these firms a lifeline is a drain on public finances and just adds to over-supply. Against global demand for 30-35 gigawatts (GW) of solar power this year, supply is 50-60 GW, most of which is in China, according to some industry estimates.

While local authorities in China continue to bail out solar panel makers to preserve social stability, governments suffering from strained finances are withdrawing the incentives that could spark increased demand.

“China’s solar industry is becoming like a prison,” said Samuel Yang, chief executive officer of Shanghai-listed solar panel maker Hareon Solar.

“None of us is doing well. We are all locked in the prison,” said Yang, whose firm is developing a solar farm in Bulgaria and is seeking financing to launch more overseas projects as one way to escape the glut. However, even China’s state banks are wary of lending to the sector - solar panel prices have fallen about 66 percent in the last two years.

Both at home and abroad, the incentives offered by governments wanting to shift to cleaner energy are drying up. The euro zone debt crisis has led to countries like Germany slashing subsidies for renewable power.

The United States has slapped anti-dumping duties on Chinese solar panels and the European Union, China’s biggest market for the product, could be on the verge of following suit.

Some Chinese panel makers have been shifting focus to the home market, hoping Beijing’s moves to stimulate domestic solar consumption would come to the rescue.

But the measures are unlikely to have any major impact due to the sheer size of China’s solar panel making capacity, a lack of funding for solar subsidies, China’s geographical energy imbalance and the absence of infrastructure required to harness intermittent renewable energy.

CAPACITY MUST SHRINK

Beijing aims to have a total 35 GW of solar energy by 2015, from both utility-scale solar farms and distributed generation facilities like solar panels installed on the rooftops of villas and factory buildings. By 2020, it wants to boost generation to 100 GW, according to Chinese state utility giant State Grid.

In theory, that should mop up much of the idle capacity of the solar panel manufacturers, but does not look feasible in practice.

“Unless capacity shrinks, there won’t be any material recovery for the Chinese solar panel industry until at least five years from now,” said Jason Cai, chief analyst at Shanghai-based consultancy Solarzoom.

Chinese wind and solar producers have been suffering from delays in subsidy payment, hurting investment interest. And industry sources say there are rumours of China’s finance ministry cutting subsidies for solar farms in western China, where they are more profitable because of abundant sunshine.

State Grid has been holding back from purchases of electricity from wind and solar farms due in part to concerns that the intermittent source of power would disrupt its networks. It has also been struggling to transmit power from renewable energy generating centres in the northwest, north and northeast to population hubs in the south and east due to a lack of a comprehensive high-voltage and smart grid.

More recently, Beijing initiated an ambitious programme to promote distributed generation. State Grid last month said it would connect all distributed renewable sources to the grid for free.

But it purchases the power at prices it pays for cheaper coal-generated electricity and generators have to apply to Beijing by themselves for subsidies – an onerous process.

Without subsidies, it will take distributed solar generators 20-25 years - more than the life time of solar panels - to recover investment.

“The problem is the technology is not cost-competitive enough,” said He Guoqing, deputy head of solar research at State Grid. “It can’t survive without subsidies but any subsidies won’t stay forever.”

BAILOUTS

Still, the bailouts continue.

Suntech Power - China’s largest solar panel maker - said last week its biggest subsidiary Wuxi Suntech was bankrupt but would undergo a government-led restructuring.

The Wuxi government’s plan is to restructure its debt while continuing production, keeping workers in their jobs and avoiding potential unrest. Suntech’s main factory is in the city of Wuxi, where it employs about 10,000 workers.

Local governments have already helped solar companies like LDK Solar Co Ltd, Shanghai Chaori Solar Energy and Technology Co Ltd in similar circumstances.

Some Beijing officials have argued it makes sense to let a few manufacturers go bankrupt in light of the oversupply of panels. But local governments are concerned that allowing the companies to fail would risk stoking social unrest.

At stake are the jobs provided by the companies, but also the billions of dollars in debt run up by them in the boom years, mostly owed to local creditors but also including $541 million worth of dollar-denominated bonds of Suntech.

“In China the intuitive response of governments is to see how such situations (factory closures) can be avoided and so they try to resist or postpone such lay-offs,” said Louis Kuijs, chief China economist at RBS.

“It will be a big issue going forward and it would be incumbent on the government to signal what process Beijing is comfortable with in the event of such bankruptcies.”