Canadian Solar Inc. (CSIQ) Q2 2022 Earnings Call Transcript

Canadian Solar Inc.  (NASDAQ: CSIQ) Q2 2022 earnings call dated Aug. 18, 2022

Corporate Participants:

Isabel Zhang — Investor Relations Director

Shawn (Xiaohua) Qu — President, Chairman and Chief Executive Officer

Yan Zhuang — President, CSI Solar

Ismael Guerrero Arias — Corporate Vice President and President of the Energy Business

Huifeng Chang — Senior Vice President and Chief Financial Officer

Analysts:

Brian Lee — Goldman Sachs — Analyst

Philip Shen — Roth Capital Partners — Analyst

Colin Rusch — Oppenheimer and Company — Analyst

Praneeth Satish — Wells Fargo — Analyst

Presentation:

Operator

Ladies and gentlemen, thank you for standing by, welcome to Canadian Solar’s Second Quarter 2022 Earnings Conference Call. My name is Sherry and I will be your operator today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Isabel Zhang, Investor Relations Director at Canadian Solar. Please go ahead.

Isabel Zhang — Investor Relations Director

Thank you, operator and welcome everyone to Canadian Solar’s second quarter 2022 conference call. Please note that we have provided slides to accompany today’s conference call, which are available on the webcast as well as Canadian Solar’s Investor Relations website within the events and presentation section.

Joining us today are Dr. Shawn Qu, Chairman and CEO; Yan Zhuang, President of Canadian Solar’s majority-owned subsidiary, CSI Solar; Dr. Huifeng Chang, Senior VP and CFO; and Ismael Guerrero, Corporate VP and President of Canadian Solar’s wholly-owned subsidiary, Global Energy. All company executives will participate in the Q&A session after management’s formal remarks.

On this call, Shawn will go over some key messages for the quarter. Yan and Ismael will respectively review the highlights of the CSI Solar and Global Energy businesses, followed by Huifeng, who will go through the financial results. Shawn will conclude the prepared remarks with the business outlook, after which we will have time for questions.

Before we begin, may I remind listeners that management’s prepared remarks today as well as their answers to questions will contain forward-looking statements that are subject to risks and uncertainties. The company claims the protection of the Safe Harbor for forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1995.

Actual results may differ from management’s current expectations. Any projections of the company’s future performance represent management’s estimates as of today. Canadian Solar assumes no obligation to update these projections in the future, unless otherwise required by applicable law.

A more detailed discussion of the risks and uncertainties can be found in the company’s Annual Report on Form 20-F filed with the Securities and Exchange Commission. Management’s prepared remarks will be presented within the requirements of SEC Regulation G regarding Generally Accepted Accounting Principles or GAAP.

Some financial information presented during the call will be provided on a GAAP and a non-GAAP basis. By disclosing certain non-GAAP information, management intends to provide investors with additional information to permit further analysis of the company’s performance and underlying trends.

Management uses non-GAAP measures to better assess operating performance and to establish operational goals. Non-GAAP information should not be viewed by investors as a substitute for data prepared in accordance with GAAP. And now, I would like to turn the call over to Canadian Solar’s Chairman and CEO, Dr. Shawn Qu. Shawn, please go ahead.

Shawn (Xiaohua) Qu — President, Chairman and Chief Executive Officer

Thank you, Isabel and hi everyone. Welcome and thank you for joining us today. Let’s turn to Slide 3. This slide provide us a summary of our key performance metrics. We achieved strong results in the second quarter of 2022 with record total module shipments of 5.1 gigawatt. Revenue for CSIQ came in at $2.3 billion and gross margin was 16%. Our results were at or exceeded the high-end of our prior guidance.

We also took another major step forward in cementing our leadership in the fast-moving storage segment with over 1 gigawatt hour of battery storage shipments in the first half of 2022. During the quarter, we remained focused on profitable growth, which has been a core tenant of Canadian Solar since its founding. I am pleased to report that we achieved Q2 net income attributable to Canadian Solar’s shareholders of $74 million with diluted earnings per share of $1.07.

Yan, Ismael, and Huifeng will go through our performance in more details. Before that, let me highlight three key messages. Please turn to Page 4. First message, our capacity growth strategy as highlighted last quarter is firmly on track. We are expanding our strategy to incorporate upstream polysilicon capacity, which is expected to start production in 2024. By the end of 2022, we expect our ingot, wafer, and cell capacities to reach approximately 20 gigawatt each and module capacity to reach 32 gigawatt.

We are also introducing our capacity expansion plan through the end of 2023. We expect ingot and wafer capacity to reach 25 gigawatt, cell capacity to reach 35 gigawatt, and module capacity to reach 50 gigawatt. We are still finalizing shipment range for 2023, but the magnitude of the planned capacity expansions should give you an indication of the significant growth we are planning for next year and beyond.

The rationale for this more aggressive growth strategy is that we are seeing a significant acceleration in global demand. This growth is driven by multiple catalysts including clean energy economics, energy security, and decarbonization. For example, we are particularly excited to see the passing of the Inflation Reduction Act or IRA in U.S. We believe it will drive a significant acceleration in demand for clean energy in U.S., solar energy and battery storage in particular and we are one of the best positioned companies to capitalize on this growth.

Canadian Solar is one of the strongest global clean energy brands with established channels, large project pipeline, strong customer relationships, and an unparalleled track record. We believe we are seeing a once-in-a-decade opportunity to gain global market share and further enhance our long-term defensive competitive advantage. To achieve that, great control over our technology, cost, and supply chain is critical.

This is why we made the strategic decision now to invest into polysilicon capacity as well. While we are still believing that polysilicon pricing will ultimately come down, we believe that directly controlling our supply chain is critical to our long-term competitiveness from a cost, supply security, and decarbonization standpoints.

Now, this brings me to my second point. Please turn to Slide 5. Our new poly facility will be located in Qinghai Province. We selected this location after careful evaluation. Of note, renewable energy accounts for approximately 90% of the electricity in this province. This will be our second facility in Qinghai after our new ingot plant which started operation several weeks ago. Poly and ingot manufacturing are the most energy intensive parts of the solar supply chain.

Using renewable energy to power these processes will contribute to our decarbonization goals and reflect our position as an industry leader. We expect to power our entire global operations with 100% renewable energy before 2030, which will serve as an important milestone in our drive to reach carbon neutrality. You can find additional details of our environmental efforts and performance in our latest ESG Sustainability Report, which we published last month, which is available to download on our website.

Now please turn to Slide 6. In summary our Board and management team’s confidence in making these capital intensive investments reflect the strong business case we see both over the immediate and long-term. The timing and pace of this investment will be linked to the timing of the carve-out IPO of our CSI Solar subsidiary. We remain in the registration process with China Securities Regulatory Commission or CSRC. The process has been delayed somewhat, but we are on track and will update you on progress achieved as we move forward. With that, let me now turn over to Yan, who will provide more details on our CSI Solar business. Yan, please go ahead.

Yan Zhuang — President, CSI Solar

Thank you, Shawn. Please turn to Slide 7. In Q2, the CSI Solar division delivered 5.1 gigawatt of solar module shipments, 800 megawatt hour of battery storage shipments, and $1.8 billion of revenue. These were all record numbers for us. From a profitability standpoint, gross margin improved by 140 basis points to 15.9% or up 65% sequentially to $290 million.

There are several reasons to our improved performance. First, we benefited from higher than expected volumes and higher pricing. Demand from our end markets has been incredibly strong despite the increase in pricing. Second, you will recall that we strategically increased our inventory during the first quarter when polysilicon pricing was more favorable. This decision helped us support growth while keeping our cost of goods sold within control. This dynamic will be more difficult to achieve in Q3, but we continue to actively manage our supply chain.

We also continue to benefit from our ongoing efforts to reduce manufacturing processing costs. Third, our gross margin also benefited from currency fluctuations led by the strong U.S. dollar relative to the RMB, which was partially offset by the weaker euro and other currencies relative to the U.S. dollar.

Lastly, unit shipping costs have continued to come down, but it was offset by a temporary increase in inland freight due to the COVID lockdowns in China during Q2. With higher shipping volumes, total logistics costs went up as expected. Overall, our operating profit doubled sequentially in Q2 to $62 million.

Please turn to Slide 8. So where are we today? Polysilicon pricing has been going up again due to a variety of events. We believe the impact of these events will normalize soon such as the impact of a fire accident at a certain polysilicon plant. Over the past few days, we have also started to see power curtailment in certain parts of China due to the summer heat wave driving low hydro electric energy resources and higher residential power demand from air conditioning.

This curtailment will temporarily reduce polysilicon output. Given the tightness, any marginal changes in supply or demand will affect polysilicon pricing. However, based on what we know today, we believe supply and demand of polysilicon will be more imbalanced towards Q4 as meaningful polysilicon capacity expansion will eventually drive a decline in polysilicon pricing. Logistics costs should also continue to improve barring any unexpected shocks to the global shipping infrastructure.

Please turn to Slide 9. Our battery storage, as Shawn mentioned, we delivered 800 megawatt hour this quarter. This is our largest quarter to date with over 1 gigawatt hour delivered for the first six months. We remain on track to achieve our full-year target of 1.8 gigawatt hours to 1.9 gigawatt hours. On the product side, we introduced our proprietary utility scale products in China a few weeks ago and received overwhelmingly positive feedback.

Our official global launch for both our utility scale and residential products will be at the Solar Power International Conference next month. I encourage you to visit our booth to see for yourself. Besides developing products and technologies that meet customer quality, cost, and reliability requirements, our priority has been to work with partners to secure supply at a reasonable cost. This gives us significant visibility over our product deliverability over the coming years. Now, let me pass it down to Ismael for an overview of the Global Energy business. Ismael, please go ahead.

Ismael Guerrero Arias — Corporate Vice President and President of the Energy Business

Thank you, Yan. Please turn to Slide 10. In Q2 we delivered $554 million in revenue with 14.4% in gross margin. This marks our highest quarterly performance since 2018. We sold approximately 880 megawatts in power projects across Australia, the U.S., Japan, and the U.K. monetizing both fully constructed as well as earlier-stage projects. I’m grateful to lead an incredible global team for making this happen and I appreciate our equity and banking partners for their trust in Canadian Solar.

We also achieved significant growth in our global project pipeline with 26 gigawatts of solar and 31 gigawatt hours of battery storage. The contracted pipeline was 5.3 gigawatts and 3.1 gigawatt hours respectively, which were all construction projects plus more than 90% of backlog projects shown on this slide. These are late-stage projects that have close to 100% success rates.

This quarter, to help you better understand the quality of our global solar and battery storage development platform, we are making a small adjustment on our pipeline definitions. We are breaking out what we previously called pipeline to advanced pipeline and early stage pipeline. Advanced pipeline are projects that have secured or have more than 90% certainty of securing an interconnection agreement while early-stage pipeline are projects owned and controlled by Canadian Solar that are still in the process of securing interconnection.

The reason we are making this distinction is that we believe access to the grid network will be one of the key drivers of competitive advantage in our business. In the past, this used to be a developer’s ability to contract PPAs or feeds. However, with the growing deployment of intermittent sources of electricity, a higher incidence of extreme climate events, and geopolitical uncertainties, our ability to secure reliable interconnection points will be a key driver of our long-term success.

As of Q2, we had 15.6 gigawatts of solar and 13.7 gigawatt hours of storage interconnection points globally. The pipeline expansion we are achieving give us significant runway for growth in the coming years and allow us to be more selective in developing the highest-quality assets.

This is particularly true in the U.S. market with the passing of the IRA where our recovering energy subsidiary has a total of 8 gigawatts of solar and 16.5 gigawatt hours of battery storage project pipeline. While it is too early to quantify the magnitude of the benefit from the IRA, it will both directly impact our existing projects and help drive faster growth in our overall U.S. pipeline.

Please turn to Slide 11. Let me now update you on the significant progress in our operations and maintenance or O&M strategy to increase our share of stable recurring income. We now manage over 3 gigawatts of operational projects under long-term O&M agreements and have an additional 2.4 gigawatts of contracted projects expected to reach COD soon. In line with our growth strategy, we recently invested in an Spain based O&M provider, which will allow us to further accelerate our O&M growth across Europe. Our O&M platform will continue to grow through a combination of organic opportunities and bolt-on acquisitions. All of this gives us confidence as we execute to our target of 20 gigawatts under operation by 2026. Now let me turn the call over to our CFO, who will go through the financial results in more detail. Huifeng, please go ahead.

Huifeng Chang — Senior Vice President and Chief Financial Officer

Thank you, Ismael. Please turn to Slide 12. In Q2, we delivered record quarterly revenue of $2.31 billion, exceeding our guidance. Q2 benefited from both volume and price increases in module shipments and a higher contribution from our battery storage shipments and project sales.

Q2 gross margin was 16%, which also exceeded our guidance. The margin improvement was led by a combination of higher pricing, lower manufacturing and inventory costs and a high return on quality projects. Selling and distribution expenses were up by 45% sequentially primarily due to higher shipping costs associated with our higher sales volume.

General and administrative expenses increased primarily due to a non-recurring $50 million impairment of certain aged manufacturing assets. Research and the development expenses increased by 36% sequentially due to the timing of our R&D investments. The net foreign exchange and derivative gain was $6 million compared to $3 million in Q1. The benefit was mainly driven by the strong U.S. dollar relative to the RMB. As you know, the majority of our revenues as well as our reporting currency are in U.S. dollars where most of our costs are in RMB.

Total net income was $89 million and net income attributable to Canadian Solar shareholders was $74 million. As a reminder, the variance between these two numbers will become more significant upon completion of the carve-out IPO of CSI Solar. This will reflect a decrease in Canadian Solar’s ownership in CSI Solar subsidiary from 80% to approximately 64%. Moving on to EPS, we achieved basic EPS of $1.16 and diluted EPS $1.07. The variance is primarily due to the adjustments for dilutive effect of our outstanding convertible notes.

Now turning to cash flow and the balance sheet. Next slide please. In Q2, we generated around $290 million in operating cash. We maintained our inventory and accounts receivables mostly flat quarter-over-quarter. Despite a significant increase in sales, this allowed us to reduce our inventory days by more than a third. The Q2 net capex payment was approximately $130 million making $210 million for the first half of 2022. Our full-year 2022 net capex expectations remain unchanged at $850 million, which means we expect the bulk of our spending to be in the second half of this year.

We ended Q2 with a total cash balance of $1.95 billion giving us the financial dry powder to invest in growth opportunities while managing risks. Total debt was largely unchanged at $2.7 billion. This mix changes as some long-term project debt rolled off with our project sales. 12 months trading net debt-to-EBITDA excluding restricted cash declined to 2.9 times from 4.1 times the prior quarter. Now let me turn the call back to Shawn, who will conclude with our guidance and the business outlook. Shawn, please go ahead.

Shawn (Xiaohua) Qu — President, Chairman and Chief Executive Officer

Thanks, Huifeng. Let’s now turn to Slide 14. For the third quarter 2022, we expect total revenue to be in the range of $2 billion to $2.1 billion. Gross margin is expected to be between 15% and 16.5% reflecting the positive contribution from the increased level of vertical grid integration, including our new ingot, wafer, and the cell capacities. We expect this to be partially offset by higher polysilicon costs.

As for Q3, total module shipment recognized revenue by CSI Solar are expected to be in the range 6.0 gigawatt to 6.2 gigawatt including approximately 140 megawatt to our own projects. We expect higher module shipments in Q3 to be offset by lower battery storage shipments and project sales due to normal seasonality. For the full-year of 2022, we raised our revenue expectation to $7.5 billion to $8 billion from the previous $7 billion to $7.5 billion.

Our full-year volume guidance remains unchanged. At CSI Solar, we expect solar module shipments to be in the range of 20 gigawatts to 22 gigawatts and battery storage system sales in the range of 1.8 gigawatt to 1.9 gigawatt hours. At Global Energy, we expect project sales to be in the range of 2.1 gigawatt to 2.6 gigawatt for the year. The increase in revenue expectation is mainly driven by higher than expected pricing trends for solar modules.

As we said previously, Q2 is likely going to be the highest quarter of the year for both revenue and profit mainly driven by seasonality of project sales and battery storage shipments. However, we expect solar module shipments to steadily ramp-up through the quarters and years as we execute and deliver market share gains. Overall, while market challenges persist, we continue to see significant near and long-term opportunities in both our solar and battery storage business driven by a combination of attractive economics and policy tailwinds such as the recently passed Inflation Reduction Act.

This IRA will propel the U.S. market to the forefront of the fight against climate change. We believe Canadian Solar is strongly positioned to capture profitable growth as we continue to focus on long-term investments that help drive our success and create lasting value for shareholders. With that, I would like to open the call to your questions, operator?

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from Brian Lee with Goldman Sachs. Please proceed.

Brian Lee — Goldman Sachs — Analyst

Hey, everyone. Thanks for taking the questions. Appreciate all the updates. I know there’s a lot of moving pieces here. So maybe the first big picture question for you, Shawn, is just we’ve seen a handful of your peers over the years in Asia try to vertically integrate into polysilicon. I don’t think there has been a ton of successful cases. So question to you would be just why the strategic decision, what makes Canadian Solar different and then from a kind of numbers perspective, can you give us a sense of what you think your processing costs will look like and what a fully burdened cost structure and margin would be on the module in let’s say 2025 once you’re using your own poly. Thank you.

Shawn (Xiaohua) Qu — President, Chairman and Chief Executive Officer

Hi, Brian. That’s a good question. Now I would like to provide my view and your observation is that companies going vertical integration into polysilicon have not seen success. My observation is that the effort vertical integrate to the poly side by the module companies, that trend just started. That’s why you haven’t seen successful case yet.

In the past, indeed, poly seems to be a separate step from the solar module processing value chain. Most of the so-called virtual companies start from ingot and then wafer, cell and module. Poly seems to be a different business. That’s why you haven’t been seen the example of that kind of vertical integration, but it doesn’t mean it won’t be successful. Now we have done almost two years of feasibility study.

And what we observed is that now, first of all, on the technology side, the Siemens method or the refined Siemens method to produce poly, that has become a standard. There’s standard design institute, for example, in China, which handles the factory design for almost everybody from the current poly-only makers to the newcomers and there are also a handful of chemical production, chemical manufacturing, engineering and EPC companies that specify in the subcontract work for certain poly.

Therefore, the process, especially the granular process is different, but for the Siemens process, the technology becomes standardized. And cost wise, in the past, the general feeling is that per watt investment for polysilicon is high. However, everything is trending [Phonetic], the cost of like per watt cost of investment — capex investment into poly has dropped to the same level of solar cell and therefore, from the cost point of view, also from a technology point of view, poly is not a forbidden part anymore. It’s something technologically accessible.

As a matter of fact, there are quite a few newcomers and their capacity come online as we speak. So in the next six months or nine months, we will see enough so-called newcomers efforts to ramp-up their new facilities. So by the time we ramp-up, we will have lots of experience. We have lots of previous experience we can reference to.

And also, you asked me strategically why do we have to do that?

Now this is because solar is getting into a new era. In the past, we say the annual new solar installation is in the range of 100 gigawatt to 200 gigawatt. However, we are seeing that the annual installation level, we believe it will grow significantly in the next 10 years, let’s say.

I would like to mention to you the new IEA report and also IRENA report. IRENA is the International Renewable Energy Agency. Both reports show that it will require 20,000 terawatts I believe of accumulated solar installation globally by 2050 in order for the major countries to achieve carbon neutral.

And right now, we have just passed the 1 terawatt mark. I’m talking about the global total accumulated installation. So there is still a lot of growth. With this kind of growth, supply chain bottleneck will happen all the time, especially on the polysilicon. So as one of the Top 5 major solar module company, we feel like we have to have control.

We have to understand the poly, we have to have certain control of the poly, but it doesn’t mean we will produce all the poly we use, but we will produce certain poly, right? And we will have the flexibility in the future to ramp-up if we have to. Thanks, Brian.

Brian Lee — Goldman Sachs — Analyst

Appreciate all the detail, Shawn. I guess maybe just another sort of more numbers-related question. Can you kind of talk about — I know the capex for ’22 is the same. It seems like capex for ’23 given all the new capacity expansion plus the poly is going to be substantially higher. Can you give us a preliminary sense of how much capex we should be budgeting in ’23 for you guys and then where the funding will come from that? I guess it seems like you’ve got a good cash balance here, but you may be not generating free cash flow in the next couple of years with the high capex burden. So two questions there. I guess what’s the capex for ’23 ballpark and then, where is the funding that you’re planning for this. Thank you, guys.

Shawn (Xiaohua) Qu — President, Chairman and Chief Executive Officer

Thanks, Brian. I would like Huifeng to answer this question. Huifeng?

Huifeng Chang — Senior Vice President and Chief Financial Officer

Brian, this is Huifeng. Before I talk about capex for 2023, let me reflect what is happening in 2022. So we budgeted $850 million capex for this year and on this call, we confirm or restate the capex this year remain the same, $850 million. Now in Q1, Q2, we spent about $210 million. So the major part of that $850 million will be spent in Q3 and Q4, especially Q4 and that capex number mainly is for our capacity expansion, for ingot, poly, wafer and cell. Now we spend some money for the polysilicon project as we announced previously, but the construction for this year is very little.

And, of course, one factor of this pace is because we are still waiting for the completion of the registration of our IPO. So we expect this IPO done this year and then starting from early 2023, we will accelerate the investment in the polysilicon project. Exactly how that dovetails with our module expansion, that we are still in the planning stage. So we will give update when we come close to the end of the year and also after completion of our IPO. I hope that answers your question. Thank you.

Brian Lee — Goldman Sachs — Analyst

Okay, fair enough. And then I guess on the funding is it all going to be with the IPO or is there some additional debt or equity. First of all, for every $100 capex, we only need to take $30 from our bank account and the other $70 can be financed with the local banks. So the capex number sounds a big one. However, consider we have about $2 billion of cash. We still have enough capacity to fund our expansion excluding the polysilicon project. I mean the expansion for ingot pooling, wafer, and cell, for that we have the funding prepared. Now, for the polysilicon project, that’s a different story. That will very much depend on the pace of the IPO. Okay, thanks a lot guys. I’ll pass it on. Appreciate it.

Huifeng Chang — Senior Vice President and Chief Financial Officer

Thank you, Brian.

Operator

[Operator Instructions] Our next question is from Philip Shen with Roth Capital Partners. Please proceed.

Philip Shen — Roth Capital Partners — Analyst

Everyone, thanks for taking my questions. Continuing with the capacity expansion, capex theme, wanted to see if you could talk us through with the passage of the Inflation Reduction Act, how much capacity could you bring to the U.S? What kind of capacity would it be? Would you bring wafer and cell or just module? And then can you share details around timing of when that could happen as well as the amount of capital you might want to spend and perhaps also location of these facilities? Thanks.

Shawn (Xiaohua) Qu — President, Chairman and Chief Executive Officer

Hi, Philip, first of all, I want to say that the IRA is just signed into law three days ago. So it’s a huge, huge document and we haven’t gone through all of it yet. So we don’t have a concrete plan yet, but we are studying. And I will ask Yan to provide more comment. Yan?

Yan Zhuang — President, CSI Solar

Well, Shawn, you have said — you have told him our status. Yes, we are actively assessing in our study the numbers on both benefit and cost side and also the strategies [Phonetic] and risks moving forward on this topic. As you know, we have people in the U.S. have been actively monitor the situation. So it’s not that we start from blank, but as you know, this is quite a complex document as Shawn has mentioned. I think we’re going to come up with a plan, a strategy to deal with this in a few weeks.

Philip Shen — Roth Capital Partners — Analyst

Okay, thanks. Shifting to margins. I was wondering if you might be able to talk through with the Sichuan electricity shutdown, Yan you mentioned that just now with the heat wave that’s going on, poly pricing looks like it might go a little bit higher. You guys actually gave a pretty healthy Q3 gross margin and so want to — I’m guessing that the poly pricing going higher and lack of low-cost inventory is being offset by lower shipping and FX. So just wanted to see if you could talk us through what the risk might be to the Q3 margin guide as well as how do you expect Q4 and Q1 margins to trend? Thanks.

Yan Zhuang — President, CSI Solar

Well, as you know, we do not provide a margin forecast for the future quarters, but for Q3, it’s pretty high confidence because the supply is almost fixed on both demand and supply side, I mean it’s fixed already. So we already take into the consideration of the possible downside caused by the events happened recently on the silicon side. So for rest of the year, I think the uncertainty resides on the price of silicon, but I think as I already mentioned, the events we’re seeing today — recently is temporary.

I think moving to September the supply — the expansion of silicon will continue flooding and to coming in and I think it will reach reasonable more rational balancing in the industry. So, as you know, the market is now — our industry is quite price elastic. I don’t see extreme movement on silicon pricing and the installation volume. It’s going to reach to a certain balancing. So we already considered all the possibilities on our guidance.

Philip Shen — Roth Capital Partners — Analyst

Okay, thanks. And then one last question from me, back to the capex in ’23 question, Huifeng, can you just give us a rough number of what that could be I mean with the poly expansion plan, I mean it’s roughly $9 billion and this year in ’22, it’s about $850 million. I mean is ’23 a $4 billion to $5 billion number or it doesn’t need, are you not going to make the decision on that until you finalize and have a very clear success situation with the China IPO? Thanks.

Huifeng Chang — Senior Vice President and Chief Financial Officer

Phil, I think let’s do that on the next earnings call.

Philip Shen — Roth Capital Partners — Analyst

Okay, got it. Thanks guys. I’ll pass it on.

Operator

[Operator Instructions] Our next question is from Colin Rusch with Oppenheimer and Company. Please proceed.

Colin Rusch — Oppenheimer and Company — Analyst

Thanks so much guys. Shawn, you’ve got a long history of de-risking the supply chain and kind of hedging through partial integration and so appreciate all the questions on the supply side, but I’m curious about how active you are on the demand side and given what we expect to be a pretty aggressive push into interconnection queues, land positions and things like that as you continue to grow that project business. Just curious where you guys are at in terms of some of that pipeline and converting that into real opportunities and getting into the queue?

Shawn (Xiaohua) Qu — President, Chairman and Chief Executive Officer

Yeah, Colin, I think you’re asking about the effort to secure the interconnection for our project, right? The [Speech Overlap]. So I will ask Ismael to answer this question. Ismael please.

Ismael Guerrero Arias — Corporate Vice President and President of the Energy Business

Sure, thank you, Colin for the question. Look, our track record is pretty good. What we are seeing is that we are experiencing due to the COVID lately some delays on pipelines [Phonetic] and all these things, but we are pretty confident that sooner or later, all our pipeline will turn into successful projects I mean and we keep on growing. So I think we have a bright future ahead.

Colin Rusch — Oppenheimer and Company — Analyst

Okay, I’ll ask more detailed questions offline then. And then can you give us an update on what’s going on with PPA pricing. Surely there has been some movement on that with inflationary pressures, demand, and what not. I guess I’m curious how you guys are approaching that just philosophically and strategically in terms of raising prices and getting yourself into a position to have some sustainable margin there at the project level.

Ismael Guerrero Arias — Corporate Vice President and President of the Energy Business

Look, the [Speech Overlap].

Shawn (Xiaohua) Qu — President, Chairman and Chief Executive Officer

It’s a question for you.

Ismael Guerrero Arias — Corporate Vice President and President of the Energy Business

Thank you, Shawn. Look, what we are seeing is that the PPA contracts are getting a little bit more complicated in their terms and to reflect provisions that protect us mainly from inflation and interest rate drops and things like that. So the approach we are taking ourselves is we are fine on having a period at the beginning where we might go merchant if the price is too high on the merchant markets and the PPA peaking [Phonetic] a year or two later, the general terms of the PPA or if the markets are very high, we have the right to renegotiate the contract for both years. This is the approach we are taking.

So what we are seeing is that the PPAs are getting adjusted to what is happening in the market in general and we keep on seeing PPAs moving up. That’s what we are seeing. It’s true also that the terms are getting a little bit shorter. It’s very weird to see now 20 years PPAs, 17 years PPAs. We are seeing much more 10 years ones.

Colin Rusch — Oppenheimer and Company — Analyst

That’s super helpful. Thanks so much guys.

Operator

Our final question comes from Praneeth Satish with Wells Fargo. Please proceed.

Praneeth Satish — Wells Fargo — Analyst

Thanks, I just really just have one question I guess with the tax credits here tied to the Inflation Reduction Act in the U.S. Does that change your capacity expansion plans at all to maybe build some of that manufacturing here in the U.S. versus building it all in China? How do you compare the two regions now that the U.S. is providing a lot more support for solar manufacturing?

Yan Zhuang — President, CSI Solar

Hey, this is Yan. Yes, we are actually reviewing once again our plan on the future capacity expansion to supply to the U.S. market. So, as you know, we’re now using Thailand and Vietnam as a base to supply to the U.S. with cell and module capacity and the IRA just passed three days ago and it’s a huge document with a lot of information, details and we’re still deep diving that document.

The team is working on that and we will have many meetings going through all the details and the benefits, the costs, the risks and the uncertainties and we’re going to have to clarify a lot of things, making judgment calls on other things. So, as you know we’ve been monitoring the U.S. policy trends for few years already and so it’s not something strange or shocking to us, but we try to make the best decision to better support the U.S. market and to service our customers in the U.S.

Praneeth Satish — Wells Fargo — Analyst

Got it. Thank you.

Operator

Thank you. At this time, I would like to turn the call back over to Canadian Solar’s CEO, Dr. Shawn Qu for final closing comments.

Shawn (Xiaohua) Qu — President, Chairman and Chief Executive Officer

Thank you and also thanks everyone for joining us today and for your continuous support. If you have any questions or would like to setup a call, please contact our Investor Relations team. Take care and have a nice day.

Operator

[Operator Closing Remarks]