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China looks to a subsidy-free future

EY - Alex Zhu

Alex Zhu
Greater China Power & Utilities Market Segment Leader
Partner, Corporate Finance
+86 10 5815 3891

EY - Gilles Pascual

Gilles Pascual
Partner, Infrastructure Advisory
+65 6309 6208

The Chinese renewable energy sector is hoping 2019 will be better than 2018, when subsidy cuts dramatically slowed growth in solar installations. While policy-makers have reversed course on some of their harshest moves to slow the sector, they are also moving forward with measures to encourage subsidy-free development, demonstrating the growing viability of clean energy technologies.

Last year, solar photovoltaic (PV) additions fell to 44.3GW, from a record 53GW in 2017, triggered by a reduction in subsidies. The country added 20.6GW of new wind power, compared with 15GW in 2017.

By the end of 2018, China accounted for 35% of global solar capacity – with 172GW – and 32% of total wind capacity, with 181GW.

However, as it moves away from its expensive feed-in tariff (FiT) regime towards unsubsidised energy, the rate of solar additions is likely to moderate, according to analysis from Fitch Solutions, while those from wind are likely to increase. The firm estimates that solar capacity will grow at an annual average of 36GW between 2019 and 2028, while wind will grow at an average of 23GW/year.

Chinese developers are not being cut off from subsidies entirely yet. In solar, regulators are once more approving ground-mounted projects, after halting approvals in June 2018 in a bid to reduce subsidy bills – at which point there was a backlog of at least RNB120b (US$18b) in unpaid subsidy payments – and to achieve lower curtailment levels.
According to Citigroup, China is expected to allocate around RNB3b (US$0.4b) of subsidies to solar projects in 2019, and it forecasts 42GW of new capacity under its base case, with the potential to rise to 50GW.

Meanwhile, the Government continues to support wind energy through its FiT regime, but with rates continuing to decline. Since 2017, the tariffs have decreased by 5%–15%, depending on an area’s wind resource. The Government is also actively supporting its offshore wind sector, which continues to qualify for attractive subsidies.

The Government is also promoting subsidy-free renewables projects as technology costs fall.
The National Energy Administration is proposing to set up an auction system, backed by 20-year offtake contracts, guaranteed grid connections, lower transmission fees, protection against curtailment, and eligibility for an expanded green certificate programme, among other things. Qualifying projects would be expected to sell power at the same price as non-subsidised coal-fired plants.

One landmark planned project is the giant 6GW Ulanqab Wind Power Base, a series of wind farms in Inner Mongolia under development by the State Power Investment Corporation at a cost of RNB42.5b (US$6.3b). The scheme will supply power to the 2022 Winter Olympics, to be held in Beijing and neighbouring Hebei province.

Another landmark development is the country’s first large, concentrated solar power and energy storage project, at 100MW and 390GWh, using a 260m-tall tower on the fringes of the Gobi Desert.

Crucial to the success of unsubsidised projects, says Fitch Solutions, will be their ability to reduce wastage where transmission constraints have prevented renewable energy projects dispatching power and, so, reducing the revenue they can earn. Provincial grid operators have tended to favour coal over renewables, as the former is cheaper than subsidised renewable energy. Curtailment rates have been falling in solar – from 6% in 2017 to 3% in 2018 – which, if it continues, will make unsubsidised projects increasingly economically viable.
To date, foreign investors have had little involvement in China’s renewables sector, with overseas investment accounting for less than 1% of the total.

International funders have steered clear of the market after bruising experiences around the turn of the century, when the national power company gave preferential treatment to domestically owned generating assets during a period of oversupply, and pushed foreign investors – mostly in coal-fired plants – to divest from China

However, improved market practices and transparency are tempting investors back, this time into renewables.

In 2017, for example, French utility ENGIE took a 30% stake in Unisun, a Chinese PV firm, while Total, the French oil major, last year helped seed, with two local partners, a China-focused clean energy fund. French power giant EDF, meanwhile, has more than 400MW of clean energy capacity under construction or in operation in China, and has also announced its first investment in the country’s offshore wind sector in March, with stakes in two projects totalling 500MW capacity.

In the solar rooftop space, Canada-based Brookfield Asset Management and Japanese logistics provider GLP formed a joint venture last year, to install 300MW in three years using a third-party ownership model.

China’s renewable energy market is, without doubt, undergoing a transition as the Government seeks to rein in the costs of subsidies. With continuing concerns about pollution, falling technology costs, and revived interest from international players, however, growth in the world’s largest clean energy market is set to continue.

Contact the RECAI team

EY - Ben Warren

Ben Warren

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