Is China ready for subsidy-free renewables?

Subsidies play a key role in renewables project development and for years have placed a major financial burden on the Renewable Energy Development Fund managed by China’s central government. By the end of 2018, the fund had already accumulated a deficit of over RMB100 billion. China wants to reach its wind and solar power grid parity targets by 2020, so that electricity created by these sources can be sold to the grid at the same price as coal-fired power. To achieve this, the government is now leveraging its range of policies in a careful balancing act to both reduce the subsidy burden on the fund while also maintaining a fairly stable market.

On 24 May, China’s National Energy Administration released its finalised guidance on wind power prices for existing and new projects, underpinning its determination to achieve grid parity. According to the notice, new onshore projects permitted after 1 January 2021 must be subsidy-free. Before that, developers will need to bid at provincial-level auctions to receive wind power tariffs above the regulated coal-fired tariff level.

Strike prices for onshore wind auctions during the transition period are to be capped and reduced based on existing wind feed-in tariffs (FIT) as ceiling prices. In 2019, the cap will be reduced by 8% to 15% for all regional wind classes, and will further drop by RMB50/MWh (around US$7.1/MWh) in 2020.

Commenting on this, Wood Mackenzie’s senior China wind analyst Xiaoyang Li said: “We expect new onshore capacity in 2019 will increase compared with 2018 as developers rush to connect remaining FIT-qualified project capacities to the grid. This is driven by the expectation of increasing constraints by central government on the market volume of subsidised auctions in each province, and the likely requirement for future GW-level national wind bases to be subsidy-free.”

A huge gap remains between wind and coal tariffs nationwide. Taking Xinjiang province as an example, the tariff gap was around RMB240/MWh (around US$35/MWh) in 2018.

The wind industry is concerned over how to find effective methods to reduce costs as China moves into the government-planned subsidy-free era in 2021. Price pressure is high and increasing across the whole value chain.

“Developers may pressure turbine OEMs to cover more costs - including O&M costs - to reduce project risks associated with a high LCOE [levelised cost of energy],” Ms Li said. “To capture new orders, turbine manufacturers and other key equipment suppliers will have to reduce or discount the price of turbines and/or auxiliary services to help lower project cost.”

Solar power is faced with the same grid parity mandates but progress towards meeting the targets seems smoother than for wind after the solar feed-in tariff was reduced last year. Wood Mackenzie expects around 5 GW of unsubsidised solar projects will be connected to the grid in 2019, based on project lists published by the government on 20 May. The 2019 figure accounts for about 40% of the total for approved projects on the list.

Rishab Shrestha, Wood Mackenzie’s solar analyst, said: “Aggressive solar cost declines and recent policy developments are the main reasons behind the fast growth of unsubsidised solar projects.”

We expect seven provinces to have a solar LCOE lower than the coal benchmark tariff in 2019. These provinces lie in the western and southern regions of China where the benchmark coal tariff and solar insolation are both higher. Guangxi and Guangdong are on that list.

“On a national basis, the utility-scale solar LCOE is around 8% higher than the national average coal benchmark price,” Mr Shrestha added. Compared with the wind-coal tariff gap, the gap between solar and coal tariffs seems much easier to close in most of the provinces in the 2021 timeframe set by the government.

Policy incentives are awarded to solar projects in the pipeline that voluntarily convert to become subsidy-free. For example, a power purchase agreement (PPA) of at least 20 years signed with the utility is guaranteed. In addition, subsidy-free renewable power is assured priority dispatch against other subsidised projects, which comes as a relief to power producers against the backdrop of solar curtailment in China.

The subsidy-free renewables policy brings into focus the discussion of project internal return rates (IRR) among developers in the Chinese market. Though the path is more painful than expected, renewable power producers will need to adapt to the shifting terrain and follow the direction of the global energy transition.

More insights on China’s wind tariffs can be found in our upcoming research reports – Global Wind Market Outlook Update Q2 2019 (to be published in late June) and China Regional Wind Power Market Report 2019 (to be published in early July). For more on solar parity, refer to our new research China – Solar grid parity on the horizon. These insights are available as part of our Global Wind Markets Service and Global Solar Markets Service.