Details of a mooted green power certificate trading scheme and long-discussed ambitions to ensure priority dispatch for solar power, reduce administration costs and rein in curtailment will hold the key to the success of China’s newly-announced package of measures for subsidy-free solar, according to analysts.
The Chinese government’s recent policy announcement prioritizing subsidy-free solar and wind development marks a concerted shift to a more market-driven approach to future buildout. It also provides a sorely needed jolt for a PV market left reeling since Beijing first revealed plans to scrap renewable energy subsidies at the end of May.
“China’s subsidy-free policy is a timely announcement that is ushering in very positive sentiment within the industry, in what was an uncertain but improving policy landscape,” said Rishab Shrestha, research analyst at Wood Mackenzie Power & Renewables.
The move away from subsidies, which has been the subject of much industry speculation since Beijing’s announcement last year, requires regional governments, state-run banks and grid operators to help expedite the development of zero-subsidy solar projects. The authorities in approved provinces will be allowed to offer their own incentives while developers will simply need to obtain construction permits at provincial level, assuming they plan to build in areas with adequate demand for power, sufficient solar resources and readily available grid connections.
More guidance needed
Local governments will also be expected to reduce taxes for project owners and rein in land-related costs while minimizing red tape for developers and ensuring grid connections. State-owned banks will be tapped for financing and developers shielded from curtailment losses under a package of measures announced last week. However, while utilization hours will be guaranteed, developers that fail to meet construction deadlines will be shoved aside to ensure grid access for subsidy-free rivals.
Shrestha was quick to temper his positive assessment of the announcement by noting the Chinese government needs to clarify its policies and iron out some glaring practical kinks. For example, while the directive highlights administrative costs and priority dispatch as key, Beijing has been talking about such issues for years, without thus far resolving them.
“The policy still needs further operational guidance,” Shrestha said, pointing to the need for procurement policy mechanisms to facilitate deployment until the end of next year, as well as clearly defined methods for identifying regions suitable for subsidy-free PV.
In addition, Beijing still needs to fine-tune its long-mooted plans for a green certificate market, which could be key to ensuring the success of unsubsidized solar. This will be particularly important because the pricing of such certificates, dependent on a renewable portfolio standard, could carry broad implications for the pricing of power-purchase agreements.
That said, the buoyant response to the latest policy announcement was arguably bolstered by the development of crucial market mechanisms over the past year. Shrestha believes roughly a quarter of the electricity generated by PV plants in China in the first three quarters of 2018 was exchanged via direct sales and bids on power exchanges, a figure he labelled a “sizable” amount of capacity.
“Various experienced stakeholders do have experience in direct market transaction and could lead the way in significant growth of unsubsidized projects,” he told pv magazine. “The subsidy-free policy potentially cements the view that China will be heading towards a recovery year.”
One of the more encouraging aspects of the country’s new policy direction is what it could mean for the curtailment of solar capacity from the grid in the long term, given the State Grid Corp. of China is soon expected to finally wrap up its ambitious $88 million buildout of ultra-high voltage direct current (UHVDC) lines across the country, following years of development. Even in northwestern parts of China such as Gansu province and the remote Xinjiang region – where PV curtailment is most severe – the situation seems to have improved somewhat in 2018, according to Shrestha.
BloombergNEF estimates the average national curtailment rate for solar at around 2.9%. However, it does not expect PV curtailment to improve significantly in the near term, despite Beijing’s plans to bar subsidy-free solar development in Xinjiang and Gansu.
Wood Mackenzie, however, does sees solar capex falling 15% this year, aided in part by supply dynamics and the competitive nature of China’s Top Runner program. Shrestha points to a handful of bids for such projects over the past year that came in below the benchmark coal price of $55/MWh.
A positive step
“While we believe solar capex is already largely competitive against coal, soft costs and curtailment have been the roadblocks,” agreed Jonathan Luan Dong, a Beijing-based analyst for BloombergNEF.
The reduction of non-technical costs and provision of relatively affordable state-owned land – as well as lower transmission and dispatch fees – could help expedite the removal of such obstacles.
“Local government and grid operators have become central in determining the size of this pilot,” said Dong. “Here, curtailment serves as a de facto cap, as it is a central government target.”
In the short term, he agrees solar curtailment is unlikely to improve significantly. That said, the new policy direction will at least give Beijing breathing space as it attempts to pare down a towering backlog of unpaid PV subsidies. BloombergNEF estimates the current deficit at roughly CNY110 billion ($16 billion), with payments made for just 54 GW of 163 GW of capacity by August.
Dong does not expect the shift to subsidy-free PV to contribute to a significant decline in installations, as had been feared at the end of May, in part because zero-subsidy capacity buildout will not be subject to quota limits. In addition, quotas for subsidized solar will remain, although the precise levels have yet to be determined by the authorities. However, he expects the existing subsidy system to scale down quickly over the next two years.
“This signals a permanent policy shift away from subsidy,” said Dong. “[But] the government still wants to continue [the] China solar industry’s development amidst the home market transition. Piloting subsidy-free projects is a small opening to explore market readiness.”