China’s solar industry is at a crossroads

China has recently implemented a government policy that drastically cuts generous subsidies from solar farms, giving new developments a tougher challenge on costs.

China’s solar manufacturers are unhappy with recent government policy changes that have put a brake on the sector.

“We’ve already halted work on 11 megawatts of industrial and commercial distributed solar PV projects,” says the marketing director for one solar photovoltaic (PV) module manufacturer in Guangdong province. 

“Without subsidies, there’s no return on investment for over a decade, so investors and property owners aren’t interested in distributed solar. With subsidies it only takes seven years to recoup the investment,” he adds.

This is one consequence of China’s “531” policy that was announced by the National Development and Reform Commission, the Ministry of Finance, and the National Energy Administration without warning on May 31(hence the “531” name). The policy is designed to control breakneck growth in the solar sector, principally by accelerating the phase-out of subsidies.

China has led the world in new solar installations in each of the past five years, helped by guaranteed electricity prices. But the cost of subsidies has been growing unsustainably, and as manufacturers have expanded rapidly to meet demand the risk of overcapacity has grown. 

The new policy brings the industry to a crossroads. During the 12thFive Year Plan period (2011-2015) subsidies were paid late and there was significant wastage of both solar and wind power. Those lessons should have been learned by now, says Meng Xiangan, deputy director of the China Renewable Energy Society. To avoid a repeat, the sector can either lobby for an extension of subsidies and continue its rapid and unsustainable expansion, or accept that new capacity will face a tougher challenge on costs.

Without subsidies, there’s no return on investment for over a decade, so investors and property owners aren’t interested in distributed solar. With subsidies it only takes seven years to recoup the investment.

Marketing director for a solar photovoltaic (PV) module manufacturer, Guangdong, China 

A sudden change

Under the current system, the National Energy Administration (NEA) sets annual targets for installed solar capacity, which is eligible for government subsidies. At the local level, development and reform commissions are responsible for approving projects. In theory, subsidies are limited to projects that fall within the NEA (central government) targets, although local governments may also provide subsidies.

The new policy, which came into effect immediately, has no target for the construction of solar farms, and orders local governments not to approve solar farms that need subsidising.

However, it is distributed solar projects, such as small-scale commercial and consumer rooftop installations that will see the biggest change. Previously, there was no target for distributed solar capacity, leading to strong growth in the distributed solar market.

In 2017, 19.44 gigawatts (GW) of new distributed solar was added—as much as the total for the previous three years. A further 7.68GW was added in the first quarter of this year, an increase of 217 per cent year-on-year and 79.6 per cent of all new installations in China. The new policy has put in place a target of 10GW of new distributed solar capacity (as opposed to solar farms), which means that the entire 2018 target was almost reached in the first three months of the year.

Alongside limiting the amount of new solar installations eligible for subsidy, the 531 policy also reduces the level of subsidy for solar farms and distributed solar, which were set through regional pricing policies in 2013.

These policies provided a huge stimulus for corporate investment in solar PV. They divided the country into three regions according to their suitability for solar generation, with prices paid per kilowatt hour set at 0.90, 0.95 and 1.00 yuan accordingly. Distributed solar installations were subsidised at 0.42 yuan per kilowatt-hour. 

The new policy has dropped those subsidies to 0.50, 0.60 and 0.70 yuan per kilowatt hour across the three regions, with the distributed solar subsidy falling to 0.32 yuan per kilowatt-hour.

This is the second cut in subsidies in less than a year. In December 2017 the distributed solar subsidy fell from 0.42 yuan per kilowatt-hour to 0.37 yuan.

“We were expecting subsidies to be cut back but this was too sudden and too sweeping, with no buffer period,” says a source at the Guangdong Solar Energy Association.

The cuts are a clear signal from the government that the sector needs to become less dependent on subsidies and shift its focus from rapid scaling toward technological improvements to further bring costs down.

“The subsidy has been a major driver of new projects,” says Lin Boqiang, head of Xiamen University’s China Institute for Studies in Energy Policy. 

“The idea of a subsidy is that eventually, it goes away. China’s been slow to do that, it would have been better if this had happened earlier,” he adds.

A difficult transition

Many investors and project owners are waiting to see how the new policy plays out.

“Some customers immediately cancelled orders and demanded cheaper prices,” says Sun Yunlin, head of Winone Solar, which provides services such as consulting, feasibility studies and handover inspections to solar farms.

The market has dropped significantly. Wang Bohua, secretary general of the China Photovoltaic Industry Association, expects to see 30-35 gigawatts of new capacity in 2018, a drop of 43 per cent on last year.

That drop in new installations in China means there is a risk of overcapacity in the supply chain, which has been expanding rapidly. The silicon subcommittee of the China Nonferrous Metals Industry Association calculates that China’s production capacity of polycrystalline silicon—a raw material for the solar industry will reach 433,000 tonnes a year in 2018, a growth of 57 per cent year-on-year. Most of that new capacity will come on stream in the third quarter.

report from the China Centre for Information Industry Development (CCIDWise) predicts that growth in the solar PV market will fall off or even reverse, with further price drops to come across the industry and firms facing significant pressure on costs.

Wang Bohua, secretary general of the China Photovoltaic Industry Association, said at this year’s 3rd Century Photovoltaic Conference that expansion of manufacturing capacity was still rapid, but the warnings of overcapacity caused by excessive expansion back in 2011 should be heeded.

Mind the gap 

China’s 13th Five-Year Plan (2016-2020) set a 105GW target for new solar PV capacity by 2020. This was hit two years and three months early. As of April 2018, capacity was 140GW.

One of the reasons for this runaway growth is because plans for the solar sector differ between central and local governments—particularly since the power to approve solar farms was devolved to the local level in 2013, which made it harder for central energy authorities to control the scale or rate of solar PV installations. That loss of control is why the subsidy funding gap has steadily widened.

“During the 12th Five-Year Plan the target for solar generation grew from 5GW to 10GW, then to 15GW, then ultimately from 21GW to 35GW. That was a bigger change than planned for any other industry. There was effectively no cap on total capacity,” explains Meng Xiangan.

The expansion started in 2013. The EU and US placed anti-dumping measures on imports of Chinese solar PV products, causing the overseas market to shrink. With no outlet for domestic capacity a meeting of the State Council in June that year took six measures to support the industry through the crisis: policy assistance, guaranteed purchase of solar power, improved electricity pricing policy, funding support, funding for research and design, and support for mergers and restructuring.

With guaranteed prices, solar power manufacturers and other companies started building solar farms. In December 2013 Deloitte published a report on clean energy in China that found 130GW of “queued” solar projects – three times the entire 12th Five-Year Plan target.

But the Renewable Energy Development Fund, from which subsidies are paid, had only one source of income – a renewable energy surcharge on electricity bills, which is collected by energy suppliers from customers. That surcharge has been adjusted five times and currently stands at 0.019 yuan per kilowatt-hour.

This story was originally published by chinadialogue under a Creative Commons License and was republished with permission. Read the full story.

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