The Solar-Coaster: a Post-Subsidy Renewables Guide to China
The day Beijing froze all subsidies for solar energy, May 31, 2018, sent shock waves through the entire solar industry, which only recently moved out of recovery mode and began adapting to the new, post-subsidy world.
Most of us in China’s renewable energy sector refer to that day simply as “five thirty-one.” I remember it well. My company, Seeder Energy, oversaw a rooftop solar installation on a factory in Jiangsu province that was scheduled for grid connection on May 30. But for unknown reasons, the grid company delayed the visit and rescheduled for a few days later. Maybe they knew something we didn’t. The next day, on the evening of May 31, the national government froze all solar subsidies.
By the time the grid company actually came to connect the project on June 2, our twenty years of pre-approved subsidies were gone in a flash.
After 5/31, the industry was in a panic. A consortium of the world’s biggest solar companies wrote letters and attempted to wield their influence to convince the government to provide further support to the market, but to no avail. The outright freeze immediately put smaller solar manufacturers at risk of mass consolidations and acquisitions from by the bigger firms, which jeopardized the whole market.
For many projects, subsidies made up about a third of the total returns on investment. As a result, solar projects in development across China saw their expected return on investment drop 3–4% without the subsidy. Some of these projects outside of major cities even became uneconomic and had to be stopped or canceled. (Projects that were already grid-connected continued to receive subsidies for the entire 20-year period as the original program promised.)
Today, more than a year later we are just beginning to see the market getting back to normal.
Beijing’s solar subsidies, first implemented in 2013, catalyzed China into the fastest growing renewable energy market in the world. By 2017, China had installed more renewables capacity than the rest of the world combined and would meet the national 2020 targets for renewable energy several years early.
Subsidies flowed so generously during this solar boom that the backlog of subsidies owed piled up to almost $20 billion USD. At the same time, the price of solar photovoltaic components continued to fall, and the overall project returns climbed and climbed — as high as 15% unleveraged internal rates of return, well above the market’s minimum expectation, which is around 9%. It was clear that the government would likely cut back on the generous policies.
But we expected a slow cool down, not a complete freeze. We saw subsidies drop from 0.42 RMB per kilowatt-hour to 0.32 at the end of 2017. And we expected to see another reduction down to 0.25 and then 0.20, and finally a subsidy-free market by around the end of 2020.
Instead, it seems to me that one day, someone at the National Development and Reform Commission (NDRC), the government body in charge of setting subsidies, took a look at the $20 billion USD backlog owed to solar projects making above-market returns and then cut it all in one stroke of the pen.
In the aftermath, panel prices immediately dropped 20–30%, because fewer new projects would be coming online, which meant a surplus of panels. The prices for panels fell so fast that they negated any real effect of Donald Trump’s 30% tariff on solar panel exports to the US, which had been implemented that January.
Today, if developers can find rooftops or available land to install capacity in cities with high electricity prices, the industry is still attractive. Since subsidies dropped, the cost of solar modules and engineering, procurement, and construction (EPC) costs have also decreased and most solar projects in China can be fully built for under 4 RMB per watt ($0.56 USD).
The most common distributed solar clients now are electronics manufacturers, the sort of factories in Apple or Huawei’s supply chain. Large western industrial companies, especially chemical, paper, and plastics manufacturers are another common client, as are local factories under pressure between electricity costs and new environmental impact regulations.
Additionally, companies may increasingly turn to wind energy, which has a higher energy density than solar: wind turbines need less space than solar panels to produce the same amount of electricity and the government has recently opened more pathways for on-site (distributed) wind energy.
In April 2018, the National Energy Association of China (NEA) released guidelines on the development and construction of distributed wind, to standardize project development and encourage business innovation through on-site wind. The policies are still opaque. And identifying factories with enough land to support wind turbines remains a challenge. But this could represent an opportunity for factories and industrial parks to power a much higher percentage of their facilities with renewables.
Rooftop solar installations can typically only cover about 5% of a factory’s energy needs, while a few wind turbines can power perhaps 40–50 percent of their facility and sometimes even higher if you incorporate energy storage rather than selling the excess renewable power to the grid, which is the standard approach in most markets today.
Ultimately on-site solar and wind can help more organizations to power their facilities with clean energy and lower their energy bills. As adoption increases and the systems continue to get cheaper and more efficient, this will continue to guide the industry from government subsidies to grid-parity, where renewables can produce energy cheaper than the price of the electric grid.
This article is part of a series on the journey from state subsidies to grid parity and eventually a true spot market for China’s energy sector.
Alex Shoer is the co-founder of Seeder Clean Energy.
