The State of Solar: Bracing for a Post-Subsidy Era in China

China has led the world in annual solar installation capacity for the last seven years. The success of China’s solar industry is closely observed by the international community, which is looking to see if China’s progress will fulfill the 2030 climate goals committed in its 2015 Intended Nationally Determined Contributions. One crucial climate target for China is to increase non-fossil fuel use to 20 percent of all energy use by 2030, and solar energy is key to meeting this goal. 

The latest report by the International Renewable Energy Agency showed that, by the end of 2019, China’s cumulative solar installation capacity reached 204GW. This almost doubles the 2020 goal (110GW) set in China’s 13th Five Year Plan, three times the US solar volume and even more than the combined solar capacity of EU-28 and the US.

The arrival of the grid-parity era?

The fact that subsidies from central and local governments drive China’s solar development is no secret. The most common subsidy scheme has been feed-in tariffs, which allows a solar project to lock in an above-market electricity rate for 20 years if the governments approve.The feed-in tariffs were as high as 80 cents per kilowatt-hour in 2010 but have since been gradually phasing out. In early April 2020, the National Development and Reform Commission further reduced the subsidy to about five cents per kilowatt-hour for a typical solar project, about one-sixteenth of the 2010 level.With dwindling feed-in tariffs almost reaching zero, some policymakers and solar industry leaders are applauding the arrival of the Grid-parity Era, the term implying that the solar industry now can compete with coal-fired power plants without additional financial support.

Eroded financial bottom line
The solar market started to slow down in the second half of 2018 when several central government agencies jointly declared the 531 New Deal on May 31, 2018, a policy to accelerate reductions of feed-in tariffs for solar power and temporarily suspend new applications for subsidies. As a result, new solar installations in the second half of 2018 plummeted, producing only 44GW—down from 53GW in 2017. In 2019, the annual solar installation capacity and production further declined to 30GW—down by 40% from 2017.

Delay of the subsidies

A solar power plant doesn’t automatically receive government subsidies; it has to apply. The opaque procedures, convoluted rules, and ambiguous criteria have made application submission, approval, and fund distribution an extraordinarily long and unpredictable procedure. And every day of delayed subsidies is essentially a loss of revenue from a business point of view.In April, the Ministry of Finance resumed a new round of applications for solar subsidies. Qualified projects had to be in operation before July 2017, which delayed subsidies for at least three years to eligible solar projects. And if you count additional time for processing the application and distributing funds, it could easily take another year. Even worse, you might be denied for the subsidies for one reason or another because the fund is not sufficient to cover all qualified solar projects.

Brace for the Post-subsidy Era

Policymakers face a dilemma: sustained scheme of solar subsidies will dig a deeper hole for the central government to fill in, but getting rid of the subsidies now may cripple the solar sector and eventually miss the 2030 national climate goals.

Maybe more fundamental than the question of whether or not the solar industry needs subsidies, is whether the solar industry is truly capable of contending with the fossil fuel-based power plants at a level playing ground? Some long-standing energy policies have notably put solar power at a disadvantage and should be amended, which may have a greater positive impact on the solar industry.

Subsidies to coal-fired power plants are never overdue. Since 2000, coal-fired power plants have been subsidized or, some say, rewarded with 100-120 billion a year to help reduce environmental pollution by installing expensive desulfurization and denitration equipment. In addition, the policy has been used as an argument to issue more permits for new coal-fired power plants, competing with solar power. 

Coal-fired power plants prioritized at dispatching. This is a conventional approach that essentially penalizes variable renewable electricity when it competes with fossil fuel-based electricity. As a consequence, when the demand for electricity drops, renewable energy is forced to yield to coal-fired power, curtailing, and losing revenue.

Solar policies lack continuity and transparency. When the solar industry is constantly guessing what, when, and how the next solar subsidy policy would be announced and who would be lucky to qualify the subsidies, investors are nervous about the uncertainty of financial return, and the solar market is more volatile.

Source:PAULSONINSTITUTE

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