China to halt subsidies for some types of wind, solar projects: NDRC

China's central government will halt subsidies for some types of renewables, including new onshore wind projects, concentrated solar photovoltaic power plants and distributed solar photovoltaic projects for commercial use, effective Aug. 1, the National Development and Reform Commission said June 11.

The subsidies have been halted because these projects have developed rapidly, become cheap and can compete head-on with coal-fired electricity. The move will also relieve the central government's subsidy burden as billions in overdue payments have accumulated over the years.

The policy will apply to new projects in the pipeline and electricity generated from these plants will be sold at either local benchmark prices that compare with coal-fired power or market prices, while participation in electricity trading will be voluntary, NDRC said in the statement.

Despite phasing out the subsidies, NDRC said it encourages local governments to develop localized policy instruments supporting all types of renewable projects, ensuring sustainable development of onshore and offshore wind, and solar for both residential and commercial use.

NDRC said provincial governments can now set prices for offshore wind projects and solar thermal power generation projects.

Long overdue

"It's been a long-awaited policy, not a sudden shift of stance. There's a painful need to phase out the unsustainable renewable subsidy that is centrally distributed," Wu Yuehao, associate director for Infrastructure Ratings at S&P Global Ratings, said, adding that the math doesn't add up.

Renewables generation in China grew by double-digits, at a five-year compounded annual rate of 26.6% over 2015-20, and at the same time power generation volume grew at 6%, while the fund that is the source of the government subsidy grew only in the mid-single digits, she said.

"It's hard for the renewable subsidy fund to catch up with the disbursement needs which grew mid-twenties," Wu said. "Clearly the surge in renewables capacity was above expectations," she said, adding that the policy essentially closes the lid on the deficit that ballooned together with renewables capacity.

Delayed subsidy payments resulted in arrears of over Yuan 300 billion ($46 billion) at the end of 2019, according to Ratings' report in April.

The report also said the levelized cost for coal-fired electricity in China now ranges from $50-66/MWh, while it is highly competitive with $41-62/MWh for onshore wind, and $29-59/MWh for solar (fixed-axis photovoltaic).

"The continued declining construction costs for wind and solar farms driven by tech innovation, and the reduced power curtailment based on government's requirement could help operators sustain their project return to a certain extent even without tariff subsidy," according to Apple Li, director and lead analyst for Global Infrastructure Ratings at S&P Global Ratings.

"We believe the fadeaway of subsidy is inevitable if renewables are on the agenda to be one of the major energy sources in the future and it has to be part of the market-based trading system," Li said, adding that upcoming carbon trading and green certificate trading could provide additional income.

Policy impact

NDRC's policy change will impact at least two categories of market participants -- renewables project developers and renewables equipment manufacturers.

For the project developers, clearly without subsidy the returns will be less, but they've got more cash flow clarity without the thorny issue of having to wait for the subsidy disbursement, Wu said.

"As the projects will be awarded on a competitive basis each developer will have to bid with their cost of capital in mind and their required IRR or Internal Rate of Return," Wu said.

In recent years private capital, which poured funding into the renewables space in China, has been hurt by delayed subsidy payments, pushing more and more of the industry to become concentrated with state-owned enterprises.

Wu said the state-owned power developers "will have to think hard about how they could enlarge their assets without impacting their leverage that much" as the subsidy regime gets phased out at a time when their decarbonization targets are only getting tougher.

"Remember five generation groups (Big 5) have about 45%-55% of the national power generation share. Given the carbon policy by President Xi, it's naturally obliging them to make the shift to make the overarching goal a reality," she said.

For renewables equipment producers, it's a mixed picture with the central subsidy gone, as project developers will have to push for more reasonable equipment prices, but the demand will compete with limited supply, Wu said, adding that the commodity super-cycle is partially caused by decarbonization efforts as lots of wind and solar farms are waiting to be built.