FITCH: China's New Policy To Reduce Waste In Renewable Energy

Chinese renewable energy producers are likely to benefit from a new policy that guarantees a minimum amount of solar and wind power is purchased in certain provinces, Fitch Ratings says. The extent of the impact of this new policy announced by China's National Development and Reform Commission on 27 May 2016 will depend on execution at the provincial level.

The new policy comes as solar and wind power producers frequently face curtailment, where power grids do not purchase all the energy generated. The wastage arises as the government has not strictly enforced the Renewable Energy Law, which requires grid companies to purchase solar and wind power generated first before buying from other sources. In the past, delayed grid connectivity and higher on-grid priority for power/heating co-generation during the winter season in certain regions contributed to solar and wind power curtailment. Starting from 2015, renewable energy faced additional challenges from slower power demand growth due to the weaker economic growth, and the significant capacity additions by thermal and renewable power producers.

Under the new policy, the NDRC will guarantee that grid companies purchase solar and wind power, based on a minimum utilization hour for such projects, in 11 provinces where producers face severe curtailment. The 11 provinces are Inner Mongolia, Xinjiang, Gansu, Jilin, Heilongjiang, Ningxia, Liaoning, Qinghai, parts of Hebei, Shanxi, and Shaanxi. The curtailment ratios in these provinces were higher than China's average solar and wind power curtailment ratios of 14% and 26%, respectively, in 1Q16. These provinces represented 69% of China's total wind power generation and 70% of total solar capacity in 2015.

The NDRC's guarantee of a minimum utilization hour for solar and wind power, which is set to allow these generators a reasonable return, will provide some comfort to renewable energy investors in these provinces, who have seen the utilization hours for ,wind and solar power in these provinces decline in the past two years. The NDRC will guarantee minimum utilization hour of between 1,800 and 2,000 hours for wind power and between 1,300 and 1,500 hours for solar power in these regions. The average minimum guarantee is about 17% higher than the actual utilization in 2015, although around 8% lower than that in 2013.

The new NDRC policy also bans new wind and solar power projects in the regions where the utilization rate is below the minimum amount under the guaranteed purchase policy. There are still 33GW of wind power projects in the pipeline in these 11 provinces, and those that have not started construction may be suspended.

We believe the effectiveness of the guarantee in provinces such as Gansu, Jilin and Heilongjiang will be most dependent on the execution; especially because the policy has not specified who will bear the cost of any non-compliance with the minimum purchase guarantee. These regions' actual utilization hours in 2015 were 19%-34% below the announced guarantee. The expected growth in power demand in these regions is also weak and export transmission capacity is currently limited. Thermal power (mostly co-gen units) is also running at low utilization, which means there is limited room to allocate more on-grid capacity to renewable energy without further hurting the thermal power producers.

The NDRC's guarantee does not affect the on-grid tariff subsidies currently in place for solar and wind power. Beyond the minimum purchase guaranteed by NDRC, solar and wind power generators can sell any excess power generated through a market power sales programme. The generators will receive the proceeds from the power sales and any applicable subsidies for solar or wind power.

The impact of the new policy on the thermal power sector will be minimal as wind and solar together account for only 4% of national power generation. We estimate that thermal-power utilization would only have been less than 1% lower if the off-take from solar and wind projects were at the guaranteed requirement in 2015. However, we expect utilization levels for coal-fired generation to continue to fall due to the increasing over-capacity in the sector.