China’s recently announced changes to national solar policies will bring significant impacts for the global PV market and possibly the first contraction in global PV demand since before 2000, according to GTM Research.
The country’s National Energy Administration, the National Development and Reform Commission and the Ministry of Finance released new guidance that terminates any approvals for new subsidized utility-scale PV power stations in 2018.
China will also reduce its feed-in tariff for projects by RMB 0.05 per kilowatt-hour (a fraction of a U.S. cent), cap distributed project size at 10 gigawatts (down from 19 gigawatts), and mandate that utility-scale projects go through auctions to set power prices. Projects connected to the grid past June 1 will not receive feed-in tariffs.
In all, the changes will significantly chill growth in a country that’s driving the global solar market.
“When the industry talks about China, it’s always about how demand in the region exceeds expectations,” said Jade Jones, a senior solar analyst at GTM Research. “That is not going to be the case anymore.”
The changes could cut China’s capacity forecast by 40 percent, to 28.8 gigawatts from 48 gigawatts, according to GTM Research. Wood Mackenzie projects a cut of 20 gigawatts this year, down to just 30 gigawatts. Other projections put 2018 capacity closer to 35 gigawatts.
Because of China’s outsized positioning, the global market will certainly take a hit, at least in the short term. Three years ago, China became the world’s leader in solar capacity. In 2017 it accounted for nearly 54 percent of global PV installations.
Source: Wood Mackenzie
Wood Mackenzie called it a “shock to the industry” that China has aggressively supported in recent years through national policy and incentives. The unexpected June 1 announcement also spurred a drastic 15 percent drop in share prices for solar companies in the days following.
With the change in policy, it appears that some responsibility will now shift to local governments to approve projects, as the directive asks for “DG projects not realized by the central government to seek financial support from respective local governments.” But it’s unclear how local governments will proceed.
Oversupply issues and opportunities
GTM Research analysts said that the reduced demand from China will lead to an oversupply in the global market.
“This not only sets the market up for an oversupplied second half of the year, but since China is such a large driver of global demand, it also suggests that suppliers need to slow down manufacturing investments,” said Jones, “lest [they] extend the oversupply cycle beyond 2018.”
While demand in the global market had been high, a shortfall from China means that’s no longer the case.
“As well as the demand-side effects, there’ll be an impact on module costs and tariffs emerging from PV auctions, too, with large volumes of modules that had been destined for the Chinese market now looking for a home elsewhere,” said Tom Heggarty, a senior solar analyst at GTM Research.
But that drop in demand could help the industry, especially in emerging markets, because of a subsequent fall in costs and Chinese developers looking for international investment.
“We’re also likely to see an increase in the number of Chinese PV developers participating in other global markets as their home market slows,” said Heggarty.
GTM Research solar analyst Benjamin Attia said developers have already shown piqued interest.
“We’re already seeing interest from Chinese industrial firms in in-progress tenders in Kuwait and Oman, including firms from the mining, real estate, and defense sectors bidding for 500-megawatt or 1.2-gigawatt projects without much solar project development experience,” he said.
That may negatively impact some markets, like in Kenya and Nigeria, where Attia said “new very low module prices may cause regulators to seek to unilaterally reduce PPA rates or seek to renegotiate a lower tariff, as had already started to happen before the changes in Chinese policy, delaying projects and possibly causing some of them to stall out altogether.”
According to Wood Mackenzie, the change may also drive an increased focus on quality with competitive auctions pushing innovation. Falling costs could also accelerate China achieving grid parity with advanced technologies and new projects by 2020.
Much like the solar tariffs that initially racked the U.S. market with angst, these policies could create a softer blow than initially expected. While Wood Mackenzie acknowledges the changes will “cause near-term market turmoil,” they’re also likely to accelerate grid parity and foster higher PV penetration in newer markets.