On 1 June, in a surprise move, China’s policymakers announced that they would cut subsidies and impose a cap on new solar projects, taking effect immediately. More precisely, the National Development and Reform Commission (NDRC) said it would limit the capacity of new solar projects to a total of 30 gigawatts (GW) in 2018, down from a 53 GW peak last year, and not allow new subsidised solar plants for this year, implying the freeze of the majority of planned photovoltaic projects for the rest of the year 2018, except for some projects under specific programmes (attributed via auctions) and projects funded by a separate ‘poverty alleviation’ fund. Also, the new regulation would impose a ceiling on smaller-scale ‘distributed generation’ (DG) on rooftops (at 10 GW), half of last year’s installed capacity. Finally, it reduces all feed-in-tariffs (i.e. a usually fixed electricity price that is granted to renewable energy producers for each unit of energy supplied into the electricity grid). It is reported that those measures are taken in order to contain the rapid growth of the solar expansion as the transmission infrastructure cannot follow the pace. Also, the national renewable subsidy fund is said to have ran out of money and already delayed payments of the subsidies last year. It obviously indicates a more rapid swing towards non-subsidised projects. This follows another policy announcement for the wind segment last May, stating that the granting of all new wind projects would be subject to competitive auctioning mechanisms as from 2019. Executives from 11 Chinese solar firms denounced the move that, according to them, has come much too soon, as the industry had accumulated large debts in order to compete with the traditional power generation sector.

Impact on sector risk

In the short term, the measure makes fear a glut of solar cells and panels as Chinese demand is expected to drop considerably this year. Effects thereof could be felt worldwide as China represented more than 50% of the globally installed capacity last year (cf. graph 1) and foreign demand is not deemed strong enough to fill up for the lost Chinese demand. Aggressive export strategies could stem from China, prices of solar equipment should continue to drop and margins along the value chain could be compressed. This will only add to an increasingly difficult period for solar cells and panel manufacturers as the USA implemented last January a 30% duty on all solar panel imports (in addition to those already in place for imports from China and Taiwan), even though the expected price drop could alleviate the tariff-related price increase. EU anti-dumping and anti-subsidy duties on the imports of Chinese photovoltaic cells are set to expire next September but could be prolonged. The global transition to competitive capacity procurement tendering is also increasing risks for companies entering such deals as high competition induced by the auctioning system pushes them to offer very low costs. This general trend presses for cost reductions through the whole solar and wind equipment supply chain (among other things for turbines).

In the medium-term, with no plan announced yet for next year and after, uncertainty remains about future solar implementation projects in China and this highlights the lack of long-term planning in the matter. At a global scale, cheaper solar equipment could make global demand rebound as from 2019.

Analyst: Florence Thiéry – f.thiery@credendo.com