Why China's new tariff cuts are bad news for solar companies

Expect a 20% slash at around Rmb0.2/kWh.

The Chinese government on 30 Sep issued a consultation paper regarding tariff cuts for renewable energy power plants. "Based on our recent due diligence with NDRC, industry researchers and power companies in Beijing, we think that the final tariff cut plan might be unveiled before end 2016. We believe this would be good news for PRC power farm and biomass operators but bad news for solar companies," said Pierra Lau, analyst at Citi.

Lau said they assume a solar tariff cut of Rmb0.2/kWh (around 20%), comparable to proposed cuts of Rmb0.23-0.25/kWh. This would reduce IRRs of new solar farms to be approved from 2017, and those approved earlier but that cannot be completed before end-1H17, from double digits to single digits.

Despite the return cut, the regulator is not worried about the industry’s development as solar equipment prices are down sharply and interest in adding new solar farms is huge.