A third of commissioned renewables have yet to receive their subsidy payment.
Whilst China is expected to remain as the world’s largest market for clean energy investment, Bloomberg New Energy Finance (BNEF) revealed that it is no longer the most attractive one in its Climatescope 2018 rankings as it dropped to rank seven, marking a critical year for the country’s clean energy sector.
“China was accumulating an unsustainable subsidy budget deficit, which meant that a national fund intended to pay renewables developers above-market tariffs was not receiving sufficient capital injections to cover its obligations to the sector,” Climatescope project director Ethan Zindler said.
The report drew parallels from the subsidy budget crisis in some European countries in 2010 to 2015. To resolve this, BNEF noted that China would either have to resort to unpopular levy increases on retail electricity prices, or inject funds directly from the government’s budget.
On 1 June 2018, when it was recorded that about a third of commissioned renewables have yet to receive their first subsidy payment, China said it was restricting new solar installations that would require the national subsidy, until a solution to funding the deficit was found.
As a result, BNEF had to cut its China new solar installation forecast for 2018 from 37-65GW to 32-42GW. It also now expects that module prices will crash by a whopping 34% due to considerable pressure on panel prices as manufacturers try to preserve sales.
“Whilst we anticipate the price drop will fuel demand outside of China, it will not be of sufficient scale to overcome the installations decline in China created by the policy move,” Zindler said.
Chile dethroned China in the Climatescope rankings, thanks to strong government policies, a demonstrated track record of clean energy investment, and a commitment to de-carbonisation despite grid constraints.
However, it was not only policies that pushed China down the rankings. BNEF explained that it revamped its methodology to recognise that some countries are now established manufacturing hubs, whilst others benefit as importers of low-cost goods. Countries did not receive higher scores for hosting manufacturing chains.
“This adjustment to the methodology resulted in some of the world’s largest nations receiving somewhat lower scores than they might have had the previous methodology, including China,” BNEF added.
Meanwhile, India got an important recognition from the report and ranked second in the Climatescope list. Whilst investment in the country declined from $12.6b in 2016 to $10.1b currently, BNEF said this is “not necessarily a negative” as a series of reverse tenders have produced cut-throat competition amongst developers.
BNEF cited the cancellation of a 1GW PV auction held in July 2018 in Uttar Pradesh because the clearing price of 3.48 Rs/MWh was much higher than the 2.44 Rs/MWh tariff discovered in the federal solar auction held concurrently. The decision came as the national government was rolling out 25% duties on imported solar modules, which not surprisingly resulted in higher auction bids.
“In general, India has seen cutthroat competition between solar developers. So much so that projects behind the most aggressive bids are unlikely to withstand a sudden adverse change in market conditions, such as an unexpected increase in equipment costs,” BNEF added.
Developers are required to submit bids that reflect their projects of how the costs and revenues of projects will evolve over their lifetime, from development all the way to decommissioning. Several Indian bids dipped even below BNEF’s most aggressive levelised cost of electricity (LCOE) estimates.
“Developer bets in auctions have often played out in their favour in the past as they have capitalised on renewable technology cost declines, and costs of capital have fallen,” BNEF explained. However, a growing number of auctions are now clearing at prices way below BNEF’s estimates of the tariffs needed to ensure project profitability.
Philippines and Thailand in top 10
The Philippines and Thailand were also at Climatescope’s top 10 at sixth and tenth, respectively. Whilst the Philippines has a large increase in forecast electricity demand, it is targeting to raise coal generation the most by up to five times the current level. Moreover, the feed-in tariff for solar and wind will not be expanded whilst a slow project permitting process could make developers wait for over five years.
Thailand, on the other hand, aims to reduce the country's dependence on natural gas power generation to 40% by 2036. However, there is currently a halt on utility-scale project applications in 2016 causing a lack of large-scale opportunities in the country.
The report added that whilst developing countries added 114GW of zero-carbon energy capacity and cut coal builds by 38% to 48GW, the 4% rise of coal-fired plant generation to 6.4TWh is still a concern. About 193GW of coal are currently under construction, and about 86% of this capacity is due on line in China, India, and Indonesia.
China and India get approximately two thirds and three quarters of their current power from coal, respectively. Combined, these two countries added 432GW of coal capacity in just the 2010-2017 period — larger than the US’ 260GW of coal online today.
“Faced with significant pressure to expand energy access (India) and keep power affordably priced (China), policy-makers will be reluctant to de-commission these new plants. No less than 81% of all emerging market coal-fired capacity is located in these two nations alone,” BNEF said.
“In the context of keeping global CO2 emissions in check, the longer-term challenge for clean power is not just to beat out new coal-fired power plants for new-build opportunities. Rather, it is to displace existing coal-fired plants, many of which have just recently come on line,” the firm added.
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