POWER UTILITY | Staff Reporter, Hong Kong

Here are 3 reasons why China's recent tariff cuts is good news

Cuts were less than the previously proposed ones.

Citi reported that NDRC issued a notice on its website about tariff cuts for on-shore wind farms and solar farms. It also said no tariff cuts for off-shore wind farms and distributed solar projects.

"In brief, we are positive on this notice because: (i) tariff cuts of most on-shore wind farms and solar farms are less than the proposed ones in consultation paper on 30 Sep 2016; (ii) despite the tariff cuts for wind farms to be approved from 2018, their leveraged IRRs would be decent at 11.3%; and (iii) overhang from tariff change of biomass power plants has been removed," it said.

Here's more from Citi:

Benchmark tariff of new wind farms to be approved from 2018 are cut: (i) Rmb0.04/kWh (9.1%) to Rmb0.40/kWh in zone 1, (ii) Rmb0.02/kWh (4.3%) to Rmb0.45/kWh in zone 2, (iii) Rmb0.02/kWh (3.9%) to Rmb0.49/kWh in zone 3; & (iv) Rmb0.01/kWh (1.7%) to Rmb0.57/kWh in zone 4.

Most of these cuts are less than the proposed cut of Rmb0.03/kWh, in line with our previous view. On simple average basis, these cuts would trim leveraged IRRs of new wind farms by 1.7ppts to 11.3%.

Less wind tariff cuts in zone 2-4; more in zone 1 – The cuts of Rmb0.01-0.02/kWh in zones 2-4 are less than the proposed cut of Rmb0.03/kWh in the consultation paper unveiled on 30 Sep, reflecting government support of new installation there.

Major PRC wind farm operators such as Longyuan and Huaneng Renewables have over 90% of their new installation ahead in zones 2-4. But the Rmb0.04/kWh cut in zone 1 exceeds the proposed cut of Rmb0.03/kWh as grid curtailment there is severe hence new installation is not much encouraged.

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