REGULATION | Staff Reporter, China

New rules to erase deficit in China's subsidies for renewables operators

But wind and solar state-owned operators will take some hits.

The new proposed guidelines from China's National Energy Association (NEA) will — if implemented — support the industry transition to grid parity and alleviate the deficit in the government fund that provides subsidies to renewable energy operators, said Moody's Investors Service in a note.

On 11 April 2019, the NEA announced a consultation document that sets policies for the construction of renewable power projects. "The proposed policies are part of the Government of China's plan to achieve grid parity for wind and solar projects by 2020 and to control the pace of renewable expansion in light of the grid curtailment issues caused by the rapid growth of renewable energy," said Ivy Poon, a Moody's vice president and senior analyst.

Whilst most new project pipelines of wind power had already been approved by the government before the proposed new policy, projects on roll-out and grid connections could be delayed as they would not be given priority over grid-parity projects, Moody’s noted. “In such a situation, the operators could alternatively opt for lower tariffs for some new projects to facilitate grid connection, which would in turn lower project returns.”

However, such risks will be partly mitigated by lower near-term capital spending as a result of delays in the yet-to-start projects and improving subsidy receivables. “We expect the proportion of grid parity projects to increase rapidly for solar power operators, but subsidised projects will remain as the primary driver of capacity expansion in 2019 because not all operators and provinces are ready for grid parity projects,” Moody’s said.

Solar power operators' new subsidised projects will be arranged under competitive bidding. At the same time, the government plans to refine the subsidy mechanism by introducing a cap on renewable subsidies for annual capacity additions on new subsidised projects.

“We expect the government will adjust the cap annually to control the pace of expansion in subsidised projects during the industry transition to grid parity. Also, the cap implies limited capacity additions on subsidised projects, which will potentially intensify price competition during bidding,” Moody’s said.

"However, for the wind power sector, the policies would be mildly credit negative to major state-owned operators, such as China Longyuan Power Group Corporation," said Boris Kan, a Moody's vice president and senior credit officer.

"For solar power operators, the policies, will also be credit negative because solar power operators will face more price pressure from lower tariffs on new capacity," added Poon.

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