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Chinese Subsidy Cuts Trigger Collapse Of New Solar Modules

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China Dialogue

“Without subsidies there’s no return on investment for over a decade, so investors and property owners aren’t interested in distributed solar.” China’s Photovoltaic Industry Association expects to see 30-35 gigawatts of new solar capacity in 2018, a drop of 43% on last year.

China's shrinking subsidies for solar PV explained

China’s solar manufacturers are unhappy with recent government policy changes that have put a brake on the sector.

“We’ve already halted work on 11 megawatts of industrial and commercial distributed solar PV projects,” says the marketing director for one solar photovoltaic (PV) module manufacturer in Guangdong province.

“Without subsidies there’s no return on investment for over a decade, so investors and property owners aren’t interested in distributed solar. With subsidies it only takes seven years to recoup the investment,” he adds.

This is one consequence of China’s “531” policy that was announced by the National Development and Reform Commission, the Ministry of Finance, and the National Energy Administration without warning on May 31(hence the “531” name). The policy is designed to control breakneck growth in the solar sector, principally by accelerating the phase-out of subsidies.

China has led the world in new solar installations in each of the past five years, helped by guaranteed electricity prices. But the cost of subsidies has been growing unsustainably, and as manufacturers have expanded rapidly to meet demand the risk of overcapacity has grown.

The new policy brings the industry to a crossroads. During the 12thFive Year Plan period (2011-2015) subsidies were paid late and there was significant wastage of both solar and wind power. Those lessons should have been learned by now, says Meng Xiangan, deputy director of the China Renewable Energy Society. To avoid a repeat, the sector can either lobby for an extension of subsidies and continue its rapid and unsustainable expansion, or accept that new capacity will face a tougher challenge on costs.

A sudden change

[…] The new policy has dropped those subsidies to 0.50, 0.60 and 0.70 yuan per kilowatt hour across the three regions, with the distributed solar subsidy falling to 0.32 yuan per kilowatt hour.

This is the second cut in subsidies in less than a year. In December 2017 the distributed solar subsidy fell from 0.42 yuan per kilowatt hour to 0.37 yuan.

“We were expecting subsidies to be cut back but this was too sudden and too sweeping, with no buffer period,” says a source at the Guangdong Solar Energy Association.

The cuts are a clear signal from government that the sector needs to become less dependent on subsidies and shift its focus from rapid scaling toward technological improvements to further bring costs down.

“The subsidy has been a major driver of new projects,” says Lin Boqiang, head of Xiamen University’s China Institute for Studies in Energy Policy.

“The idea of a subsidy is that eventually it goes away. China’s been slow to do that, it would have been better if this had happened earlier,” he adds.

A difficult transition

Many investors and project owners are waiting to see how the new policy plays out.

“Some customers immediately cancelled orders and demanded cheaper prices,” says Sun Yunlin, head of Winone Solar, which provides services such as consulting, feasibility studies and handover inspections to solar farms.

The market has dropped significantly. Wang Bohua, secretary general of the China Photovoltaic Industry Association, expects to see 30-35 gigawatts of new capacity in 2018, a drop of 43% on last year.

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