China witnessed an era of tremendous economic growth after 1978, which also drove up the consumption of energy. Similarly to many other developing countries, China chose to rely on coal to satisfy its rising energy demand. Even though the use of coal in the last ten years has seen a downward trend, as of 2019, around 57% of China’s energy consumption still comes from coal. Likewise, electricity generation in China was, and in fact still is, dominated by cheap and reliable coal as shown in the graph below. The enormous consumption of coal would inevitably emit high levels of carbon, leaving severe environmental repercussions. The Chinese leadership started to pay more attention to the renewable industry, as they face increasing pressure from the public about air pollution, especially after the “air-apocalypse” in 2013. In 2016, China ratified the Paris Agreement, which promised to reach a carbon peak and increase the percentage of non-fossil fuel energy sources to 20% by 2030.
Other than serving as an alternative to coal and other fossil fuels, the worldwide development of renewable energy since the start of the 21st century represents a critical moment for China to take on global leadership in these new high-tech industries. Climate change mitigation became the “window of opportunity” for China to move away from an export-driven model. Since the Hu Jintao regime, and highlighted further under Xi Jinping, China has sought to transform its economy through the huge investment in innovative technology.
What is unique about solar energy in China is that it was an important export industry in the early 2000s, before it emerged as a critical renewable energy industry. We have witnessed a special policy dynamic for solar energy in the last ten years: from stimulating solar energy equipment manufacturers, to stimulating solar power generators, and now trending towards de-capacity.
The Past: Over-Subsidizing Solar Manufacturers
In 2002, China’s first domestic photovoltaic (PV) cell production line was put into operation, with 10MW of capacity. In 2004, China began exporting PV cells to Europe, taking advantage of the development of PV power generation in European countries, especially Germany.
However, the domestic solar energy market in China at the time was very limited; the majority of PV products were exported to the EU and the U.S.
After the 2008 global financial crisis, the heavily export-dependent PV industry witnessed a massive drop in overseas demand. To support the solar energy industry, the Chinese government began subsidizing solar companies.
However, imposing policies without careful design led to severe overcapacity in the solar industry.
Similar to other sectors, there are two layers of decision making in China’s solar policies. The upper layer is the central government, which crafts the grand strategy for the whole industry. Central decision making reflects its current priority. The lower layer is made up of local governments, both provincial and municipal, which handle the execution of policies. They have the authority to impose more detailed regulations, or even lobby the central government for policies that are better suited to the local economy. The latter happened in Qinghai province, with the creation of a feed-in tariff scheme that will be discussed later.
At the central level, the solar energy market was supported by cheap capital after the financial crisis. A four trillion RMB stimulus package along with about 10 trillion RMB of bank credit were implemented after 2008. In Jiangsu province alone, the local PV industry received over 10 billion RMB in credit from the China Development Bank (CDB). The CDB financed the solar industry out of the needs of national grand strategy. At the same time, out of the growing concern about climate change after the Copenhagen Convention in 2009, several foreign financial institutions also started to subsidize their countries’ domestic solar industries as part of their stimulus plan. This drove up the demand for Chinese PV batteries once again. This created an illusion that the PV market had already recovered, causing many bankers to lend money to PV manufacturers. The relaxing credit pool plus the improving export market falsely signaled the solar companies to expand their capacity. Unfortunately, many of these loans became bad performance loans in the next few years.
At the local level, provincial and municipal officials strongly supported solar manufacturers mainly due to the alignment of their interests. China’s cadre evaluation system was designed in a way that “rational” bureaucrats would pay more attention to projects and targets beneficial to their promotion. Using Suzhou City as an example, the municipal government released an announcement about developing renewable energy, and set a target of reaching 30 billion RMB of PV industry output value by 2012. Suzhou New District (SND) signed a strategic partnership contract with Canadian Solar (阿斯特太阳能公司) which experienced a severe cash shortage at the time. SND promised to use Canadian Solar’s products to build rooftop solar power plants and extended 15 billion RMB in bank credit. In exchange for preferential policy and financial support, Canadian Solar would establish its research center and Chinese headquarters in Suzhou, as well as increase their capital investment and output volume. This strategic partnership not only helped municipal bureaucrats meet the targets mentioned in the announcement, but also increased future tax revenue and raised employment rates. The research center also boosted technological innovation in Suzhou.
Because the export manufacturing industries were impacted by the financial crisis, the central government’s priority at the time included: maintain economic growth, look for new sectors that can generate future economic growth, maintain employment rates, and push for industrial structural reform. The solar industry was one of the industries due to be upgraded, as it relied heavily on the export market. At this point, the central government decided to heavily support the solar industry. Unfortunately, the policies did not successfully lead to the “healthy” growth of solar battery applications, and the solar industry still remains unable to fully marketize today.
In fact, the Chinese central government had already actively tried to expand the solar electricity generating capacity in China back in 2009, through several subsidized projects, one of which was the infamous Golden Sun project (金太阳工程). The Golden Sun project would cover up to 50% of the investment of qualified solar power plants, transmission, and distribution projects. The lack of regulations and supervision led to massive wasted investment, as many of the solar companies “cheated” in order to receive more subsidies. For instance, many lied to the government about material cost and product quality. The Ministry of Finance had to announce a large withdrawal of subsidies, accounting for over 10 billion RMB in 2013.
One important factor of incentivizing companies to enter the electricity-generation market is missing here: profitability. Even though subsidies had effectively lowered the material and installation cost, for solar power plants to make a profit without relying on government subsidies, their electricity needed to be sold to the national grid. Initially, the “license” of selling solar power to the national grid had to be bid over by solar power plant owners. At the same time, it was clear that the Chinese government also planned to study the German experience and adopt feed-in tariff (FIT) measures in the future to replace the bidding process. The feed-in tariff policy means that after the National Development and Reform Commission (NDRC) approved the electricity price, the government would collect a surcharge from consumers and pass it on to the solar power generators. This surcharge is used to fill the gap between the FIT price and the benchmark tariff (the cost of sulphur-scrubbed coal power). In this way, a profit margin was created for the solar companies and incentivized them to continue installing power plants.
This feed-in tariff scheme was released almost two years after solar power subsidies were given, as solar power generation initially lacked government attention. The central government had always preferred to support wind power, because the latter has lower installation and operation costs, but also because the technology is more mature in China compared to solar power. The NDRC’s approval of FIT schemes was almost coerced by the provincial governments, as their local PV manufacturers faced export reduction pressure. Jiangsu and Shandong drafted provincial feed-in tariff schemes and actively lobbied for approval after 2008. Their plans were approved in June of 2009 and 2010 respectively.
Qinghai province has abundant solar energy resources, and the local government hoped that the development of the local solar industry could drive up regional economic growth. As a result, the government signed 28 PV power project contracts with 25 firms since 2008. Nevertheless, the developers refused to start construction without an electricity price being released. In 2011, after a discussion between the anxious Qinghai provincial secretary and governor, and the head of the NDRC, the national feed-in tariff scheme was finally released.
The Present: Current Challenges and Strategies
In the 13th FYP Development Plan for Solar Power, the National Administration listed out the current challenges for PV power. Among five of them, there are two that are most important: One is that solar electricity generation is too expensive, and the other is the conflict between the conventional power system and PV power system leads to difficulty in PV grid-connected operation and PV power consumption. Other relevant considerations are international protectionism and the solar heating industry developing slowly.
High PV power cost
In July 2013, the State Council released a document calling for over 35 GW of total installed capacity by 2015. This was also the first official document that provided a clear path for the future growth of the industry, clarifying that the industry should expand in sectors including Distributed Solar Generation (DSG), solar power plants, and the international market. With the release of complementary guidance in September 2014 laying out how power generators would make a profit in DSG, the market witnessed an increase in investment interest. However, the growth of this sector still remains limited as investors experienced fundraising difficulties and a lack of clarity over property rights for rooftops.
Later in 2015, with the goal of lowering PV electricity price, the NDRC planned to reduce solar power subsidies starting in December. This in fact encouraged a temporary surge of solar installations, as companies sought to enjoy the subsidy before the reduction policies took place. The “forerunner” project that also started in 2015 created dozens of PV mega demonstration zones through developers’ bidding. The fierce competition between “forerunner” zones led to a solar electricity price that was more than 20% lower than the benchmark price, along with the improvement in solar power efficiency technology. As a result of multiple measures and projects over time, the cumulative installed solar capacity in China reached 43GW in 2015–which is substantially higher than the 35GW target set in 2013–and 205GW in 2019.
What the 13th FYP of Solar Development did not point out is that Northwest China had been suffering from high curtailment of renewable energy, which became particularly serious starting in 2015. The total amount of wasted solar power in 2015 was 4.65 MWh, at a curtailment rate of 12.6%. These issues occur specifically in Gansu, Qinghai, Xinjiang and Ningxia. According to the State Grid Corporation of China (SGCC), solar energy curtailment is defined as the wasted potential of power plants producing energy. It is interesting to find that the National Energy Administration (NEA) suddenly started publishing the solar curtailment rate in Tibet in 2019, which was 25.7% in the first half of 2019 and dropped 26.6 percentage points compared to the same period in the previous year. No data on the high curtailment rate in Tibet from before 2019 can be found, and the extraordinary numbers still lack an explanation.
Most of the solar power in Northwest China is generated inutility-scale solar power plants, which led to power production that exceeded the targeted level in recent years. At the same time, the local demand for electricity was not growing enough to match with the rise of power supply. The discrepancy in energy supply and demand caused an enormous amount of solar resources that had the potential for conversion into electricity to be “wasted.”
The inherent unreliability of solar power is another reason for power plant owners to refrain from using it, which was a phenomenon not only limited to Northwest China. Compared to the cheaper and more reliable energy sources (ie. coal and natural gas), there was hardly any incentive for grid owners to purchase renewable energy, especially under conditions where storage capacity was small. Lacking transmission lines in local areas also contributed to solar power rejection: if the solar energy exceeded load demand in certain time periods, the extra power could not be transmitted elsewhere.
To solve this problem, the NDRC and NEA together released the Management Measures for the Full Guaranteed Acquisition of Renewable Energy Generation in 2016, requiring full procurement of renewable energy power, while setting a minimum purchase amount of renewable power operating hours for each region. If the minimum purchase could not be satisfied, the provincial government would need to compensate the solar power generators. Lin Boqiang from Xiamen University believed that as the gap in power supply and demand grew into a national problem, treating the root of the issue–growing power capacity in areas with high curtailment rates–would be a better measure than requiring the local government to act as the “last resort.”
The Clean Energy Consumption Action Plan [2018-2020] was introduced in late 2018, providing more comprehensive requirements for improving the grid integration of renewable energy power, though setting a somewhat arbitrary goal of achieving a nationwide solar power curtailment rate of under 5%. Since the solar power rejection problem was mostly concentrated in Northwest China, lacking specific solutions for certain regions cannot effectively solve the origin of the problem.
Subsidy Removal – Moving to the Era of “Grid Parity”
The previously high curtailment rate revealed that solar power is currently at overcapacity in China. In hopes of increasing the competitiveness of domestic solar companies and promoting the healthy development of the industry, China officially embarked on the road towards subsidy removal in 2018, reducing subsidies by 0.05 RMB per KWh. The gradual removal of subsidies should benefit the solar industry in the long run, since it is no secret that Chinese solar companies mostly rely on subsidies for profit. By early 2019, the NDRC and NEA pushed solar power owners even further with a document that removed all subsidies despite the challenges of COVID-19. China has officially entered the era of grid parity.
The Future: Uncertainty
It seems that the Chinese solar companies will continue to face pressure from both subsidy removal and challenges in grid integration. Under these pressures, it is not easy to predict the prospects of the industry. The effectiveness of recently implemented and drafted policies remains uncertain, especially as the 14th Five-Year Plan has not yet been published.
Even with the phase-out of solar power subsidies, the International Energy Agency expects to see an increase in solar capacity in 2021 as shown below, because the government has demonstrated some willingness to exercise flexibility in the length of the phase-out. It will be a formidable challenge for the Chinese government to ensure that both the newly produced renewable power and the previously curtailed power could be efficiently integrated into the existing power system.
A draft of the Energy Law released in April of last year potentially offers us some insights about how solar energy will be addressed in the 14th FYP. This new law aims to provide more concrete regulations and a reform path for the whole energy industry. The draft highlights that the reform will clearly state the legal status of the renewable energy consumption system by the state grid. Therefore, provincial government officials are obliged to ensure the smooth running of the system, as it also brings accountability to local energy targets. With an improvement in power integration, China most likely will benefit from dropping solar curtailment rates, even though Chinese experts have expressed that more detailed related measures should be provided.
(Image Source: Antonio Camelo)
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