China Cuts Solar Subsidy: Investors in Crisis

Subsidy cuts in China have caught global solar investors by surprise this June.

The National Development and Reform Commission, the Ministry of Finance, and the National Energy Administration announced a cut in the national feed-in tariff by ¥0.05 ($0.008) per kilowatt-hour and a reduction of the same amount in subsidies for power generated by large-scale distributed PV projects. Subsidy reductions will not affect power prices for smaller-scale, community-based solar power projects. The Chinese government justified the move, explaining that solar PV has long been commoditized because of reduction in equipment prices and that scaling back on subsidies will reduce overheating in the sector. The joint announcement indicated that the measures are aimed at “promoting the solar energy sector’s sustainable development, enhancing its development quality, and speeding up reduction of subsidies.”

Many agree that the move is the result of recent trade wars with the US administration. January 2018, President Trump announced a 30% tariff on imported solar equipment that will last for at least the next 4 years. This is believed to be in response to anti-dumping measures and to prevent undercuts by Chinese solar manufacturers in the US market.

Can Subsidy Cuts Lead to Grid Parity?

Financial incentives and subsidies have long been the cornerstone of solar investments. On one hand, it provides much-needed economies of scale. On the other hand, it encourages investments by ensuring that PV electricity cost achieves grid parity. As the energy sector was settling down into , technology investments and grid flexibility meant that solar energy could reach grid parity even without financial incentives.

The Chinese renewable industry is one of the front-runners of clean energy projects across EVs, wind turbines, solar panels, and energy efficient appliances. During the last decade, the Chinese government introduced the Solar Roofs Plan for promoting the application of solar PV building, and reintroduced the Golden Sun Project to give 50% of the total investment subsidies to the grid-connected PV power generation project. Increasing domestic and industrial demand, the adoption of EVs, and rising pollution have created an ever-increasing need for solar projects in China.

Thus, subsidy scale-backs have created an uproar in the Chinese market. On June 4, there was a sell-off in Chinese solar equipment stocks. Shares dropped the 10% daily limit for several firms, including Shanghai-listed LONGi Green Energy Technology, Jiangsu Linyang Energy, and Tongwei, and Shenzhen-listed Sungrow Power Supply.

China Will Remain a Renewables Leader, despite Scale Back

Resilience of renewables has been a topic of discussion across many energy forums, and the solar industry is a front-runner in this. Chinese solar power will continue to strengthen its position as a mainstream energy source across both utility-scale and distributed energy generation. Guidehouse Insights’ recent report, Preparing for New DER-Driven Opportunities in the Chinese C&I Energy Market, explores the changes in the Chinese commercial and industrial electricity market and the opportunities this creates for distributed energy resources stakeholders.

The Chinese solar industry is likely to witness a larger number of mergers and acquisitions over the next year, especially among the smaller market participants. While long-term prospects continue to remain positive, the short-term impact will cause a contraction in the overall positive growth trajectory.