On Friday three government agencies, 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 yuan per kilowatt-hour and a reduction of the same amount in subsidies for power generated by distributed PV projects. As a result, the on-grid power tariffs now range from 0.5 yuan to 0.7 yuan.
The policy will curb the fast growth of solar PV power base, amid efforts by the central government to make electricity cheaper for consumers. The government has stipulated that 2018 electricity prices will be lowered by 10 percent. The Solar PV subsidy comes from continuous hiking of electricity prices in the past, which was paid for by ordinary consumers. With the need to cut electricity prices, the PV subsidies must now be scaled back.
An article on the public China Photovoltaic Industry Association said Friday that while the sector’s growth momentum might not be sustained, solar power will remain a key force in the nation’s energy revolution and will still receive state support. The association said that solar PV installations can generate power at a lower cost than other power sources. This is the Chinese solar industry’s greatest strength. The Chinese solar industry has been doing very well lately, both in terms of growth and stronger profitability, and would manage a cut in subsidies. Given that equipment costs have been steadily reduced in the past few years, it is only reasonable for the subsidy to be lowered. The reduction is mild, but still unexpected. Many PV power plants are still being built.
The cut came as a surprise for the market which reacted very negatively. But the policy do make sense from the perspective the companies are highly profitable on back of strong growth and falling costs. Short term it will have a negative impact on earnings by roughly 10 percent and given the market reaction we think it probably created a buying opportunity in a mid term perspective. In the long run it is clear that the Chinese government want to push the industry towards further development and cost reduction so they reach a point when solar can compete without subsidies. This is actually what the industry has been communicating in recent years, but they didn´t expect the state to use the stick to speed up the process.
This policy decision shouldn’t confuse solar investors. China is taking the lead in PV development globally, with an internationally competitive and complete industrial chain. The central government is aiming for 27 percent of total power generation to come from renewable energy sources by the end of 2020, according to the 2016-20 plan for renewable energy. They wouldn´t implement policies that would jeopardize that plan.
From our perspective the Chinese Solar PV market, both from a producer and equipment manufacturing perspective, is one of the most attractive investment opportunities in the renewable sector today. If this policy decision makes the industry even more competitive in the long run this is only making our view even stronger.