March 28, 2018 Read More →

New Chinese Policies Favor Wind and Solar

S&P Global Ratings (press release):

China’s long-awaited rollout of its renewable energy-quota system will force grid companies to purchase and transmit more non-fossil fuel sources of power. Wind and solar are at the top of the pecking order under the framework, S&P Global Ratings said today.

“China’s renewable energy quota system will be more effective in boosting renewables use than before,” said S&P Global Ratings credit analyst Gloria Lu. “This is credit positive for renewables, especially wind and solar generators,  whose quotas are increasing the most by 2020.”

The new system sets quotas for renewable energy consumption, whereas  previously renewables targets were based on generation. The rules were issued  on March 23, 2018, with the aim to go into effect this year after industry consultation.

Generation-focused quotas contributed to a rush of renewables investments by  major power generation groups. This in turn aggravated curtailment, or cases when the energy was produced but not dispatched. Excess renewables supply in  the northern and southwest regions sat idle. This is because there was not enough demand for local consumption, while the excess could not be transmitted outside the region.

“High curtailment rates have been a major bottleneck for China’s renewables  sector in recent years,” said Ms. Lu. “That said, curtailment started to trend  down from 2017, after local governments were required to stringently observe a minimum-utilization hour policy on renewable energy generation facilities.”

Under the new framework, provincial grid companies and power purchasers will be obligated to meet the renewable energy consumption quotas set for each  province by the end of 2018 and 2020 respectively. If they do not meet targets, they can be penalized.

Beijing plans to raise non-fossil fuels to 15% of energy consumption by  2020–from 13.3% in 2016–and to 20% by 2030. However, a great deal of abandoned wind and solar power in the northern China and hydro-power in  southwest China has become a deterrent for the nation’s development of renewable energy.

“The new quota system will push the provincial government and the grid companies to take effective measures to increase renewables consumption in order to avoid punitive economic and political consequences for missing the  quota,” said Ms. Lu.

As part of the quota system, China will also issue renewable power certificates to power companies for every megawatt hour of generation. The renewables generators will transfer the certificates to grid companies or power purchasers when they dispatch the power and receive payment. Importantly, the generators will still be entitled to government subsidies for renewable energy even after the certificate transfer.

Note the difference in approach from the “green-certificate” program for onshore wind and solar starting in July 1, 2017. On a voluntary basis, energy companies could earn and trade green certificates to raise short-term cash in the market. However, by doing so, these companies lost their eligibility to receive government subsidies on renewables generation. The green-certificate

program helped the government reduce its mounting subsidy burden.

It is not clear whether these two certificates will merge in a mandatory green-certificate program. This would force companies to trade their green certificates on the market–where returns are uncertain–rather than hold out for subsidies.

We expect a negative effect for the captive coal-fired power plants also covered by the renewable energy quota system. These captive generation  companies (gencos) supply electricity for the production of aluminum, steel, polysilicon, and cement within the same group.

“If those captive gencos have to purchase the certificates to meet quota, their payments may replenish the source of renewable energy subsidies,” said Ms. Lu.  

The new rules were announced and will be monitored by China’s economic planning body, the National Development and Reform Commission (NDRC). The NDRC will allocate renewable energy quotas to the provincial grid companies, other distribution and retail companies, large end-users in direct power purchase, and the captive gencos in the same province for 2018 and 2020. Two sets of quota were introduced on (1) total renewable energy (hydro and non-hydro); and (2) non-hydro renewable energy, including onshore and offshore wind, solar, biomass, and geothermal.

Wind and power stand to benefit the most, because non-hydro quotas are  increasing the most from 2018-2020. The quota for hydropower is relatively flat from 2018-2020, partly due to its mature stage of development in China and long planning and construction period. That is decreasing for regions that are facing severe curtailment on hydropower generation, such as Yunnan,  Guangxi, and Sichuan.

More: Wind And Solar Generators Stand To Gain The Most From China’s Renewable Energy Quota System

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