China’s wind and solar firms catch chill on tariff cut proposal
Beijing’s proposal to slice renewable power tariffs in next five years saw wind and solar power sector shares sink but cuts are not set in stone
Beijing’s proposal to cut renewable power tariffs in the next five years saw wind and solar power sector shares pummelled in recent days, but some industry executives and analysts say the cuts are not set in stone and the government still needs to incentivise projects development to meet its environment goals.
Policy makers will likely take into account technological advancement and interest rate movements when making final decisions on tariff adjustments, they said.
“Internationally, wind and solar tariffs always go downward as technology improvement leads to better energy conversion efficiency and reduce the cost of power production,” Joe Zhou Xiaodong, an investor relations vice-general manager at Concord New Energy Group, a Hong Kong-listed wind and solar farms developer on the mainland, told the South China Morning Post.
“But the proposed tariff cuts seem to be on the high side toward the later years and the government appears to be quite bold on the target for cost reduction.”
He said the six interest rate cuts since November meant his company’s new wind farms under development could earn a rate of return of around 20 per cent on existing power tariffs, far higher than the 12 per cent minimum it requires for any project it would pursue.
Zhou said it could not be ruled out that Beijing may not cut tariffs by as much as proposed if the technological improvement and interest costs reduction turns out less rosy than has been assumed.
An executive director at a state-backed wind power generator said another factor driving the proposed tariff cuts is the expected up to 7 per cent power price cut for competing coal-fired power, which may soon be announced following sharp falls in coal prices, adding President Xi Jinping’s pledge to start national carbon emission credits trading in 2017 would see renewable power producers gain extra income and help them offset the impact of lower power tariffs.
“While it is reasonable to cut tariffs, we hope the magnitude of the cuts in the later years would be softer, so as to maintain the incentives for sufficient projects to be developed to help meet the nation’s pollution reduction goals,” he told the Post.
Industry regulator National Development and Reform Commission has issued late last week a circular to consult industry participants on its proposal to reduce power prices, an industry executive said. The document was not made public on the commission’s web site.
The proposed cuts could see the subsidised power prices of new wind farms fall by between 1.7 per cent and 5.8 per cent annually between next year and 2019, which would vary across regions with different wind resources, according to analysts of Daiwa Capital Markets.
The suggested reductions for 2020 are much steeper, at between 6.2 per cent and 7.3 per cent.
Operating projects and those completed by year-end will not be affected.
For solar farms, the plan is for tariffs to decline by between 2 per cent and 5.6 per cent annually between next year and 2020, also varying by regions who get different levels of solar radiation.
News of the proposed cuts spooked investors since tariffs were previously reduced only once every two to three years. Tariffs were last cut for solar power in August 2013 and for wind tariffs in March this year.
Investors dumped shares of wind and solar farms developers and their suppliers.
China Longyuan Power Group, Asia’s largest wind power producer, lost 8.7 per cent in the two trading days after the proposed tariff cuts was first reported by the China Business News before making up some lost grounds on Tuesday. Solar farms developer GCL New Energy sank 6.9 per cent in the two trading sessions.
On the equipment side, wind turbine maker Xinjiang Goldwind Science & Technology dived 19.9 per cent, while solar farms installation firm China Singyes Solar Technologies shed 7 per cent over the two trading days.
Citi head of Asia utilities research Pierre Lau estimated that the rate of return of wind farms to be built could fall to 8.5 per cent in 2020 from 17.1 per cent next year.
He cut his forecast on the mainland wind power industry’s total installed capacity by the end of 2020 to 220 gigawatts from 250 GW, compared to 115 GW installed at the end of last year, and projected the annual new wind farm installations to fall from 26 GW this year to 20 GW in 2017.
Some analysts saw an upside despite the cloud over the industry’s growth prospects.
“Beijing has sent a clear message that tariffs need to be cut to encourage the industry to lower costs.” said Frank Haugwitz, founder of consulting firm Asia Europe Clean Energy (Solar) Advisory.
He noted the proposed tariff cuts have been structured to spur more investment in solar and wind farms closer to consumption centres in the central and coastal regions by not slashing their tariffs or cutting them by less, while pruning more sharply those of projects in the northern and northwestern sun and wind-rich but sparsely-populated regions that have power transmission capacity bottleneck problems.
“The proposed tariff reductions are not too excessive and project developers have been given a clear roadmap for the next five years, thus ensuring a greater predictability to the up and downstream industry,” said Haugwitz.