Beijing’s power tariff cut proposal hammers Chinese renewable energy stocks

PUBLISHED : Friday, 30 September, 2016, 4:52pm
UPDATED : Friday, 30 September, 2016, 4:52pm

Shares of Chinese developers of wind and solar power projects sank after Beijing proposed substantial cuts to their subsidised power tariffs to plug the growing deficit in the state-financed renewable energy subsidy fund.

The cuts also reflect lower power production and equipment costs for renewable energy projects amid technological advancement and savings from greater production scale, as the renewable energy industry is fast closing the cost gap with pollution-prone coal-fired power.

“Renewable power project returns are relatively high even as tariffs have been falling in recent years, thanks to technological progress and growing operating scale,” Liu Shunxing, chairman of Beijing-based Hong Kong-listed wind and solar farms developer Concord New Energy Group told the Post.

“As the cost reductions have far exceeded the government’s earlier projections, it is natural that subsidies need to come down to avoid excessive returns.”

He noted power tariffs of new projects tendered by local governments on a competitive basis have attracted significantly lower power tariff offers from developers compared to state-set benchmarket tariffs, which further justifies the proposed cuts for projects with regulated subsidised tariffs.

By forcing developers to bid for new projects in an increasing number of regions, Beijing has been gradually shifting away from the current mainstay model of fixed subsidies for renewable projects, so as to reduce its financial burden from surging subsidies owed.

The Beijing-run renewable energy development fund, financed by a surcharge on end-users’ power bills, has been running at over 30 billion yuan in deficit, despite repeated hikes to the surcharge, resulting in 12 to 18 months of payment arrears to project developers.

According to an industry consultation document issued by regulator National Development and Reform Commission posted on industry web-site, ground-mounted solar farm tariffs are proposed to be cut by 31 per cent to 0.55 yuan per kilo-watt-hour (kWh) in most northwest regions, for new projects approved on or after January 1 next year.

The document did not give a deadline for when currently approved projects must be connected to the power grid in order for developers to avoid being affected by the cuts.

Most northern and northeast regions would see a 26 per cent reduction to 0.65 yuan, and that of other regions would fall by 23 per cent to 0.75 yuan.

For roof-top and other off-power grid solar farms, their subsidies are suggested to be slashed by 29 to 52 per cent.

“Overall, 2017 domestic demand [for new solar farms] is expected to significantly slow down, and both [equipment] manufacturers and [project] developers will have to look beyond the Chinese border even more,” said Frank Haugwitz, founder of consulting firm Asia Europe Clean Energy (Solar) Advisory.

He said even with construction cost reductions, the proposed tariff cuts would result in lower project returns.

This would dampen developers’ fervour to add new projects, after a record installation volume was recorded in this year’s first half, ahead of the July 1 grid-connection deadline to avoid the previous round of tariff cuts.

Other analysts are more optimistic. “Even though the magnitude for the suggested [subsidised tariff] cut is not official, it is larger than expected ... however, given construction cost is expected to drop by more than 15 per cent this year and will further decline next year, we believe the cut will not significantly affect project returns for zone three [regions other than northern China] projects,” said DBS Vickers analysts Patricia Yeung and Tony Wu in a note.

They estimated that returns for zone one [mostly northwest China] projects would fall by some 2.5 percentage points and that of two [mostly northern and northeast China] projects would decline by 1.5 percentage points.

The consultation paper has proposed that the power tariffs of new onshore wind farms approved on or after January 1, 2018 be slashed by 3 fen per kWh, or 5.9 to 6.8 per cent depending on the region, according to Pierre Lau, Citi’s head of Asia utilities research.

He estimated that the proposal could see project returns fall to 10.7 per cent from 15 per cent this year and 17 per cent last year, assuming a construction cost of 8 million yuan per mega-watt and 1,950 hours of plant utilisation per year.

Meanwhile, the consultation paper also suggested that power tariffs of biomass and waste-to-power projects approved on or after January 1 next year be decided by local governments based on benchmark prices set by Beijing, or “levels commensurate with local conditions”.

“The policy might lead to a drop in the on-grid waste-to-energy and biomass power tariffs, as the subsidised tariffs’ determination is delegated to local governments and won’t be guaranteed by the Ministry of Finance,” Dennis Ip, Daiwa Capital Markets’ head of Hong Kong and China utilities, renewables and environment research, wrote in a report.

Shares of wind farm development-focused China Longyuan Power, Huaneng Renewables and Concord New Energy closed from 9 to 11 per cent lower on Friday.

Shares of solar farms developer GCL New Energy tumbled 10 per cent, while those of waste-to-energy and biomass power projects developer China Everbright International sank 8 per cent.