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28 April 2022

China’s green subsidies shift to provinces and specific initiatives

The Price Department of China’s National Development and Reform Commission (NDRC) has stated that new solar and wind power projects will continue to be built on a parity basis in 2022 – parity with the coal power price benchmark – and that new projects will have the option of participating in the open market. This announcement may not cover residential solar, which wasn’t mentioned. Shares of power generating companies such as Star Power, Mindong Power, Huaying Power and Huadian International rose modestly with the news.

China’s move to market-oriented electricity prices and a spot market has been on the cards since the country’s second power market reform began in 2015. The benchmark electricity price was allowed to “float” up by 10% and down by 15% in October 2019, with certain sectors exempted from the float. Already by 2018 market-based transactions had reached 2,170 TWh, up 30% from the year before – and total electricity consumption was close to 7,000 TWh that year. In 2020, 70% of coal power was traded on the market.

In October 2021, in one of the reactions to China’s brief coal shortage, this floating mechanism rose to 20% in both directions, and the commercial and industrial sectors were fully included in the mechanism, having previously only reached a 44% rate of market participation. Despite its commitment to eventually have a liberalized electricity market, the government has also kept price controls on electricity for the sake of industrial development, with one part of the September blackouts being generators’ limited ability to buy coal when its price spiked.

Different generators also follow different rules – in 2019 regulations had gas allowed to exceed the coal benchmark by no more than $53 per MWh, while nuclear power had to follow either the national nuclear benchmark price of $65.6 per MWh or the local coal benchmark, whichever was lower. In October, China’s coal benchmark prices varied from $70.6 per MWh in Guangdong down to $38.1 per MWh in Xinjiang.

According to anonymous sources reported by Bloomberg last month, the majority of a $61 billion increase to a Chinese central government fund is destined to pay off subsidy arrears owed to renewable power generators. The sources claimed that the bureaucracy is currently calculating debt owed to various developers and that the entire backlog may be paid off this year. The backlog was $40 billion in mid-2020 and is now more like $60 billion. These reports are corroborated by Chinese media statements which are similarly not entirely certain yet.

New subsidies for solar and wind projects have mostly been terminated, but a few minor categories remain subsidized this year. In November, China’s Finance Ministry assigned $236 million in subsidies to solar power projects for 2022, and $348 million to wind power. Residential solar and offshore wind are the last renewable categories to retain a portion of their old subsidies into 2022, but new initiatives have been brought into place to support renewables, namely the “whole-county promotion” of rooftop solar and the “desert base project” for hybrid wind-solar complexes.

Then there are provincial support initiatives for renewable energy – something actively encouraged in the NDRC’s recent announcement. Two of the most important provinces for offshore wind, Guangdong and Shandong, announced their policies to support offshore projects in March, and Zhejiang, another coastal province, followed suit in the first week of April.

In Shandong Province wind farm projects will be subsidized at a rate of $122 per kW of capacity this year, $76 per kW in 2023, and $46 in 2023. Up to 2 GW, 3.4 GW, and 1.6 GW can be covered in those respective years – so 7 GW of offshore wind in three years from a province with a population of 101 million. Shandong is the leading province in the renewables field within China, accounting for 11% of solar capacity and 6% of wind. The province will bring in an optional two-phase time-of-day pricing system for residents from May 1st, with peak prices 50% higher.

Nuclear power is also to benefit from the government decision to allow electricity prices to increase, but this segment of the power sector, with is 10-year lead times, is the most removed from market considerations and the most dependent on policy. Four new reactors were commissioned in 2021, bringing the total to 53, with China’s nuclear capacity to reach 100 GW in 2030, and then between 200 GW to 400 GW in 2060.