China Sets Renewable Subsidy Caps: Offshore Wind the Causality?

Chinese offshore wind utilization time

Chinese renewable market embraced yet another new twist of its subsidy set up—one that may have immediate impacts on the country’s offshore wind investment momentum.

The new policy twist came just one week after the wind industry vowed to add 50GW-60GW wind turbines annually from now to 2030–a vision seen as a bullish statement. [READ MORE: Tapping into China’s 3000GW Wind Market ]

However, some analyses believe that the new policy is overall positive on the industry’s long-term development, as it brings clarity and long-term certainty to investors. 

However, many others are skeptical, since a portion of projects would get much less subsidy payment than their previous plans.

The policy is likely to kick off unexpected chain effects on the nation’s offshore wind construction trajectory and may even impact the market’s enthusiasm to adopt better technology.

“Utilization Hour” Time Cap 

The new policy is another effort by Beijing to cope with the enlarging deficit issue in China’s renewable subsidy cash pool—or known as the Renewable Energy Development Fund (REDF). [READ MORE: Detailed Explained–China’s Renewable Subsidy Deficit Issue]

It also brings clarity to a fundamental question that has been bothering renewable investors for years.

  • What is the length of China’s renewable subsidy scheme? In other words, how long would a renewable project receive the fixed premium fixed feed-in tariffs set by Beijing? The industry’s common assumption was 20 years. However, there was no written policy previously backing that “common wisdom”. 

Two policy updates this year by Beijing—one on January and the other released last week—finally brought clarity to that question.

  1. January [MOF (2020) No.4 Rule]: states that all renewable projects that eligible for the national subsidy should receive payment based on their “reasonable utilization time” across 20 years. 
  2. October [MOF (2020) No. 426 Rule]: set down the exact numbers of “reasonable hours” for wind, solar, and biomass projects. 

The time cap will limit the total amount of subsidy payable to each renewable projects in their full life cycle. In that sense, the time caps serve as a subsidy payment ceilings. 

Subsidy Caps of Different Renewable Projects

Onshore wind, offshore, solar PV and biomass projects face different “utilization time” ceilings and thus subsidy ceilings, as we mentioned in this week’s syndicate

  • Onshore Wind: 48,000, 44,000, 40,000, and 36,000 hours for type I, II, III and IV projects 
  • Offshore Wind: 52,000 hours.
  • Mounted PV: 32,000, 26,000, and 22,000 hours for type I, II, and III projects. 
  • Front Runner PV: 35,200, 28,600, and 24,200 hours for type I, II and III projects 
  • Biomass projects: 82,500 hours.  
Energy Iceberg Collected based on Project Public Info

China’s Renewable Subsidy Set up After the Policy Update

Following the policy release, China renewable subsidy set up has subsequently changed in the following dimensions: 

  1. Project’s total subsidy payment will be based on 20-year power production
  2. The feed-in tariff prices, in principle, shall be followed strictly  
  3. Subsidy Ceiling: renewable projects face subsidy caps in their full life cycle [= subsidy rate × project designed output × reasonable utilization time caps ] 
Subsidy Ceiling = 
Subsidy Rates × Project Designed Output 
× Reasonable Utilization Time Caps  

If a projects produce in fewer hours than its “utilization hour cap,” the total subsidy payment that it will receive is based on its actual generation amounts over 20 years. There will no be subsidy extensions after the 20-year operation. 

Suppose a project produces more hours than the “utilization hour cap,” the total subsidy payment that it will receive equal to the subsidy ceiling. The “extra” power generation will be sold at grid-parity prices (= regional coal-fired power price). 

Developers could still seek extra revenue of these “extra power” by green certificate trading. 

Please note, China has yet to finalize mandatory green-certificate trading, which so far remains a voluntary trading mechanism. However, Beijing intends eventually to move to a mandatory system. 

[READ MORE: Chins’s Renewable Feed-in Tariff Pricing and Subsidy Set up–the Basics]

Impacts on Wind

The new set up would have different impacts on the business cases of different renewable projects. 

For projects running in a relatively lower utilization hour, the impact is neutral or positive, as the policy could lead to higher and more stable returns. 

However, projects running or design with a relatively high utilization rate—such as some offshore wind projects and strategic onshore projects in China’s central and eastern region—are likely to face fewer returns than planned. 

An oversimplified summary: 

  • Onshore projects in China’s Northern Region (Type I projects): no impacts or mildly positive impact. Although these projects generally have high utilization rates, in the past, they were facing severe wind curtailment issue, which will be alleviated by the new policy. 
  • Onshore projects in the Southern Region (Type IV projects/Low Wind Speed projects): no impacts as they are likely to produce less than the “caps.” 
  • Onshore projects in Central Regions (Type II and III): it will depends. Some strategic projects with better wind yields face negative impacts. 
  • Offshore projects: overall negative impacts as many investments are decided based on higher wind yields than the “cap.”

Chinese Offshore Wind Market Faces Challenges

Notably, the offshore wind sector is likely to face challenges: 

Energy Iceberg Analysis Based on Existing Projects Public Info
  1. Many Existing Projects Already Have Higher Outputs: the offshore utilization time cap, of 52,000 hrs over 20 years, equals to an annual production time of 2,600 hours. Already there are many operating projects performing in a much higher utilization time. That means a sizable portion of offshore projects would face diminishing returns.   
  2. High-Wind-Yield Markets to Embrace Negative Impacts: in China’s Jiangsu, Guangdong, and Fujian markets, projects are generally expected to produce over 3000 hours per year. Most investments were designed with subsidy payment for >60,000 hrs operation. Some projects in Fujian province, for instance, has been producing for over 4000 hours per year. 
  3. The Economics of Large Offshore Turbines Would Change: the industry previously expected to see the quick adaptation of larger—and more expansive— offshore turbines, which could substantially increase projects’ power output and, thus, secure more subsidy payment. However, developers would need to reconsider their business cases now. 
  4. New Projects May Be Stranded: projects currently under construction is unlikely to stop. However, some projects or investment planned to kick off soon may be stranded due to the reduced return.  

Clearly, the policy may have brought uncertainty to China’s offshore wind construction next years. An expected installation rush in the offshore market may face setbacks. 

Take-Aways for Investors 

Given the policy twist, many previous conclusions regarding China’s offshore wind market are now subject to change. 

  • Reduced Asset Value

Most notably, many projects will get less subsidy and, therefore, will be unable to achieve their revenue forecasts. In particular, those projects initially considered “better” would be affected.

The value of many offshore wind projects in Fujian province will go down. 

  • Signals of Tightening Renewable Subsidy Policy 

Although the industry has been calling for Beijing to provide “extensions” for the subsidy, it is unlikely to happen. The new policy effort has clearly shown the priority of Ministry Finance, which is to resolve the subsidy deficit issue quickly. 

Beijing is trying to balance the interest of the renewable industry and that of the grid operators. The grid operators are required to issue bonds to provide subsidy for the industry. 

  • Further Subsidy Policy “Twists” Are Possible

It is likely to see further subsidy policy measures, as the current policy efforts may be still insufficient to resolve the deficit of Renewable Energy Development Fund. Policy changes remain a risk factor to the industry.