Inititally published on 2020/07/08 this analysis was updated on 2020/10/14
China’s solar photovoltaic market is likely to be the most critical battlefield for the sate-owned power developers in the coming five years.
We have observed since this year that the tier-1 power companies in China are showing stronger appetites for PV project investments—if not completely shifting the focus of their renewable investment strategies from wind to solar.
Solar used to play a secondary role in state-owned power utilities’ energy transition games. But that is soon to change during China’s 14th Five-Year Plan Period (14h FYP, 2021-2025).
The sharp decrease of solar’s LCOE since 2018 has been the key driver behind the quiet change.
2019: Wind and Solar Taking Equal Roles
China’s electricity market has seen been through some fundamental changes in the past decade.
- Less Coal: From 2010-2019, the share of coal-fired units in the total power mix decreased by 14% (from 73% to 59%).
- More Renewable: During the same period, the share of renewable power has jumped by 17% (from just 4% to 21%).
- World-Class Renewable Asset: China’s total installed renewable capacity has exceeded 410 GW
In the energy transition of the past decade, wind and solar have more or less taken equal roles. The following data indicates:
- Equal Size: As of the end of Jun. 2020, Chinese wind and solar market have each built up roughly 220GW installed capacity.
- Equal Shares in the Power Mix: wind and solar each accounts for roughly 10% of China’s total power mix (over 2050 GW) as of 2020/06/30.
- Similar Growth Path: for wind, its share in the power mix has been risen from 3% in 2010, while solar was up from 1% in 2010.
Wind was the Focus of Large Power Developers
Against the backdrop of the nation-wide energy transition, power utilities in China have slowly changed their investment strategy in the past decade.
The leading utilities–traditionally heavy on coal and hydro– have also become the leaders in renewable investment and construction, with a growing commitment to fronter clean techs like hydrogen and energy storage.
However, in the past decade, their renewable commitment placed much heavier emphases on wind– instead of on solar.
The following figures (as of 2019) show a clear investment preference of China’s five major power developers (the Big Five) for wind over solar:
- 54% Wind: The total installed wind power capacity of the “Big Five” accounts for 54% of the total wind portfolio in the whole nation.
- 14% Solar: The total installed solar PV capacity of the “Big Five” accounts for only 14% of the total PV portfolio in the nation.
- 80% Wind: For four of the “Big Five”, +80% of their renewable assets are wind capacity. SPIC is the only exception with almost a renewable portfolio equally shared by wind and solar. [READ MORE: summary of the “Big-Five’s” 2019 financial and power construction performance]
- 97% Wind: 97% of the renewable asset of CEIC—the world’s largest power developer and renewable developer–is wind turbines
Clearly, the “Big-Five” have played very different role in China’s wind and solar market.
As the five largest power generation conglomerates, the Big Five are also currently the top-5 wind developers in China.
However, in the solar market, three of the five–except for SPIC–are out of China’s top-10 solar developer list. In that sense, SPIC has been taking a unique approach that is solar-bullish. As of now, it is the global No.1 solar developer in terms of installed capacity.
Why the “Wind Preference”?
The following factors have contributed to state-owned utilities and 1st tier players’ “wind preference:”
- Investment Scale: Chinese wind market is featured with centralized and mounted projects of a much larger investment scale. Solar projects, on the other hand, are mostly smaller in size. The rapid development of China’s solar market in the past few years is mainly driven by distributed solar projects, which was not the typical game for the traditional utilities.
- Financing Barrier: large-scale energy projects require stronger financing capacity. The state-owned utilities are with stronger financing capacity in China and better in manoeuvring central and local politics for wind projects.
- Technical Barrier: Solar projects are considered of lower technical barriers. While the large state-owned utilities are in an advantageous position with in-house manufacturing, engineering and technology capacities. They are less flexible in the solar market.
- Utilization Time: Both wind and solar face a similar challenge of power curtailment (generation waste). Wind units in China still enjoy a much higher load factor. As of 2019, the average utilization time of operating wind turbines is 2082 hr, much higher compared to the 1169 hrs of solar units. Higher yields are more attractive to investors.
- LCOE vs. Subsidy: prior to 2017, the wind market had been outperforming solar in terms of cost reduction. The LCOE of wind in 2017 had been reduced to just ¥430/MWh, while solar’s LCOE remained high at ¥500-700/MWh.
China’s 14th Five Year Renewable Plan: Solar Taking a Heavier Role
However, China’s electricity and renewable market are poised to move toward a slightly different direction in the coming five year–when the country is under its 14th Five-Tear National Economy Plan cycle.
Indeed it is highly expected that renewable would continue its rapid development in the coming decades, as China promised to hit carbon neutrality by 2060. However, between solar and wind, things–the relatively equal positions–could be different.
Solar Has been Catching up Since 2018
Since 2018, solar has been more dominant in China’s power investment, as incremental capacity statistics indicate:
- 2020H1: China added 11.52GW new solar capacity (7.08GW mounted and 4.43 distributed); while the nation only installed 6.82GW additional wind units. Solar is almost double the size of incremental wind. Against a backdrop of electricity demand slump due to COVID-19, solar is the only power sector in China that saw positive capacity growth (compared to 2019H1). [READ MORE: China’s 2020H1 Power Market Statistics]
- 2019: solar provided 26.81GW incremental capacity, slightly higher than 25.74GW of the wind market.
- 2018: it is a milestone year for solar. The sector added 45.25GW new capacity, while the wind market only added 21.27GW. This is also the first time solar become the No.1 area in China’s power market.
Higher Solar than Wind in 14th Five Year Plan
Moving forward, most predictions and advisories for China’s 14th Five Year Renewable Plan suggest that wind and solar would take more dominant roles than the traditional sectors like hydro, nuclear, and coal. [READ MORE: our analysis of China’s 14th Five Year Plan Renewable Target Setting]
However, between solar and wind, the former is poised to take a leading role.
- State Grid’s Prediction for 2025: solar would reach 551GW cumulative capacity (18.7% of total power mix) and wind rise to 536 GW (18.2% total power mix) by the end of 2025. Incremental solar between 2021-2025 would be around 320GW, whereas wind would be around 290GW.
- China Industrial Secs Estimation: the security brokerage recently has a bold prediction that, between 2021-2025, the annual incremental solar capacity would be around 80-115GW and the incremental wind yearly would be only 36-45GW. If true, solar investment size would be more than double of wind’s.
- Industry Feedback: our investigation shows that the industry is commonly expecting +80GW solar annually, with little to no installation drop after 2021. While the industry remains undecided on the likely roadmap of wind–likely a mild installation drop during 2021-2022.
Chinese Power Companies’ New Solar Strategies (Updated)
Chinese state-owned power utilities have sensed the shifting renewable scenario. Their recent business strategies reflected their view on solar’s future role in the power market.
China Energy Investment Corp (CEIC)
As world’s largest wind developer-as well as the biggest power developer, the recent business strategy shift of CEIC is highly symbolic.
In its new corporate strategy release, the firm announced an almost-frenetic plan to add 25-30GW PV between 2021-2025. By 2025, the firm sets to see PV account for 7%-8% of the group’s total power capacity mix.
The group currently has only built up a small 1.339GW solar portfolio, compared to 41GW wind (19.6% of China’s total wind portfolio) and almost 185GW of coal-fired power (15.5% of the nation’s total coal power mix).
Amidst the bullish solar ambition, the group has started to take actions. In 2020H1 it secured 2GW projects.
Huaneng has become the fifth solar developer in the past few years. Last year it acquired the solar assets of GCL Poly—currently the 2nd largest solar developer in China— delivering the highest note of the solar sector in 2019. Initially, the state-owned power giant planned to purchase a majority stake in GCL Policy’s solar power company (of over 7GW capacity). First batches of solar asset purchases have been completed in 2020.
Notably, Huaneng is building some 46 solar projects during 2020H1, totaling 4.2GW.
China Datang in 2020H1 has acquired 4GW solar pipeline during the zero-subsidy tenders, too. The move would allow it to rank among in China’s top-10 solar developers.
SPIC: to Maintain the Leading Role
SPIC has been the global No.1 solar developer, currently with 19.29GW solar installed capacity. But its appetite for wind and solar remain huge, eyeing on building up 270GW renewable portfolio by 2035.
Second Tier Power Utilities
Besides the “Big Five,” the second tier power players are also active in the solar game.
Since Jan 2020, there are 22 companies/enterprises have signed clean energy investment agreements with a total value of ¥300b. Among these deals, more than 39GW are photovoltaic power plants. And SOEs are leading 32GW, or 83%, of these projects.
Key Factor of the Shift: Solar’s Lower LCOE
The change was due mostly to the speedy cost reduction of solar since 2018.
2018 was a turning point when the cost of solar projects dropped to the same level of wind–for the first time. However, since then, solar is much quicker in bringing down the cost.
China Photovoltaic Industry Association recently releases an analysis on the LCOE (Levelized Cost of Electricity) of China’s photovoltaic projects. According to the report:
- In 2019, the average annual utilization hours of photovoltaics nationwide were 1169 hours, and the construction cost of photovoltaic power plants is ¥4.5/W. Upon the two conditions, the average LCOE of solar projects is ¥0.44/kWh. [To Compared: The national average desulfurization coal-fired LCOE is ¥0.3624 /kWh.]
- Partially Cheaper than Coal: In 2019, PV projects’ (of 1800h, 1500h, 1200h, and 1000h annual utilization hours) LCOEs were estimated at ¥0.28, ¥0.34, ¥0.42, and ¥0.51 per kWh, respectively. That means some of the solar projects could already be cheaper than coal.
- Overall Grid-Parity from 2021: The association also predict that the whole solar market (mounted PV projects) would reach grid parity soon after 2021.
As solar manufacturers set off a drastic price competition this year, the cost of solar is expected to continue to sink.
In the recent solar project bidding, PV projects have reached an all-time low price, just ¥0.033/KWh higher than the coal-fired power benchmark prices in China. The subsidy amount is 50% lower than that of the previous year, recent research show. It proves again that solar PV is just one small step away from grid parity in China.
Wind, on the other hand, has slowed down its cost reduction. As due to the collective project dashes since 2019, current construction cost has been slightly moved up.
That fundamental shift may have pushed larger electricity players to adjust their solar strategy.
China’s Solar Market: an Even Stronger Impact on the Global Investment Landscape
We urged investors and international companies to take note of shift of China’s renewable market.
Our observations and expectation: The participation of these traditional power players would reshape China’s solar market.
- A stronger role of state-owned investment will reshape the solar market: China’s state-owned power utilities (both tier-1 and 2) are of solid financing capability, which allows them to invest for the long run. As a result, mounted large-scale solar base development would roll over again.
- New clean-tech to couple with solar would benefit: battery storage, hydrogen power-to-gas storage, and smart systems (for renewable optimization) could see wider applications.
- Higher cost reduction pressure on the manufacturers: while many private PV manufacturers were active in project development. Their role may be replaced by the state-owned powerhouses who have a stronger market and policy leverage. As a result, PV materials and products would still face further price reduction pressure.
- International solar investment boom: China’s commitment to 2060 carbon neutrality and its emphasis on solar has a major implication on the global investment market in the coming five years. International solar companies are expected to directly or indirectly benefit from China’s active solar actions.