Coronavirus on Renewable Industry of China: Shorter Time, Less Subsidy, Higher Cost

It seems inevitable. As the novel coronavirus outbreak swipe across China, negative economic impacts on the country’s renewable industry would follow. 

The most direct implication is on the industry’s construction schedule. The work disruption caused by the deadly epidemic will cost precious building time of the domestic renewable projects. Already, project developers are under mounting pressure to grid-connection this year to secure the last chance for nation subsidy.  [ READ our previous breakdown of the renewable subsidy setups.]

The outbreak would cost some to lose the subsidy, unfortunately. For solar and wind projects, however, the odds are slightly different due to different regulatory schemes. 

Meanwhile, the business disruption caused by the deadly illness tends to drive up prices of wind and photovoltaic products, in theory. But price elevations may be more prominent in the wind market. 

While many renewable developers in the past days begin to call for Beijing to change the policy and “cut some slack” on the required project grid-connection time. I have low expectation on Beijing to do so—even the regular may agree to provide extra time for renewable projects, the “exceptions” are unlikely to apply to the whole renewable industry, and the “slack” would not be for long. 

Below is my full analysis: 

Coronavirus Outbreak: Impacts on Everyone, but Life-Threatening on Renewable SMEs

The plummet of Chinese A-share stock market on Monday is only the prelude of the economic ripple effects caused by the public health emergency. 

Right now, it is too early to conclude all of the outbreak’s financial consequences. But negative impacts are inevitable. Multiple aspects of the national economy will embrace the impacts, while wider and global scale chain effects are on the way. 

We caution you to pay attention to the economic implications from four dimensions: 

  • overlapping work disruption: the collective work-resumption delay across the whole value chain will have a magnifying effect on project delays 
  • the transportation factor: many municipals set up strict rules to limit cross-municipal transportation, which requires a longer time frame to lift all the bans and resume a smooth transportation network after the country taming the epidemic 
  • the chain effect of the worsen financials: many cash-strapped small-to-medium companies (SMEs) may not sustain the financial impacts of the outbreak; solar factories are especially vulnerable, in that sense [READ MORE in that direction: China’s current renewable asset sales ]
  • lower electricity demand: 2-4 points of GDP growth means at least a similar drops of energy consumption. 

The most direct issue right now is the work disruption caused by the coronavirus outbreak. 

To curb the virus spreading, Beijing extended lunar Chinese new year holiday from the end of January to February 3. But more than a dozen regional governments issued further delays to a restart of companies’ operations —most extending the holiday to February 9. (READ More on the work resumption arrangement in each province–News in Chinese.

While the whole value chain—from manufacturers, transporters, and project constructors—share the same delay. The disruption may be magnified on the project construction schedule. 

Besides the delay of work resumption, the coronavirus has led to transportation disruption in the country. Right now, many cities have imposed cross-municipal travel bans. A smooth transportation network may require a longer time to fix, without which the transportation of chemicals, materials, and large parts are risky or wholly suspended.

Under the ongoing disruption, SMEs have to fight with lower income, with the same overheads and financial costs. Amidst China’s economic downturn and the de-leveraging move, many SEMs already struggled with their financials (with high leverage a common issue). The lack of economic activities could become the last straw on the camel’s back. [READ MORE on Beijing’s fight to “de-leverage”. ]

Overall, a slowdown of economic growth is inevitable, of which some officials hint of only 2% drops, but many others predict 4% or much higher reductions. Either way, energy demand growth would decline accordingly. In particular, fossil fuel consumption (across coal, crude, refineries, LNG) will be on steep declines. 

Slower growth in electricity demand will clash with the current installation rush in the renewable industry, which put renewable projects in an even weaker position to appeal for higher electricity prices from the policymakers.  [READ MORE on Beijing’s decision to cut off wind, solar, hydro 14th Five-year plans ]

Coronavirus on Renewable: Time and Subsidy Directly Impacted 

A direct impact of the carnivores outbreak on China’s renewable industry is the construction timeline. 

As we mentioned in the last analytical piece, 2020 is a critical year for onshore wind and mounted solar PV projects, the majority of which face stressful grid connection deadline within 2020. Project completions before these “deadlines” is the only chance for these renewable projects to be qualified for the premium renewable feed-in tariffs and, thus, the national subsidy for 20 years. READ our summary of renewable power pricing from now to 2022. 

To recap, wind and solar projects face different “subsidy” deadlines: 

  • Onshore wind projects have to grid-connect all units by the end of 2020 (31/12/2020), to be eligible for the subsidy 
  • Offshore wind projects need to complete all units by the end of 2021 (31/12/2021)
  • Mounted solar projects face different deadlines: March 31 and June 30 this year to lock in higher price points. 

The work disruption may cost renewable projects precious time of project construction, therefore increase their risk of missing the national subsidy. 

Coronavirus on Onshore Wind: Project Prices at Risks

Some 50GW projects have secured approvals but yet to start construction. Although the deadline is still ten months away, the industry has been already coping with the stress in the supply chain—or potential shortage of component supply. 

The uncertain work and transportation disruption will have the following consequences: developers will raise prices to secure their supply chain security. As a result, prices of some critical materials and equipment (balsa wood, blades, turbines, etc.) would continue to rise. Most projects thus face a lower return on investment; a portion of the projects will not make the deadline and therefore lose all national subsidy. [READ MORE on insurance risk facing the offshore wind sector–insurance is a common “lower stave of the basket” in the industry]

Coronavirus on Offshore Wind: Higher Risk of Completion Time

Some 40-48GW projects need to complete in two years. Those who fail the timeline will have to sell at the provincial coal-fired power prices. One thing to note is that losing national subsidy has a more substantial influence on the business cases of offshore wind projects than that of the onshore wind. 

Currently, offshore wind FIT is at 0.85/kWh, half of which is paid by the national subsidy. To compared, national subsidy accounts only for about a quarter of the onshore wind FITs in the production regions. 

While offshore developers still have 22 months for construction. But the industry is featured with a complex supply chain. The ripple effect from the supply chain disruption is of higher uncertainty.

While the state-owned research facility recently projected less than 1/4 of the pipeline projects would be able to make the 2021 timeline. This pessimistic view is closer to reality. [READ MORE on the offshore wind investment risks in China ]

Under construction pressure, demands for construction vessels and teams will soar even higher. [READ MORE on offshore wind vessel market’s soaring demand ]

Coronavirus on Solar: Limited Impact on a Selective Groups of Projects

Last year, some 5-10GW mounted PV projects failed to complete on time (December 31 2019). According to current regulation, solar projects that fail to secure grid connection on time (by the end of that year these projects are approved) will face a cut of ¥0.01/kWh from the feed-in tariffs per quarter. That means these 5-10GW projects will rush to grid connection on March 31 and June 30 this year. While the disruption may delay their effort, overall, the amount of projects to be delayed is limited. 

For new projects applying for the 2020 national subsidy, the project approvals this year have yet to begin. The disruption will have a limited impact on these new plans. 

Analysts now commonly expected 40-50GW new solar installation in 2020.

Coronavirus on Photovoltaic and Panel Exports: Limited Impact

So far the PHEIC level outbreak has yet to lead to countries banning Chinese photovoltaic goods exports. The work disruption certainly will lead to slow production in Q1, but the highly automatic production lines would be quick to resume work as soon as the epidemic is under control. Traditionally, Q1 is a “low season” for PV production, too. 

As more Chinese PV producers look into the overseas market, most equipment prices in the global market are expected to remain stable or even decline further. 

Who Take the Cost: Developers?

There would be an economic implication if a renewable project failed its construction deadline. But manufacturers or contractors are less likely to take the responsibility, as the outbreak now would serve as a “force majeru” factor. 

Project developers, therefore, may end up taking the cost from the outbreak, if without proper project insurance in advance.  

Beijing’s Policy-making Priorities After the Outbreak

As facing shorter timeframe to finish the task, developers are taking actions. Earlier this week, solar developers and industry associations start to voice their concerns, calling for the National Energy Administration to provide a longer time for the grid-connection given the unexpected outbreak. 

It is up for the energy regulator to decide whether to “cut some slack.” My judgement, however, is pessimistic, based on the current priority of Beijing’s energy policy-making. 

Right now, the top priority of Beijing is to boost (manufacturing) industry development via low electricity cost—even more so after the epidemic. It is unrealistic to expect Beijing to extend the time window for a large group of projects. An extension on offshore wind subsidy deadline (2021 Dec) is, for instance, unlikely. 

Meanwhile, renewable subsidy and pricing policy is not a decision made only by one regulator. Instead, it is a collaborative decision by the Ministry of Finance(MoF) with two energy regulators (NDRC and NEA). The process for retroactively changes or “cutting slacks” will not be immediate.   

In the past, the energy regulators have created exceptions for their policy, if under pressure by the whole industry. But the current outbreak is an event of total different scale, with a collective impact on the entire economy. It will be a tough decision for Beijing to balance and cater to all demands. 

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