Chinese renewable power development has once again faced a chokepoint.
To many’s surprises, local governments in China appears to set off a new wave of pausing renewable project development, just after the industry hit hard by Beijing’s no-subsidy policy and the recent month’s work delay. The recent development is only a reflection of the severe over-investment issue facing China’s power sector. And as we have long predicted, the renewable could be entering into a new phase in which energy storage provides fixes of the many challenges.
Renewable New Build Stranded, Just After the COVID-19 Attack
One by one China’s provincial governments has unleashed their annual renewable (wind and solar) construction plan for 2020. The country is in a desperate mood to resume economic activities and infrastructure construction routine, after a long-stretching lockdown to combat COVID-19 spreading.
But the near-term outlook for China’s wind and solar developers (wind, mostly) seems grim. The provincial governments did not announce ambitious renewable new investment plans—something that we are have been accustomed to in the past decade.
On the contrary, more than a dozen of provinces unveiled plans to suspend new investment into wind. Some provinces put incremental wind development on-hold overall; others said to pause approval for new investments into a fraction of the market (i.e. onshore wind only).
A quick recap of the provincial “renewable suspension” schemes:
- Hunan province banned new wind investment, Shaanxi, Shanxi, Anhui, Shandong announced no new wind investment would be arranged in 2020.
- Shandong and Jiangsu province will not green-light any new wind investment—mounted or distributed, onshore or offshore— if they require national subsidy.
- Guangdong the offshore wind enthusiastic said it would suspend approval for new onshore investment, but appears to allow offshore still.
- Two of the largest onshore wind complex builders, Xinjiang and Inner Mongolia, is still tagged as “orange province” with moderate renewable investment risk. Constructions for previously approved projects are allowed, but new investment cases will be paused.
The collective moves generate questions and create confusion: does China plan to put a brake of its booming renewable market? And as Beijing appears to green light “more” coal-fired power projects, does the country—pledging to promote decarbonization in the past decade— now reverse its progress?
Deficit in Subsidy Cash Pool the Main Reason
The official rhetoric pointed to “over investment” as the main culprit. Local governments said their renewable installations have exceeded the preciously-laid-down 13th Five-Year Plan targets. Consequentially, there is” no more development quota” left for new projects.
However, China’s renewable development target has been “forecasting” goals instead of complementary objectives. What is more, exceeding an FYP target was never really an issue previously—a quota of new project development was not legally binding.
Beijing introduced a new policy last year to tighten provincial governments’ power over renewable approvals. Regional governments are commanded to ensure power consumption of renewable sources (meaning, a low-level renewable waste rate) before giving new project go-ahead. The new measures may have played a role in taming regional governments project approval enthusiasm.
A bigger factor, Energy Iceberg believes, is the cash balance of China’s renewable subsidy account. China embarked a renewable energy development funding (REDF) to pay out renewable power subsidy, which collects renewable surcharges from end customers and payout to renewable plants via power gird. But in reality, several design loopholes, “over investment,” and booming renewable development lead to a mounting deficit in the cash pool.
Triggered by the REDF deficit, the following factors have all factored into the current situation:
- The deficit of national funding cash pool: a majority of China’s wind and solar projects have either experienced delayed subsidy payment or never receive the subsidy at all (although such payment is legally binding).
- Beijing’s new strategy to tackle the subsidy fund’s deficit: after years “kicking the can down the road,” Beijing has unleashed serious measures to address the issue. A key strategy is to push forward zero-subsidy for new projects, in a bit to limit enlarging the subsidy spending. Also, Beijing has tightened provincial governments’ power over renewable project approval. Those who have planned “too much” projects are stripped of new project development right.
- Project launch dashes in 2018-2019 due to the “zero-subsidy” timeline: provincial governments have approved a massive amount of projects in the previous two years, in a bid to help the local renewable plants to secure national subsidy (of which the cut-off line is 2020). The historical project dashes lead to severe issues: soaring construction cost, supply chain bottleneck, higher investment risk (as unfinished projects would lose subsidy), and regional renewable power waste (a destined future).
- Local governments lack incentive/capability to fund renewable: there are many discussion in the industry to ask local (provincial) governments to provide subsidy to the renewable projects, while Beijing sets to shelve their financial support. But local finance in China faces their own issues, and most could not afford to subsidize these projects themselves.
- Challenge of High Penetration Renewable on Grid: the project dash faces transmission infrastructure gridlock, and it brings challenges to the grid regulation. China’s grid is far from ready in terms of flexibility (both dispatch capacity and management) to take a much higher penetration rate of renewable, even though the renewable law requires the grid to prioritize renewable consumption. Without the grid’s support to sell renewable, local governments are reluctant to push forward projects that may turn into stranded assets.
In conclusion, China’s frenzy renewable installation rush—especially in distributed solar and offshore wind—are the direct reason leading to the pausing of new investments. But the most fundamental factor remains to be renewable’s funding. Beijing may be unable—at the very least, unwilling—to financial fund the speed of renewable growth that we are used to in the past ten years.
A New Stage—Renewable Plus Energy Storage as the Salvation
The project suspension trend, certainly, added insult to the injury of China’s renewable industry, which seems to face a perfect storm: sliding subsidy, slowing market demand growth, construction bottleneck…
But the current gridlock will not last forever. China’s wind and solar power market may be heading into a new phase, where the industry is to finally tackle two critical issues of which the solutions have been long overdue:
- the economics and price competitiveness: the industry will be forced to reduce cost and survive without subsidy
- technical barriers for higher power penetration: the industry needs to increase electricity power quality, stability and flexibility to take a role as a base-load provider
A potential answer to the second issues appears to be energy storage, where battery-based or other storage solutions teamed with renewable to serve as a stable energy provider.
The current struggle of renewable, therefore, could be good news to the storage battery providers and BES operators. After a hard blow by the winter, the young industry may be slowly lurching to spring.
The local energy regulators in China, evidently, have seen that the renewable-storage hybrid solution is the future direction to go. In recent months, a handful of Chinese provincial governments have included “storage”, or even more precisely “battery storage”, in their wind/solar 2020 work arrangements.
Make no mistake: these “government work plans” embrace more than just empty slogans and phases. They are local policies. The rhetoric shows that local governments would prioritize the development of the renewable project with storage facilities.
Already five provinces in China have included battery storage in their 2020 wind development plans, and three other provinces (Qinghai, Xinjiang Autonomous Region, and Jiangsu) have developed a similar strategy before 2020.
Battery storage is looking more and more like the solar PV sector ten years ago, where the support of the local governments provided an industry boom. The battery industry has begin to imagine, soon enough, storage would become a must-have for any new renewable investors.
Storage in Early Stage to Explore Business Viability
There are many reasons for the industry to support BES for renewable. Technically, (all sorts of) storage units could be the salvation of renewable power’s electricity power quality issue (for frequency regulation) and the perfect fit for load regulation.
For local rulers, BES solutions could also turn into manufacturing possibility and, therefore, local economic interest. BES certainly alleviated the tension between local governments and the state-owned grid for renewable dispatch.
Several local decision-makers have delivered policy support, and more will be on the way. However, a large-scale push for renewable plus storage business remains a distinct dream.
Storage sector is still exploring the feasible business model. Such exploration is still on an early stage. [READ MORE on our analysis on 5 different business models for China’s BES sector. ]
Despite the fact that local governments delivered vocal support for storage, a mandatory policy requirement for “renewable + storage” is unlikely. At the moment, more and more renewable projects in China are fighting to survive, as the subsidy has been shelved and renewable need to compete head-to-head with the low-price coal or hydropower units.
In that case, demanding renewable firms to invest extra on storage facility could easily lead to stranded investment in bulk, thus facing push back from the renewable industry. The previous lesson already exists: in 2017, Qinghai province unleashed such mandatory requirement on renewable power plants but walked back the decision due to industry push back.
[DATA: investment cost for an average wind farm in China is estimated to increase ¥200-300 per kilowatt if extra investment needed to build 20% storage unit.]
Meanwhile, the expensive storage solutions also face competitor for the “renewable plus” business—the coal-fired units retiring from the base-load role. Beijing is offering the option for many stranded thermal units in China to transit into an auxiliary service providers. The demonstration projects among wind, solar, and thermal-auxiliary plant are taking off in China as well. In China’s northern region where large coal-fired plants are abundant, storage units are in a clear disadvantage.
Without a mandatory policy requirement, the industry would remain cautious of adopting storage units. In the coming two years, we are fully expecting the renewable+ storage hybrid pilots to spring up.
Currently, China already has at least 19 BES and wind hybrid demo project reported. More are on the way.
The exploration of the economics of between BES and renewable, via these demonstrations, would be some valuable lessons for the global market.
[Energy Iceberg is developing a retainer market intelligence product for investors with battery/storage/Chinese-supply-chain exposure. Feel Free to drop us a note for exchange on the industry. ]