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How China Can Make the Most of Its Solar Energy Boom

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How China Can Make the Most of Its Solar Energy Boom

China’s solar industry has made great strides, but national priorities continue to be undermined by local realities.

How China Can Make the Most of Its Solar Energy Boom
Credit: Unsplash

The successes and shortcomings of solar energy market growth in China highlight the potential advantages, but also the inherent risks, of top-down, government-fueled growth initiatives. How the central government manages current issues in the power sector will play an influential role in determining the future of the solar market.

Early Manufacturing Buildup

In the early 2000s, European countries and the United States began to provide subsidies for solar photovoltaic (PV) installations. Recognizing the impending increase in demand for solar modules and seeking to gain a sizable market share of a technology of the future, China began heavily subsidizing domestic solar PV manufacturers.

Plans to acquire market share of the emerging technology were successful; China’s global share of solar cell production, just 1.6 percent in 2003, jumped to 27 percent by 2007, and was a staggering 60 percent in 2011. China welcomed the economic benefits of successfully building itself up as the global leader in solar manufacturing, but also created an industry susceptible to shocks in the global market. Following the economic crisis of 2008 and tariffs levied against Chinese-manufactured solar panels by the United States and European Union in 2012 and 2014, demand for Chinese solar products dropped precipitously. Amid the decrease in demand, many Chinese manufacturers filed for bankruptcy. Among the casualties was Wuxi Suntech which, at the time, was one of the largest solar manufacturers in the world.

Push for Domestic Installations

Responding to decreasing global demand in the wake of the fiscal crisis in 2008, the Ministry of Finance developed two initiatives in 2009: The Solar Roofs Program and the Golden Sun Demonstration Project. Each of these programs aimed to absorb manufacturing overcapacity by providing subsidies to solar PV projects installed domestically. From the inception of the programs, in 2009, to 2011, domestic solar capacity in China grew elevenfold, from 300 MW to 3300 MW.

The incentives in these programs, however, proved to be misaligned. Subsidies for solar installations were allocated based on nameplate capacity, rather than by the amount of electricity generated by the panels. This means that, for example, two different 500 kW solar installations would receive the same amount of money in subsidies, even if one of the installations was producing more electricity than the other project. As a result, solar project developers oftentimes purchased cheaper, lower-quality panels that produced less energy. With two 500 kW projects netting the same subsidies, there was no economic incentive to invest in higher-quality, more efficient panels.

Recognizing the shortcomings in incentives, these programs were replaced with a nationwide feed-in tariff (FIT) in 2011, which pays renewable energy producers an incentive based on the actual amount of electricity generated.  The FIT temporarily remedied the misdirection of financial incentives. Still, however, too much focus was spent building out solar capacity, rather than on strategic siting and electrical grid harmonization.

A bulk of solar additions were installed in sparsely-populated regions with abundant land and solar energy resources, such as Xinjiang and Gansu. High installation rates in these parts of the country have led to overcapacity and high rates of curtailment. Curtailment occurs when a power generation source produces less than its potential energy because some of the electricity cannot be dispatched to the grid. It is oftentimes a product of grid congestion or excessive power supply. Curtailment, in small doses, is not necessarily determinantal. Excessive curtailment, however, threatens the long-term economic prospects of renewable energy resources. Extreme curtailment has been a common occurrence in sparsely populated western regions of China with low energy demand and no way to transport excess electricity to other parts of the country.

Developers have continued to install solar (and wind) projects in the western regions of the country since they have been able to receive subsidies for doing so, yet the installations exceed the energy needs in the region. For example, in 2016, Xinjiang installed over 3 GW of solar, bringing its cumulative total to 8 GW, both of which led the country. Yet, the same year, Xinjiang curtailed 32 percent of the solar energy it generated. For reference, central planners hope to keep curtailment rates below 5 percent.

Recent Initiatives

Beginning with the 13th Five-Year Plan (2016-2020), leaders at the highest levels of China’s government have started undertaking efforts to improve electrical grid planning and reduce curtailment issues. However, some of these directives are not being properly implemented at local levels. For example, the National Energy Administration (NEA) established mandatory minimum numbers of hours that wind and solar must be utilized. Yet in 2016, Xinjiang and Gansu, the two provinces with the highest levels of curtailment, dispatched solar energy into the grid at a rate of over 25 percent lower than the minimum amount established by the NEA.

In addition to establishing minimum guarantees for renewable energy dispatch, another national initiative that could help ameliorate curtailment issues is ultra-high voltage (UHV) transmission lines. One reason for high curtailment rates in western regions of the country is that there is an oversupply of electricity, and traditional grid infrastructure is incapable of transporting electricity far enough to reach high demand centers. New UHV lines, in contrast, can transport electricity between two points thousands of kilometers apart.

At the national level, new UHV lines have been heralded as monumental advances in grid infrastructure, transporting excess electricity from western regions with abundant resources to the densely populated, high-energy consumption regions in the east. These incentives do not, however, align with local incentives. For provinces that do not already have an oversupply of electricity, leaders at the provincial and local levels prefer to build more power generation capacity within the province. While this will end up costing more than buying excess supply from Xinjiang or Gansu, politicians prefer to build generation capacity locally due to the associated tax revenue and increased employment that result from it.

Recognizing this disconnect in incentives, the NEA proposed guidelines in March for mandatory renewable portfolio standards by province. Under the proposed guidelines, provinces are forced to generate a certain percentage of total energy from non-hydro, renewable sources. Ideally, the penalties for not meeting these targets would incentivize some provinces to import energy from other provinces. These transactions could be facilitated, in part, by new UHV lines.

Improvements Needed for Healthy Solar Market Development

Despite efforts undertaken in recent years to remedy issues with the solar industry and electricity markets in general, improvements are still needed. Gains can be made by incentivizing economically sound dispatch and aligning federal and local incentives.

China’s current power market does not incentivize power dispatch that makes sense economically. A power plant’s marginal costs, as opposed to its capital costs, are the variable costs associated with operating the plant. A majority of these costs are the costs of fuel, maintenance, and labor, making the marginal costs for wind and solar almost zero. From an economic perspective, wind and solar power should be the first power sources dispatched when they are generating, as it does not incur additional costs. Grid companies in China, however, pay the same price to renewable energy generators as they do to thermal plants, which ignores the advantages of lower operating costs for wind and solar.

In addition to power dispatch issues, work remains to be done in terms of aligning national and local incentives. As mentioned before, due to the political advantages of attracting GDP, tax revenue, and employment, provincial and local officials prefer building new generation capacity to importing power from other provinces. The result of this incentive structure, in terms of electrical generation, is that nearly all provinces have more power generation capacity than they need. Rather than importing excess power from neighboring provinces and reducing curtailment, as national officials would prefer, provinces continue to build new generation capacity despite near ubiquitous oversupply.

China’s solar energy industry has made drastic improvements in the last two decades, as evident from the fact that China leads the world in both solar manufacturing and installations. The future healthy development of the domestic solar industry, however, depends in large part on remedying these remaining issues.

Samuel Corwin is a 2017-2018 Fulbright fellow based in Nanjing, China, where he is researching development trends in China’s domestic solar PV market and the influence of local governments.

The views reflected in this article are not those of the Fulbright program or the U.S. Department of State