China's solar curb
Beijing's move to curtail solar power subsidies is far from terminal for the global market.
China's suspension of approval for new subsidised grid-scale photovoltaic (PV) solar projects has led to sharply reduced forecasts for global capacity expansion in 2018. But the longer-term outlook for the sector still looks buoyant, as costs continue to fall.
The government's decision, at the end of May, came into effect in June and effectively means only projects subject to competitive bidding will be sanctioned in 2018, while feed-in tariffs have also been cut.
The rationale for the move is familiar, echoing similar moves in Spain and Germany, the countries that led the solar drive in Europe. A combination of attractive subsidies and falling installation costs led to more projects being built than those governments had envisaged, or grids could cope with, forcing an overhaul of the market.
In China, there has been the added problem that some big solar projects are being built in remote regions of the country, which are a long way from the country's most energy-hungry population centres. Money is being poured into improving the long-distance transmission network, but much work still needs to be done.
As a result of the edict, global capacity forecasts for the year have been slashed. Wood Mackenzie's GTM Research has reduced its estimate of fresh Chinese PV demand in 2018 to 28.2 gigawatts (GW) from a previously anticipated 48.2GW. Accordingly, the firm's global PV demand forecast for 2018 has been cut to 85.2 GW from 103.5 GW.
Pros and cons
How China's longer-term policy will shape up remains to be seen. It seems inevitable that the pace of growth of the Chinese sector will be slower than had been expected, but it hardly spells curtains for the industry. GTM estimated in a report published in August that China will still install 141GW of capacity between 2018 and 2022—lower than the previously anticipated 206 GW, but still substantial.
There are also benefits for the industry elsewhere in the world. Lower demand in China is likely to result in oversupply of solar panels and other technology by Chinese manufacturers, which will seek to offload their surplus at reduced cost on global markets.
Global PV demand for 2018 has been cut to 85.2 GW from 103.5 GW
That should make solar installations cheaper in growing solar markets, such as India, Australia, Egypt and Vietnam. Developers in more mature markets, such as Europe and the US should also reap the benefits, with prices becoming increasingly competitive with fossil fuels, regardless of reduced subsidies.
"Bid prices will continue their downward march pretty much everywhere… By 2022, awarded prices as low as $14/megawatt-hour will be old news," GTM said.
Solar auction prices in 2017 were in the $40-$50/MWh range in the US and higher in Europe. But in some countries with the most favourable conditions for solar, such as Mexico and Saudi Arabia, prices have dipped below $18/MWh recently. By comparison, the unsubsidised cost of wind power in the US was $30-$60/MWh range in 2017, while power from US combined cycle gas plants cost around $40-80, according to the American Wind Energy Association.
Local content priority
The Trump administration's imposition of tariffs on Chinese products may partially offset any cost reductions in the US, and India is also considering imposing tariffs on Chinese solar equipment to stimulate domestic manufacturing.
Others are also reluctant to let China rule the roost. "Local content requirements and paired manufacturing with IPP [independent power project] tenders will proliferate. Algeria, India, Saudi Arabia, South Africa, Turkey and others are already tendering in this way with job creation and economic transformation in mind," GTM said.
But, with the cost of solar module manufacturing continuing to fall virtually everywhere, large-scale solar PV projects are still likely to become cheaper. That trend will be particularly marked in markets where module costs comprise the highest proportion of total capital expenditure. These include India, where module costs account for 57% of the cost of utility-scale projects. GTM estimated that a module cost decline of some 30% in India would result in a total capex reduction of 17%.
Aggressive bids in auctions for utility-scale solar PV projects over recent months in Saudi Arabia, Mexico and Chile suggest developers are betting on large reductions in module prices for projects with commercial operation dates due over the next two to four years, GTM said.
While the 50% annual demand growth seen a couple of years ago is likely to remain a thing of the past, as the sector matures, GTM expects the global market to recover in the early 2020s, meeting around 120GW of new demand each year, with almost half of that demand coming from Asia.