The Government of China looks to reduce subsidies

The Government of China looks to reduce subsidies

The response to COVID-19 has brought much of the global economy to a halt, with consequent shocks to energy demand, global supply chains, and capital markets.

The China Government has been gradually lowering the subsidies paid to onshore wind and solar projects – which currently support around 210GW of wind capacity – as it tries to reduce the US$14 billion deficit of its Renewable Energy Development Fund.

According to Wood Mackenzie, the Ministry of Finance has budgeted just $700 million to subsidize new renewables in 2020, which is expected to support 8GW–10GW of new onshore wind capacity. It is reported in the EY’s analytical report.

As a result, the Government is incentivizing wind projects that are currently receiving feed-in tariffs to switch to an unsubsidized system, whereby they would be offered long-term power purchase agreements and the preferential payment of unpaid subsidies.

Wood Mackenzie calculates that around 60GW of older capacity, which will have recouped its initial investment, can maintain current yields by making the switch, potentially eliminating subsidies.

Despite these challenges, Wood Mackenzie is forecasting that yearly onshore power additions, after dipping to 18.8GW in 2021, will rise to almost 23GW by 2028. However, it warns that growth in the offshore wind market is set to be hampered by political uncertainty, a limited subsidy quota, and disruptions caused to supply chains by COVID-19.

Its base case sees total installations reaching 14.5GW by the end of 2021, with new additions falling to 2GW the following year before recovering to 5GW in 2025. Worst case, China could reach 11GW by the end of next year, followed by less than 0.5GW awarded each year for the rest of the decade if the sector is not supported by provincial governments, and if low demand fails to prime local supply chains.

It is known that the renewable sector in most of the countries is heavily dependent on imports from other regions, mainly China. In the global solar industry, more than 40% of the supply chain is reliant on supply from China and other Southeast Asian countries such as Vietnam and Thailand.

The leading analytics company GlobalData suggests that the significant concerns of the renewable energy sector revolve around global supply chain issues with solar and wind projects already witnessing logistical delays. Countries should avoid dependency on one or two countries and progress towards attaining self-reliance on domestic production and diversifying their supply networks to overcome future disruptions.

COVID-19 has caused its share of disruption in the short term, and the renewable energy sector has not been immune to the effects. But despite the profound challenges presented by the pandemic, the long-term trend hasn’t changed: clean, low-carbon energy generation will play a central role in the global economy of the future.

Learn in details about growing European renewable energy markets and possible entry points on July 24 at the digital energy innovation week EN.Novation, which will be held on July 20-24.

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