China renewable auction signals challenges for solar developers

Analysts said that the solar power prices at China's first province-level auction under its new renewable price mechanism are so low, they may discourage investors from launching new projects.

The auction held in Shandong last week, which is seen as an indicator for future auctions nationwide, indicates that prices will be lower in the future than they were under the old system, although perhaps not as low as those in Shandong where solar investment drove prices down.

According to the results, Jefferies analyst Alan Lau stated that "I would not be very optimistic about other provinces unless they are coastal provinces where there is a strong growth in power."

The auction was part a reform announced by the government in February to introduce market-based pricing for renewable energy in the dominant producer in the world.

Prior to this, China's renewables projects enjoyed a fixed rate of return that was tied to the benchmark coal price. This gave developers a valuable level of certainty, but also increased the risk of overinvestment.

Local transmission grid operators are to award renewable project contracts in June. The clearing price will be determined by the highest bidder, after selecting bids starting from the lowest bid until the province's targeted volume is reached. Renewable generators will have to sell their products into the market, but they will receive compensation if the price is below the auction clearing or strike price.

Shandong was the first auctioneer. It is a leading renewables developer.

According to a report in Friday's state media, citing Shandong grid operator, the clearing price for solar is 225 yuan (about $31.58 per megawatt-hour). Developers were allowed to submit bids ranging from 123 yuan/MWh up to 350 yuan/MWh, according a report in Friday's state media.

Lau said that investors would find it difficult to earn a reasonable rate of return when the price is so high.

Lauri Myllyvirta is the co-founder of Centre for Research on Energy and Clean Air in Helsinki. She said that many of the Shandong project were already complete and were "desperately" trying to sell their electricity at a set rate.

The system is more reliable than selling on the spot market in Shandong.

David Fishman, principal of the Lantau Group consultancy, wrote on LinkedIn that the average spot price in the province has been as low at 116 yuan/MWh due to its abundant solar supply.

(source: Reuters)