leyu乐于体育:China's Major Wind Power Operators Can Absorb Tariff Cuts

HONG KONG (S&P Global Ratings) June 4, 2018--China's wind power industry will accelerate towards "grid parity" earlier than S&P Global Ratings expected. The central government recently announced that future wind tariffs will be determined by a bidding process, with a gradual elimination of government subsidies. As a result, tariffs are likely to fall in line with the benchmark for coal-fired power. S&P Global Ratings believes the reform would therefore be negative for wind farm operators, but most major players should be able to absorb the impact.

"We're not surprised that the government has taken this action. The steps encourage industry-wide cost efficiency, address the ever-widening funding shortfall for subsidies, and guide the sector to grow in more sustainable way," said S&P Global Ratings credit analyst Apple Li.
Under the reform announced by the National Energy Administration, a bidding process will set the tariffs for projects that have not already received approval as of May 18, 2018. Previously approved projects will continue to receive the existing feed-in-tariff (FiT) for the project life. Tariff subsidies embedded in wind FiT will be removed for new projects over time, and wind tariffs will approach or equalize with the local benchmark for on-grid coal-fired tariffs. The policy covers both onshore and offshore wind farms, but excludes distributed wind projects. Since the end of 2017, average regulated wind tariffs are still 30% higher than the average of benchmark tariffs.
For the next one to two years, we see a limited impact on major wind farm operators, such as China Longyuan Power Group Corp. Ltd. (A-/Watch Dev/--) and Concord New Energy Group Ltd. (BB/Negative/--). This is because local governments mostly approved their planned 2018-2019 projects prior to the new policy becoming effective. These projects and operating capacity could still have higher tariffs for the life of projects. Many companies have slowed or scaled back capital expenditure since 2017 because they have had fewer opportunities to add new capacity.
The latest policy measures incentivize only cost-competitive providers to fulfill the government's renewable growth targets. The gradual removal of regulated tariff also means that the sector will be subject to less policy risk. China's renewable sector has experienced serious delays in
tariff-subsidy settlement since 2016, and that has burdened operators with large working capital outflows.
China still targets long-term energy transformation by expanding its clean energy resources. Strong execution of the priority grid dispatching policy led to a curtailment rate of 8.5% in the first quarter of 2018, down 8 percentage points year on year (from 17% in 2016, 12% in 2017). Under the new policy, the government specifies that new projects under the bidding process will have minimum utilization hours or curtailment rate of not higher than 5%.
The government is also stepping up efforts to reduce various non-operating costs and expenses of project owners.
"Lower FiTs are likely to pressure equipment manufacturers to produce more competitive and efficient products through technology innovation, which in turn will benefit wind power developers," said Ms. Li.
With intensifying market-based competition, the industry may see some consolidation. Competition would generally favor large-scale incumbents that have higher bargaining power with equipment providers and those whose cost of capital is competitive. Compared with the private sector, state-owned developers are more competitive and have more incentive to further grow their clean energy portfolio. Large state-owned enterprises are more likely to steer industry consolidation by acquiring assets owned by the private sector or equipment producers.

We believe the new policy is in line with the central government's


mid-to-long-term plan for the overall renewable energy industry. In 2015, the National Development and Reform Commission guided that wind power should achieve grid parity by 2020. The government is determined to boost clean energy usage, and has committed to achieving 15% primary energy consumption from non-fossil fuels by 2020 and 20% by 2030.