Solar Slowdown in China

The Chinese government is reportedly cutting its target for solar capacity additions from 150 GW in 2020 to just 110 GW. The main reasons for the cutting in my view are:

1) Grid constraints as there is not enough power lines from the main western producing regions of China such as Gansu to the eastern consuming provinces such as Guangdong. It is being reported that the grid curtailment figures are between 30-40% for some solar projects in the western provinces. Till the time that the power grid is built to move sufficient amounts of power, it would be prudent not to build more solar energy capacity as this would just be a waste of capital.

2) Huge boom in solar installations in 2016, with 22 GW being installed in the first half of 2016 leading to a bust in the second half. High returns had made solar developers go the whole hog in building a huge amount of solar power capacity across the country. Now most are nursing a huge slowdown in demand.  Classical boom and bust should be avoided for a healthy growth of the industry.

3) The third reason for a cut in solar capacity is the electricity demand in China not growing fast enough. The economy has slowed down and the demand for power is also concurrently going down. It does not make sense for the country to add more power capacity at the breakneck speed that it did in the past.

China has already planned to reduce the feed in tariff for both solar rooftop as well as solar grid projects going into 2017. This will be a massive cut of around 25-30%, which should reduce the attractiveness of solar power for developers who were getting good assured returns from the government. China should even think about allocating solar power projects through reverse auctions which should give it a better control over capacity addtions, while at the same time removing this issue of super normal returns for developers in case of high IRR.