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China’s wind power industry faces slowdown as tariff cuts loom

Mainland China’s wind farm developers and equipment suppliers face a substantial drop off in installation volume in 2018 when Beijing’s proposed cuts to wind power tariffs are expected to take effect, industry executives warned.

Profitability will also be hampered by further power grid bottlenecks and intensifying competition over price and sales volume amid wider capacity oversupply, they told the China Windpower conference.

“What worries us is [plant] utilisation, which has been falling much more than expected,” said Alvario Bilbao, the Asia Pacific chief executive of Gamesa, one of the world’s largest wind turbine makers.

The Spanish firm has stayed in the China market – the world’s largest – despite its market share dropping to 0.27 per cent in 2014 from 36 per cent a decade earlier due to stiff competition from domestic rivals.

Hu Guodong, deputy general manager of state-backed, Hong Kong-listed wind farms developer China Datang Corporation Renewable Power, said he believes Beijing is likely to stop offering guaranteed subsidised wind power tariffs after 2018.

“This will hit project developers the hardest in the supply chain,” he said. “With both our plant utilisation and power-selling prices subjected to market forces and uncertainties, how can we be confident that our projects will be profitable during their 20-year operating period?”

A live poll of seven developers, equipment and parts suppliers by a conference moderator found that on average they expect installation volume to slide from last year’s record of 30.5 gigawatts (GW) to 24.6 GW this year.

They predict that it will pick up slightly to 26 GW next year, as developers rush to complete projects ahead of the expected tariff cuts at the start of 2018, before dropping 11.5 per cent to 23 GW that year.

Volumes are projected to rebound to 26 GW in 2019 and 28 GW in 2020, as more high-capacity, long-distance power grids come on line to send excess renewable energy from northern regions to markets in the central and coastal regions.

Product efficiency improvements by equipment suppliers and cost reductions across the supply chain will help developers deliver enough volumes to meet Beijing’s goal for the nation to raise installed wind farms’ capacity to 250 GW by the end of 2020 from 145 GW at the end of last year, industry executives said.

Their comments came three weeks after Beijing proposed reducing guaranteed power tariffs of new onshore wind farms approved in 2018 by between 5.2 and 6.8 per cent.

Hu said China’s wind power industry faces the “inevitable” fate of free market competition after 2018 since Beijing has already rolled out reforms to gradually open the wider electricity market for greater price and sales volume competition. This has already led to sharp tariff declines among coal-fired power producers.

“Widespread losses are expected next year for coal-fired producers as local governments favour lower power prices to aid their struggling energy-intensive industries,” he said.

Renewable clean power producers, traditionally protected by guaranteed subsidised tariffs that are much higher than those of pollution-prone, coal-fired power, have also been asked to compete in the market for sales beyond certain guaranteed volumes.

Hu said many local governments have failed so far to properly implement the guaranteed minimum operating hours for wind farms announced by the central government earlier this year, owing to power oversupply, which continued to squeeze plant utilisation.

“Last year, the wind power industry’s average utilisation was just over 1,700 hours, which is our break-even point,” he said. “We need 1,800 to 2,000 hours to attain reasonable levels of profit.”

China Datang, which is highly exposed to grid bottlenecks in northern China, saw 24 per cent of its wind farms’ output wasted and not sent to the grid in the first half of this year, compared to 21 per cent nationwide. Last year’s national average was 15 per cent.

Still, he said the company is confident of reaching its target of doubling installed wind capacity to 14 GW by the end of 2020 from 7GW at the end of last year.

“Many developers are rushing to build more projects and grab market share while guaranteed tariffs are still offered,” he said of last year’s record installation, which came despite deteriorating profitability.

“In the future, the market environment will be even tougher, and we must work closely with equipment suppliers to raise efficiency and cut costs across the supply chain.”