The long read: When a solar spark becomes a fire
From pv magazine 06/2022
In 2015, China first surpassed Germany to become the world’s largest PV end market. Since then, the country has never relinquished its place at the top of the podium. Yet in contrast with most other major markets, China was dominated by ground mounted PV, rather than rooftop, and much less residential solar.
According to the China Photovoltaic Industry Association (CPIA), by the end of 2021 most leading PV markets in western countries were dominated by distributed PV. In Germany, the United States, France, and Spain, distributed PV accounted for over 80% of total installations. In Australia and Japan, over 95%.
But China was different. Because the country subsidizes the electricity consumption of individual citizens or households, and taxes commercial users, utility scale solar became the mainstream PV investment of choice. By end of 2016, 86.7% of China’s PV installations were utility-scale PV. Of the remaining 13.3%, distributed PV, commercial and industrial (C&I) made up the lion’s share, with the residential segment a relative minnow.
However, things started to change in 2017. Despite the impact of 5/31 policy in 2018, which involved a range of measures to dampen tearaway solar development, China’s residential PV segment remained on a vigorous expansion trajectory. By the time 2019 dawned, the residential boom had begun.
According to China’s National Energy Administration (NEA), there were over 900,000 residential PV arrays installed and grid connected in 2021. The installation volume in the segment hit an astounding 21.6 GW, accounting for 39.3% of the annual total. The proportion of residential PV had substantially surpassed C&I PV and came in only slightly short of the utility scale.
Behind the boom
There were multiple factors contributing to the residential segment’s stellar growth. Prior to 2018, China used to focus on utility-scale PV plants, many of which it located in rural areas of northwest, north, and northeast China – which were all far away from the centers of electricity demand in China’s east and southeastern regions.
The high-cost transmission lines required to deliver power from PV production to centers of demand incurred considerable cost. The curtailment of utility scale PV output also became a serious issue, undermining project development activities. Even China, with its vast reserves of capital couldn’t afford to build sufficient transmission infrastructure. The long development and construction timelines for such transmission projects meant that they could not keep pace with the nimble PV industry.
Given these compelling circumstances, distributed PV in China’s east and southeast was seen as increasingly worthwhile. And when compared to the limited number of suitable C&I roofs, and complicated property rights that come into play on commercial buildings, households became the prime candidate for solar development close to demand.
When breaking a utility-scale PV project investment into its component parts, the non-technical costs are significant. These include things like land costs, grid connection fees, and administrative or soft costs. According to the CPIA, in 2020, with an average PV system investment cost of CNY 4($0.60)/W, non-technical project costs came in around CNY 0.68/W or 17%. By contrast, they amount to only CNY 0.19/W, or 6%, for a residential array.
Compared to utility scale and C&I arrays, the residential segment has received the longest-lived incentives from China’s central government. China reduced its subsidies for utility scale PV and C&I to CNY 1 billion ($159 million) in 2020. Incentives to these segments were terminated the following year.
By contrast, the subsidy from central government for new residential PV installations will not end before 2023. Even after this, there will remain provincial or even city level subsidies granted in pursuit of achieving carbon reduction and renewable energy development targets. Based on calculations by the China International Capital Corp (CICC), each CNY 0.03/kWh of incentive increases the Internal Rate of Return (IRR) of a residential rooftop installation by 2%.
Benefiting from a wide range of market participants and flexible means of operation, China’s residential solar segment has developed a variety of business models. The sales model matured particularly quickly.
Relatively high upfront costs for households can prevent many in China from installing a PV system. Different forms of solar leases were implemented to overcome this. In China, third-party investors are most commonly smaller EPC companies or institutional investors. Lease periods tend to run for 25 years.
A new third-party business model has appeared in China. The initial investor transfers the residential PV asset to another party after installation. This investor can then move quickly to develop new residential PV projects but will hold none of them. Asset investment funds that have an appetite for long-term, stable returns take over operations and maintenance of the project for 25 or even 30 years. The householder gains stable rental income from the use of the roof space.
In June 2021, the NEA released its latest plan for solar development in China. More than 650 selected counties will participate in a program called County Propulsion to develop distributed PV including residential in their territory. According to the NEA, “led by local government, dominated by large state-owned enterprises, private company and householders will participate.”
Though a new intervention, this is more in the direction of the planned Chinese power system, rather than the more market-based residential segment, it is widely believed that the County Propulsion program will greatly accelerate the development of residential PV in China’s vast rural areas.
The issue of availability of PV subsidies matters for the segment’s ongoing expansion. It is expected that there will be no extension of subsidies for residential PV in 2023 from the central government. Provincial or city level subsidies will be pursuant on local governments. With China’s economy facing downward pressure, such subsidies may be terminated.
Meanwhile, cost increases right across the solar supply chain have not only squeezed profits of market participants but also threatened the return on investment (ROI) of all PV projects, including residential solar. According to CPIA, upstream solar prices will remain high throughout 2022 and costs will barely decrease before the forst quarter of 2023.
Another big issue is China’s zero-Covid policy. After the first pandemic wave in 2020, China’s government took effective measures allowing much of the country to carry on as normal. However, the Omicron variant changed everything. Since January 2022, the pandemic has spread in Xi’an, Shenzhen, Hong Kong and Shanghai. Lengthy lockdowns severely impacted solar manufacturing and logistics, halting many residential projects. Whether the pandemic and zero-Covid policy will continue will have a major impact on the residential PV installation figures achieved this year.
Another potential break on China’s residential segment is observable in provinces like Shandong and Hebei. These regions have had very good residential PV installation figures in recent years. Provincial administrators have now started requiring that battery storage be added to new projects. With battery supply chains tight, the additional cost of an energy storage system may have a depressing impact on distributed solar installation figures.
China’s booming residential PV segment is just at its beginnings. According to CICC calculations, the general penetration rate of residential PV was only 1.8% and 3% by end of 2020 and 2021, respectively. Checking provincial details, the penetration rates of the top three provinces for residential PV, which were Shandong, Hebei and Henan, were 7.3%, 6.0% and 2.0% at end of 2020. By contrast, corresponding figures in Australian states were between 21% and 40%.
More importantly, with anticipated cost declines in the coming years, at least 17 other provinces including large population provinces like Shanxi, Anhui, Jiangsu, Guangdong, and Zhejiang are expected to embrace residential PV and will likely be getting close to the IRR level achieved in Shandong and Hebei.
The CPIA expects residential PV installations to exceed 30 GW in 2022 and that China’s cumulative installations in the segment will surge to between 220 GW and 250 GW by end of 2025. Considering 41.8 GW of residential PV had been achieved by the end of 2021, there will be around 180 GW to 210 GW of new residential PV installed before 2026.
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