Analysis: Boom and bust fear over China tariff change

CHINA: The launch of China's first onshore feed-in tariff (FIT) in 2009 gave the country's wind sector a welcome boost. But now a cut to the scheme is causing upheaval throughout the industry.

There are concerns the mini boom could result in problems further down the line
There are concerns the mini boom could result in problems further down the line

The tariff prices range from CNY 0.51 to CNY 0.61/kWh ($0.083-0.099/kWh) in four regional categories. The rates are around CNY 0.20-0.30 higher than benchmark prices for local thermal power. Projects sell electricity at the thermal rates to the grid, claiming the difference from the government.

In September, the pricing department of the National Development and Reform Commission (NDRC) issued an opinion-soliciting draft to relevant parties. According to the document, the tariff will be cut by CNY 0.02-0.04 depending on the wind resources of the regions. The new rates will be applied to projects that become operational after 30 June 2015.

The situation appears to be bringing about a similar boom to that seen in the US in 2012 before the production tax cedit was due to expire. Many Chinese wind companies are frustrated by the plan and the effect it is having on the sector. As such, developers are racing to complete their projects ahead of schedule to beat the projected deadline for the new charges.

This has led to a further boost for suppliers, with many factories working overtime to meet demand. But this increase has also led to concerns over quality. During China's wind boom around 2010, quality control over components from substandard manufacturers was a major concern.

Quality control

The subsequent slowdown caused many of these companies to go out of business. Now, many are believed to have resumed production.

Low-quality machines rushed to installation may help developers meet the deadline. But, in the words of one industry observer, turbine and component failures will make the operators suffer in the long run.

The boom also is a mixed blessing for leading manufacturers. "When the installation fever is over, a period of depression will probably follow," said Goldwind board chairman Wu Gang in October.

The new FIT scheme is still in the processing stage, but will probably be law by the end of the year. Supporters of the law argue that the tariff should come down anyway because turbine costs are falling.

Opponents of the new scheme admit turbine costs have dropped, but prices in areas such as land use and financing are increasing. The wind resources available — as China has been encouraging developers to build in the populous east — are also inferior. These factors and the effect of curtailment further escalate overall costs.

Developers in some areas, such as Ningxia, say a cut by CNY 0.04 will deny them the chance of making a profit. It will also scare off potential investors. Statistics up to August show more than half of the country's wind farms were running in the red. Many wind projects find it difficult to achieve a 8% internal rate of return.

"At this stage, China's wind industry still needs government support," said Qin Haiyan, secretary general of the China Wind Energy Association. The government's target is installing 200GW of wind capacity by the end of 2020. That means an average 20GW every year.

"Under the present circumstances, it is not certain whether this goal will be achieved. If the price-cutting policy comes out, it will be more difficult," he said.

Sources say NDRC is considering fine-tuning the reduction of rates and the deadline for the approval date of projects. If this is true, the new scheme will be more acceptable, but by then the damage may have been done.

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