China’s distributed solar development: Ready for take-off?

Strong policy support and rapid cost decline led to phenomenal distributed solar photovoltaic (DPV) capacity additions in China. In 2017 alone, 20 GW of DPV came online, five times the previous year's capacity additions and twice the combined capacity additions in all previous years. Half of the new capacity additions was in just four provinces-Zhejiang, Shandong, Anhui, and Jiangsu, all near east coast power demand centers. The growth continued in 2018 with 7.7 GW capacity additions in the first quarter of the year, up 60% year on year.

Figure 1: China's distributed solar

The Chinese government launched DPV subsidy program in 2013 but it wasn't until 2017 that full policy support switched on. Compared with DPV, about 70% of utility-scale solar capacity is in the sparsely populated northwest region owing to good solar irradiance and vast and cheap land resources. However, these large projects are far from the power demand centers in the east, and therefore face serious curtailment.

Comparing with utility-scale projects, distributed solar receives favorable polices such as simplified project approval, in-time subsidy payment, tax preferential treatment, and grid dispatch priority.

In addition to policy support, other factors also contribute to DPV's recent rise and will drive its future growth.

• Technological advancement, economies of scale, and product efficiency improvement have helped reduce unit cost by 20%-30% during the last five years. Cost reduction will likely continue albeit at a moderating rate.
• DPV projects also benefit from having new options to market their outputs to multiple users via power trading platform.
• DPV is becoming more appealing to power customers as it grows in scale in many parts of the country.
• Multiple business models exist for developers, with grid-dispatch being the most popular owing to its simplicity and revenue security. In the future, self-consumption and direct supply will gain market share as investors look to minimize cost and maximize profit.

However, there are uncertainties in DPV's future development. Policy may be the biggest factor. Many DPV-related policies and regulations are still evolving, including the definition of distributed solar, self-consumption requirement, and subsidy reduction to reflect declining capital cost. On the market side, unstable output requires battery and other ancillary services to ensure grid reliability.

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Isabella Ni is a Senior Research Analyst covering the power and renewable energy market analysis on China.
Posted 15 June 2018

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.