Rooftop solar is a rational and important step in China’s path to peak coal use: A rebuttal

On 14 September 2023, The China Project published a piece entitled China leads the world in green energy, but it just can’t stop emitting greenhouse gasses. I disagree with the author’s characterizations of the Chinese power sector in that article and submit this piece in rebuttal.

To frame my response to what I feel to be the original author’s misstatements about the Chinese power sector, I will adopt a Q&A format.

What does the expansion of China’s coal plants mean for coal consumption and emissions?

The author describes with concern the scale of China’s plan to build more coal plants, citing data showing the coal capacity in China’s construction pipeline is six times larger than the rest of the world combined. None of this is incorrect. However, the author, like many other analysts, dwells too long on the question of coal-fired capacity, while neglecting the question of coal-fired generation.

Coal-fired plants, once built, naturally will strive to earn money by generating power (and burning coal), but their utilization is not guaranteed. Since sweeping sector reforms to China’s power dispatch and pricing policy in November 2021, coal-fired power plants must compete for dispatch in the wholesale power market, along with every other generation type.

As these reforms have taken root, a nascent merchant market model has emerged (i.e., a wholesale market where plants compete to sell power on the basis of price). With the marginal cost of wind and solar competitively low, renewable energy will nearly always be used first, ahead of all other generators. The more renewable energy production grows, the more coal-fired power gets displaced. Thus, what determines how much coal China burns is not how much coal-fired capacity it has, but how much power generation it’s getting from everything else that isn’t coal.

China’s coal plants already see low utilization rates overall, thanks to overbuilding and regional oversupply. In 2022, Chinese coal plants saw an average capacity factor of just around 50%, far lower than in other countries. This number will continue to shrink, as renewable generation picks up and coal-fired plants correspondingly lose more dispatch hours, an expectation echoed by other analysts in the space. Barring further extreme weather events, China’s power industry is on track to reach peak coal use in 2023 or 2024.

Why do Chinese renewables see low capacity factors?

The author’s second point I want to address focuses on the low capacity factors of Chinese renewables. On a statistical basis, China’s newly-built wind and solar capacity figures are impressive, but their performance consistently lags that of renewable assets in other countries. The underlying issue is laid out accurately by the author: China gets low utilization rates for its wind and solar because it has built a lot of capacity in parts of the country that have average-at-best natural wind and solar resources. Furthermore, much of the solar is on rooftops, which also see lower capacity factors than ground-mounted solar.

For example, take Shandong Province, which leads the country for installed solar capacity. Shandong is only moderately sunny, and panels installed there generally see only a 14% capacity factor, or around 1,250 hours of generation per year. That’s higher than places like Germany, but lower than northern or western China, where you might see more than 2,000 hours per year, or a 20% capacity factor, similar to California. From a purely technical perspective, Shandong rooftops are an unimpressive place to park solar panels. The author deems this irrational, but this is an error.

Why build in Shandong?

The answer here is very simple and perhaps even depressingly banal: rooftop solar in Shandong is profitable. As for why this is so, it all comes down to power demand and power prices. Shandong, as an industrialized coastal province, is a net importer of power with a huge industrial base, strong power demand growth, and high tariffs. These are attractive — even crucial — project development conditions for solar developers. Beijing didn’t have to mandate solar developers to build in Shandong; these solid economic conditions drew them in naturally.

Of course, it helps that municipal governments in Shandong, Jiangsu, and elsewhere have made it easy to access rooftop solar opportunities via their participation in Beijing’s Whole County Rooftop Solar Pilot Program. In this program, the rooftop solar development rights for an entire county are packaged up and tendered out to interested developers, maximizing economies of scale. Chinese developers consistently report lower total capital expenditures (CapEx) for rooftop systems than ground-mounted systems, due to reduced costs for electrical upgrades and land acquisition, while the rooftop owners benefit from a cheaper, greener power source versus grid power supply, and Shandong makes progress towards meeting its renewables quota targets. This is a win for everyone involved.

Rooftop solar isn’t built according to a central blueprint — these days it’s driven by thousands of individual profit-seeking solar developers and savings-seeking rooftop owners, responding to the prevailing policy and macro conditions by making individual economic choices. The “irrational” development of rooftops in Shandong (and Jiangsu, and Anhui, and Henan, etc.) is actually the most economic choice for the scores of Chinese developers choosing to build there. By contrast, building in places like Qinghai or Inner Mongolia, cited as preferable by the author, is often uneconomic, loss-making, and risky.

Don’t those regions have much better solar resources?

Yes, the solar resources are better, but unfortunately in regions where the solar resources are much better, power prices are also much lower — often half the level of industrialized coastal provinces. Furthermore, these provinces have weak power demand and oversupply so severe that the grid company will only offer pennies to offtake solar power, or else will allow it to go to waste. These projects just don’t make financial sense for developers, so it’s no surprise they’ve been less favored in recent years. You can’t site a project by looking at solar irradiance alone.

When the cross-region transmission grid becomes more mature, such projects might be able to find customers in other provinces by exporting via long-distance ultra high-voltage (UHV) lines. But UHV lines take considerable time and resources to design, plan, and build. State Grid is building them as fast as it can, but the UHV network is still very much a work in progress. Currently, solar projects in places like Qinghai or Gansu face a very real risk of weak demand (and potential curtailment), low power prices, and unprofitability, which has cooled developer interest in the region.

Is it “wasteful” to deploy panels or wind turbines in regions where they get less than their full potential?

The author has described China’s deployment of renewable assets as wasteful. I disagree. Firstly, there is no shortage of solar panels; indeed, there is currently a vast oversupply. BloombergNEF estimates China will manufacture well over 500 GW of solar modules in 2023, with global demand standing at 392 GW. Prices have been falling and are now under 14 US cents per watt, the lowest level ever, which is hurting manufacturers. Solar modules are starting to be the cheapest part of a solar project, and around the world, including in China. The bottleneck to solar is access to the grid and appropriate sites, not panels.

Next, if today there was a clear way for solar power generated somewhere like Gansu to get to market and earn a good rate, then yes, it would be more efficient to build there, but that situation doesn’t exist. It would be more wasteful to deploy panels in regions where they would generate power no-one needs. And unless we think China can afford to wait to build renewables (it can’t), it’s best to just build as much as it can, where it can, when it can.

I don’t want to create the impression that China is neglecting those high-potential regions — they ARE building there too. Here, when I say “China” is building, I do mean that it’s a central government decision; these are key national projects directly championed by Beijing, with construction responsibility allocated to massive SOEs, financed by state banks. Crucially, these projects will be paired with purpose-built UHV lines to bring the generation to load centers in other parts of the country.

This year, we’ve begun to see a small portion of these superlative energy bases start connecting to the grid, and there are still many more to go. Reuters reports that China is targeting nearly 100 GW by the end of 2023, and another 200 GW by 2025 (although some delays are likely). As these bases come online, the capacity factor of the Chinese renewables fleet will start to rise. Eventually, as excess capacity on the new UHV lines becomes available, smaller developers might start to see opportunities in those sunny, windy, far-flung regions too.

Until then, though, Shandong rooftop solar is rational, economical, and super groovy.

The author would like to thank Jenny Chase of BloombergNEF for her contributions to this piece.