By Colleen Howe
BEIJING (Reuters) -Solar power prices in China’s first provincial auction under its new renewable pricing mechanism were so low they could discourage new project investments there, analysts said.
Last week’s auction in Shandong province, seen as a bellwether for nationwide auctions, signals that renewables prices in the future will be lower than under the previous system – although not necessarily as low as in Shandong, where a glut of solar investment has driven prices down.
Based on the results, “I wouldn’t be very optimistic in other provinces, unless it’s in coastal provinces with strong power [demand] growth,” Jefferies analyst Alan Lau said.
The auction was part of a reform announced in February aimed at introducing market-based pricing in the world’s dominant producer of renewable energy.
Previously, renewables projects in China enjoyed a guaranteed rate of return fixed to the coal price benchmark. That gave developers valuable certainty but risked over-investment.
From June, local transmission grid operators will award new renewable projects contracts for most of their generation using an auction that sets a clearing price based on the highest bid, after selecting bids from lowest to highest until the province’s target volume is met. Renewable generators must sell into the market but will be compensated if the price falls below the auction clearing price, or strike price.
Shandong, a top renewables builder, was the first to hold auctions.
The clearing price for solar was 225 yuan ($31.58) per megawatt hour (MWh), according to a state media report on Friday citing Shandong’s grid operator. Developers could submit bids between 123 yuan/MWh and 350 yuan/MWh.
Investors would struggle to make an acceptable rate of return at that price, Lau said.
Many of the Shandong projects were already completed so were “desperate” to sell their power at a fixed rate, said Lauri Myllyvirta, co-founder of the Helsinki-based Centre for Research on Energy and Clean Air.
The system offers more certainty than the alternative of selling into Shandong’s spot market.
Recent average spot prices in the province have been as low as 116 yuan/MWh because of its ample solar supply, said David Fishman, principal at consultancy the Lantau Group, in a post on LinkedIn.
(Reporting by Colleen Howe; Editing by Christian Schmollinger)
