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China’s 2022 Wind Power Growth to Stay Strong Despite Subsidy End

Strong growth in China’s wind power capacity installations will continue in 2022 despite the complete phase out of central-level subsidies, as more rapid additions of onshore wind capacity will offset the slowdown of offshore installations, says Fitch Ratings. Chinese thermal power generators (gencos) remain keen to optimise fuel mix, but cost declines will shape the pace of wind power capacity installations in the long run.

China’s offshore wind capacity installations may slow from the 2021 peak, as prior-approved central-level subsidies, which account for roughly half of the on-grid tariff, will be phased out from 2022 onwards. China plans to expand offshore wind capacity by 5x-6x in 2021-2025 from end-2020 levels. Even so, we expect the remaining installations to be largely backloaded to 2024-2025 because of concerns on project returns in the absence of central-level subsidies. By end-2020, the levelized cost of offshore wind power, which had already declined by near-half in the past decade, was still twice that of onshore wind power. Onshore wind subsidies were phased out in full by the end of 2020.

The economic viability of new offshore wind installations after 2021 will hinge on the speed of further cuts in levelized cost and, to a lesser extent, the strength of provincial governments’ potential fiscal support. Many offshore wind developers adopted a wait-and-see strategy, halting turbine tendering this year. Public tendering of offshore wind turbines in 9M21 was only 18% of that in 9M20, and the market did not see much bids coming until September 2021.

Nevertheless, we expect China’s annual wind power capacity installations to rise in 2022 on stronger onshore wind additions, which accounted for around 94% per year, on average, of the total in 2015-2020. Higher onshore wind capacity installations in 2022 can be supported by the robust turbine tendering of 40.9GW in 9M21, almost tripling the quantum for 9M20. State-owned thermal gencos, driven by self-imposed mandates to peak carbon emissions ahead of the government’s agenda, are taking advantage of the falling wind turbine prices to rapidly optimise fuel mix. The average turbine bidding price dropped by around 26% yoy by end-9M21 and the price decline is continuing.

We expect the weight of wind power in rated Chinese thermal gencos’ fuel fix (by capacity) to rise by around 2pp in 2022, before gradually approaching 18%, on average, by 2024. Fitch views such a transition as credit positive, because renewables have dispatch priorities and are not exposed to fuel cost volatilities. Meanwhile, state-owned enterprises’ strong financing capability can help to alleviate the debt-servicing pressure from high capex.

For offshore wind power over the medium term, we expect the equipment price cuts to play a stronger role in driving new installations than the direct allocation of provincial-level subsidies to gencos, as grid-parity is a pre-condition for the sector to see rapid growth. Many provinces have pledged to develop subsidising mechanisms, but the scale of provincial-level subsidies will be much smaller than that of central-level subsidies, being limited to the extent that technological breakthroughs or cost reductions will not be discouraged. In the latest bids, the prices of offshore wind turbines fell below CNY4/W, roughly 40% lower than the 2020-level on average.
Source: Fitch Ratings

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