Since implementing its renewable energy law in 2005, China has been rapidly rolling out wind and solar power – from 10 gigawatts (GW) per year early on to over 430 GW last year. The country now has about 1,840 GW of installed capacity, forming more of the power capacity mix (47.3%) than that derived from fossil fuels.
China’s new climate action plan, submitted to the UN last year, includes a target to almost double capacity to 3,600 GW by 2035. That would go far beyond what any other country has or aims to have. To achieve it, China must continue building and connecting renewables to the grid at pace.
Many think that the rapidly falling cost of installing renewables and improving technology means the sector can already compete on the open market. But as the share of renewables in China’s electricity mix keeps rising, generators are having a tougher time. They are dealing with fluctuating earnings, difficulty getting hooked up to the grid and low average prices for their output.
Amid these challenges, can renewables win sufficient revenue and investment to drive expansion and add the 200 GW or more of capacity required every year to achieve China’s target? Let’s take a look.
The new pricing system for supporting renewables
Reaching 3,600 GW very much depends on a document produced last year by China’s economic planning body, the National Development and Reform Commission.
Document 136 provides the top-level policy design for China’s energy transition. It includes so-called market mechanisms to promote the consumption of renewable power and consistent investment, laying the foundation for a new electricity system.
The document requires provincial governments to set up price-guarantee mechanisms for new wind and solar projects. These are similar to the contract-for-difference (CfD) systems used overseas. CfD systems mitigate the wide price fluctuations in electricity spot markets that give generators unstable incomes and scare off investors.
Under such a system, renewable generators bid against each other to supply electricity to the grid at a fixed “strike price”. When market prices fall below that price, which is set annually, the government pays the generator the difference. When market prices exceed it, the generator pays back the surplus.
These CfD mechanisms had been put in place by the end of last year. They spelled the end of feed-in tariffs, feed-in premiums, or benchmarking against coal power prices, and the start of a centrally led but locally determined system for price setting.
But the new rules have not straightforwardly stabilised generators’ income or given investors certainty on returns.
In Europe and the US, CfDs usually cover all electricity generated by a project. In China, to keep more control over profitability, most provinces are underwriting only some of the generation – between 40% and 80%. The remainder of a project’s income is subject to market fluctuations.
In one sense, the CfD mechanism resembles the “capacity payments” that some coal-power generators receive for standing idle, ready to produce power if needed to meet peak demand. That is, both are annual risk-free payments proportionally linked to a power plant’s rated capacity.
China’s whole power system is shifting to capacity payments
Renewables aren’t the only form of generation being underwritten. China has rolled out capacity payments for several types of generation.
A system for pumped hydropower – a form of energy storage – was put in place in 2021, with payments in the region of CNY 500 (USD 72) per kilowatt per year made to 48 pumped hydro stations.
For “new-type” storage, which largely means battery storage, some provinces are paying between CNY 100-250 per kilowatt per year, with a national system for capacity payments implemented in early 2026.
For coal power, a 2023 document set fees at CNY 330 per kilowatt per year.
For gas, decisions on capacity payments have always been devolved to provincial governments, with provinces such as Guangdong and Jiangsu setting clear capacity-payment or subsidy standards.
China’s electricity system is clearly shifting from paying for electricity generated to paying for the capacity to generate it.
The CfD mechanism involves new wind and solar in this broader capacity-based subsidy system. In effect, the government is providing renewables facilities with a stable annual income, rather than them relying purely on market price signals.
Will income levels enable long-term expansion?
There are major differences in the amount of income support renewable generators receive across China’s regions. Judging from the strike prices and kilowatt-hours of power covered, wind power can cover its capital costs in most provinces. But returns on solar power in western provinces have reached the edge of, or even fallen below, the threshold of profitable investment – mainly due to lower than expected prices.
The support itself is also not consistent over time. Strike prices and covered quantities are set annually. While spot market prices change on a shorter timescale. Central government policy usually works on a five-year cycle. While provincial implementation of that policy adjusts annually. And electricity trading and settlement – meaning billing and payment – works to a monthly schedule.
In practice, monthly settlement means annual CfD-covered quantities must be artificially divided across the 12 months and settled at the monthly price. The actual subsidies projects receive are impacted by the changing monthly average of spot market prices, with generators giving up or receiving income depending on that average.
Subsidies are paid for by commercial electricity users as part of a “system operational fee”. Local governments, however, have concerns about the magnitude of the subsidies, and so the balance of the subsidy account influences how covered quantities are set in future.
Wind and solar projects require huge up-front investment, and their profitability and success relies on long-term stable cashflow. If electricity prices, covered proportions or settlement rules change frequently, investment risk quickly increases. That means higher financing costs and so less investment.
In theory, electricity spot prices should reflect the balance of supply and demand, but also send a signal to long-term investors. Under China’s current system, these prices are used more to recover costs and implement policy. Dispatch discretion, price ceilings and floors, and off-market interventions (including directed dispatch and off-market arrangements) make market prices lower than needed for long-term returns on investment.
As a result, renewable generators may still not be able to stand on their own two feet. They need to be supported by the new pricing mechanism as subsidies are phased out. Wind and solar power prices are still largely set in line with their costs, rather than the market price.
The issues of low prices and wasted generation
The part of a project’s generation not covered by the CfD mechanism can still be sold, via the spot market or through longer-term contracts. But that is limited as electricity markets are currently somewhat fragmented and distorted, plus there is not enough liquidity across markets in various time segments. Prices on short-term markets often drop the closer they get to real-time trades.
In Shandong, Zhejiang and Sichuan, the average electricity spot market price is significantly lower than the coal-power reference price, and close to zero when solar power generation is peaking. This price structure doesn’t reflect the actual “marginal costs” in the system but does significantly increase uncertainty for renewable generators. (Here marginal costs means the cost of the final unit of electricity needed to meet demand, which usually comes from a coal power plant when demand is high.)
That exposes uncovered generation to low and unstable prices, putting overall return on investment at risk.
As more renewables come online, wasted generation, or “curtailment”, is becoming a bigger problem, rising particularly in north-western China. According to reports, curtailment rates in Gansu are over 30% for solar and even higher for wind. The CfDs of Document 136 are closer to a “price guarantee, with conditions”: the guarantee only comes into play if a project is hooked up to the grid and actually generating power. It can’t provide discipline for electricity curtailments.
Rule restrictions behind the boom
Even with wind and solar generation costs having fallen significantly, China’s renewables remain highly reliant on predictable cost-recovery mechanisms.
In Europe and the US, market pricing is used to complete short-term clearing and is key to balancing real-time supply and demand. China’s electricity system, by contrast, has long regarded prices as a cost-recovery tool. This significantly weakens competition, and means the scale and structure of investments are made within a very policy-driven framework.
Achieving the 3,600 GW target on time will ultimately depend on whether local governments are willing and able to set CfD proportions at levels that ensure new projects can recover their costs.
