Yunnan strictly implements latest power market reforms despite impact on local economy
LONGI recently announced that its annual profits may be impacted by the fact that its manufacturing base in Yunnan will no longer enjoy the cheap electricity price granted by the Yunnan government. Instead, the company has been obliged to purchase electricity from the power trading market since September 1st, 2021. LONGI’s share price has slumped and silicon prices have been rising almost every month since last November.
Earlier in March this year, the Yunnan Provincial Development and Reform Commission (DRC) and 12 other departments issued a notice promoting Steady Industrial and Economic Development (关于落实促进工业经济平稳增长若干政策的通知). The notice pointed out that the green electricity price policy and the incremental electricity pricing system (cascade pricing) for energy intensive industries should be strictly implemented. At the same time, coordination between electricity price policies, industrial development, and environmental protection shall be strengthened.
Historically, the province implemented favorable electricity prices to promote industrial activity
Back in the 2010s, Yunnan had strived to use cheap hydropower to attract aluminum and silicon manufacturers. LONGI was one of those energy-hungry companies who set up factories in Yunnan in 2016. Since then, Yunnan’s hydro curtailment had been reduced from 31.4TWh in 2016 to 1.7TWh in 2019. Self-positioned as the world’s “green silicon and aluminum capital”, Yunnan DRC has made a commitment of offering preferential electricity prices to solicit new investments on electrolytic aluminum and silicon industries in 2018. Many market insiders estimated that LONGI could have a special electricity price below 0.3CNY / kWh (user side).
While the demand for clean energy was growing rapidly, as more and more companies had set up scalable manufacturing bases, the potential development of new hydro power was reaching saturation. Yunnan turned to wind and solar capacity to ease the imminent shortage of power anticipated in 2023. On Oct. 30, 2020, Yunnan DRC issued a Plan to Develop New Energy Projects in Suitable Areas (云南省在适宜地区适度开发利用新能源规划). The plan included 3 GW of solar and 7.9 GW of wind with a COD (Date of Commercial Operation) deadline set at the end of 2021, in counties welcoming silicon industry clusters such as Kunming, Qujing, or Chuxiong. Yunnan promised a “generous” off-taking scheme for the new wind and solar projects: during the first decade, solar power would be fully purchased by the grid company at the Yunnan coal-fired base price (0.3358 CNY / kWh), while project owners could choose either the same on-grid price or a market-based price during the second decade. Compared to Yunnan’s historical wind and solar on-grid prices which were leveled down by the local hydropower and reduced to no more than 0.25 CNY / kWh in 2019, the offer was particularly attractive. It is assumed that the Yunnan government has been filling in the price gap to provide such an attractive electricity price.
But the central government’s latest power market reforms are challenging such practices
Many unexpected decisions made by the central government have changed the landscape. The game changing policy announced by NDRC in October last year to semi-liberate coal-fired power prices has pushed all industrial and commercial users to purchase market-based power. Energy intensive users are supposed to pay higher power tariffs. In addition, the average market-based power price in Yunnan has increased by 10% in 2021 due to the high demand for power.
Moreover, the green electricity trading rules have been formulated since the launch of the national green electricity pilot trading last September. Nowadays, green electricity’s environmental attribute is included in its price. As a result, market based green electricity trades at a premium compared to the local coal-fired base price, making the original deal promised by Yunnan DRC obsolete. If wind and solar power goes on the market for a higher price, someone will have to pay more. Under the pressure of market prices rising, the green electricity premium, stringent control of big power users, Yunnan has no choice but to cancel its cheap power price policy.
Yunnan’s new policy change may not be an exception in China. Similar news may arise in other provinces and regions who took advantage of cheap local resources to bring in big industrial investors. Indeed, all industries need to pay for the environmental attribute of green electricity, including those who are in the renewable industry. On the other hand, it is a clear sign of China’s commitment to achieve its 30/60 goal.
(Yunnan NEA, China Power, China News, PV news )
