Distributed generation (DG) solar panels in China have evolved to compete with utility-scale locations. National Energy Administration (NEA) data showed that about 96.3 GW of the 216.3 GW of solar generation capacity added in China in 2023 were commercial and industrial (C&I), residential and other small and medium systems . The 23.8 GW of distributed systems installed in the first quarter of 2024 exceeded the 21.9 GW of ground-mounted project capacity.
Where utility-scale solar led, C&I systems followed, with residential PV gaining popularity in recent years. Installations were helped by initiatives such as the Golden Sun Project and the Top-Runner Program introduced in 2012 after trade disputes with the United States and Europe hit Chinese solar exporters.
In 2014, China’s National Development and Reform Commission (NDRC) introduced distributed PV regulation and subsidies, which attracted investors. Small solar even survived the shock of the “5/31” subsidy cuts that Beijing introduced in late May 2018, taking advantage of its inherent advantages over utility-scale solar projects.
Attractive arrays
Distributed arrays can be installed on rooftops in area-limited population centers on China’s east coast and can comfortably supply the lower electricity loads typical of residential buildings, reducing excess generation compared to large solar sites.
C&I’s electricity prices can be much higher than regular consumer rates, strengthening the case for C&I’s solar energy. In Jiangsu Province, electricity from C&I costs about CNY0.90 ($0.10)/kWh, compared to CNY0.50 to CNY0.60 for residential consumers. C&I rates can reach CNY1/kWh in southern provinces including Zhejiang and Fujian.
Since 2014, distributed PV arrays – typically considered to scale up to 6 MW – have become popular due to the ease of connection to the grid at a lower cost than large solar systems, the minimal need for amplifying and transforming equipment, the location flexibility and low transmission losses. due to their proximity to end users.
Rise of housing
Government subsidies for home electricity prices caused residential PV to lag behind C&I solar for a while, but falling panel and inverter prices since 2019 have boosted the segment. Home solar subsidies have further accelerated the process. In 2019, 5.3 GW of residential capacity was added. This rose to 43.5 GW of new capacity in 2023 and could surpass 50 GW by 2024.
The northern provinces, including Shandong, Hebei and Henan, have traditionally hosted more than 70% of China’s residential solar generation capacity, thanks to available solar energy resources, prosperous rural communities and established electricity distribution networks. Since 2023, provinces in central and eastern China – including Jiangsu, Zhejiang, Hunan and Jiangxi – have experienced rapid implementation of home solar energy.
Policy setback
In June 2021, the NEA announced the more than CNY 1 trillion first phase of its Countywide Promotion, which aimed to encourage state-owned enterprises and provincial-level governments to install solar energy on government buildings, educational institutions, healthcare institutions and other public structures. , but also on private homes. Policymakers have designated 24% of China’s provinces – 676 authorities – to participate.
State-owned electric utilities are more accustomed to utility-scale solar development, dealing with the complexities of distributed PV deployment and the dynamics between local government, residents, private companies and other stakeholders. Many of the national projects stalled before completion and in some cases private companies sidelined by policy were re-engaged so that they, or the provinces themselves, could undertake developments to achieve policy objectives. By the end of 2023, less than 15% of the policy’s ambition for generation capacity had been achieved.
Key challenges
The rise of solar energy in China since 2016 has exceeded the capacity of the electricity grid, excessively limiting the clean electricity generated by large-scale sites in northern and northwest China. The NDRC responded by limiting the allowable curtailment to 5% and many investors shifted their focus to distributed PV in central and eastern China. As a result, distributed arrays are now beginning to suffer from the same network capacity issues.
Since 2023, more than 20 provinces and municipalities – including Liaoning, Hubei, Henan, Guangdong, Anhui and Jiangxi – have introduced policies to restrict distributed PV, including suspending project applications, banning construction and denying grid connection requests. Even Shandong, Hebei and Henan are experiencing grid constraints for rural solar panels, casting doubt on the future of the residential solar segment’s growth trajectory.
“The variability, volatility and counter-peak shaving [nature of their generation] are the main reasons affecting solar grid connection,” said Zhang Jinping, director of the China Electric Power Research Institute. Distributed arrays cause overvoltage, undervoltage and overloading of lines and transformers, he said. The resulting volatility was underscored by 2023 data from regional grid operator State Grid Corp. from China, which showed that intraday power fluctuations reached 256 GW.
Path forward
The state-owned company and Beijing are exploring solutions to address grid constraints, including policy, technology, pricing and market strategies.
Enthusiasm for distributed PV continues, thanks to declining equipment prices since 2023 and the solar and wind curtailment limit increased from 5% to 8% by the NDRC and State Grid. Even project investments are affected by this latest measure, as new installations can operate at lower rates to stay within the mitigation limit.
Falling battery costs make distributed energy storage viable, and the resulting peak-shaving capacity reduces grid volatility and provides a revenue stream for residential and commercial battery owners. Time-of-day electricity tariff reform is currently being used by some provincial grids in China to induce energy consumers to adjust their electricity consumption times in response to price signals. This strategy aims to improve the overall efficiency of the energy system. Different provinces in China have introduced different time-of-day tariff mechanisms, with notable changes observed in provinces such as Shandong and Henan since 2023. These provinces have converted their daytime peak power zones to “off-peak periods” to allow for significant solar energy contributions. The result was low or even negative electricity prices during high daytime loads. This shift has prompted electricity users to shift their consumption patterns from night to day, increasing electricity consumption from solar projects. While time-of-day tariff reforms can impact electricity consumption and increase PV project consumption, it can also reduce solar project revenues and distort project financial models.
Despite the sophistication of time-of-day rate mechanisms, energy industry insiders suggest such systems are less effective than real-time spot market pricing. Many energy sector specialists are calling for a strengthening of the market-based mechanism for energy price formation, moving away from a planning-oriented approach and embracing real-time spot prices instead of time-of-day rates. Proponents of real-time pricing believe it could be critical to unlocking the efficiency potential of the electricity grid and fueling the further advancement of distributed PV systems.
According to statistics from State Grid and NEA, about 47.3% of China’s non-fossil energy – mainly solar and wind energy – participated in energy market trading in 2023, but most of that volume came from large-scale power stations. Most Chinese C&I solar panels are intended for self-consumption, with the surplus exported to the grid rather than traded on electricity markets. Most of the country’s residential solar energy is sold at fixed prices, so there is plenty of potential for market-based trading through distributed arrays. Despite the significant market potential, the Chinese government has been cautious in promoting distributed PV market trade. This approach is mainly due to the fact that existing power stations receive subsidies on their electricity prices. Any adjustment to tariffs could jeopardize the government’s commitments, potentially undermining Beijing’s credibility and hampering industry development.
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