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Announcement:

Moody's: China's green certificates will lower tariffs for wind and solar power producers, but support development of renewable energy sector in the long term

 The document has been translated in other languages

13 Feb 2017

Hong Kong, February 13, 2017 -- Moody's Investors Service says that the introduction of green certificates in China's (Aa3 negative) renewable energy sector will likely lower the tariffs on wind and solar power in the near term, but support the further development of the sector in the longer term by easing curtailment.

The new measures will have no immediate impact on the ratings and outlook of the two wind and solar power producers rated by Moody's, China Longyuan Power Group Corporation Ltd. (A3 stable) and United Photovoltaics Group Limited (United PV, Ba3 stable).

On 3 February, China's National Development and Reform Commission (NDRC) announced a pilot program for issuance of green certificates to solar and wind power producers, each certificate representing 1MWh of electricity output.

Power producers can sell the certificates to buyers such as coal-fired power producers, grid operators, and corporates to evidence their use of clean energy. The price for the certificates will be determined by bilateral negotiation or competitive bidding, and is capped at the level of the subsidy currently received by power producers.

Solar and wind power producers who sell their green certificates will no longer receive government subsidies for the renewable energy generation that is linked to the green certificate. Wind and solar producers currently receive a benchmark tariff and a subsidy to cover the difference between this higher tariff and the tariff for coal-fired power generation.

However, because renewable energy companies may need to sell the certificates at prices below the current subsidy in order to attract demand, the certificates could effectively result in a tariff reduction. Nevertheless, price volatility from speculation is unlikely for the green certificates because resale of the certificates will be not permitted.

The scheme will commence on voluntary basis on 1 July, and the NDRC has indicated it may make the scheme mandatory from 2018. However, Moody's does not expect an active trading volume during the pilot period, in the absence of clear incentives for both sellers and buyers.

Renewable energy companies -- the sellers -- lack incentive to sell the green certificates, as the lower prices compared to the subsidy could reduce their revenue. This may be different for companies exposed to lengthy collection periods of up to 12 months for renewable subsidies, and who may opt to sell green certificates to improve their liquidity.

At the same time, coal-fired power producers - likely the major buyers of green certificates - lack incentive to incur additional expenses to acquire the green certificates, amid margin pressure following the rally in coal prices and reduced utilization hours at power plants.

Despite these near-term challenges, Moody's believes the green certificates will support the development of the renewable energy sector in the longer term, in particular by addressing curtailment.

The new mechanism provides an alternative to improving the share of renewable energy in the country's total power generation mix without increasing installed capacity, which avoid further pressure on existing overcapacity.

Demand for green certificates will over time be supported by the requirement for coal-fired power producers to increase their exposure to clean energy in the medium term. According to guidelines issued by the National Energy Administration in April 2016, power producers are required to increase the share of non-hydro clean energy in their power generation to at least 9% by 2020. In addition, individual consumption targets are also set for each of the 31 provinces at levels ranging from 5% to 13%.

Moody's will monitor the implementation of the green certificate mechanism, and assess the potential impact on the rated power companies as more details on the execution mechanism become available.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

Ivy Poon
Asst Vice President - Analyst
Project & Infrastructure Finance
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Terry Fanous
MD-Public Proj & Infstr Fin
Project & Infrastructure Finance
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

No Related Data.
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