Easing restrictions on solar and wind installations in China to boost renewable energy helps sector struggling with oversupply

China has eased restrictions on solar and wind installations to curb fossil fuel use, a positive sign for the country’s renewable energy sector, which is struggling with oversupply.

The action plan released Wednesday by the State Council, China’s cabinet, aims to improve energy conservation and reduce carbon dioxide emissions over the next two years.

The roadmap includes a caveat about “restricting” solar and wind energy. Under the plan, these plants can operate at a utilization rate of 90%, up from the previous 95%, “if economic considerations prevail,” meaning more renewable energy installations will be allowed, but at a lower utilization rate.

Investors reacted positively to the development of the situation. Leading Chinese solar company JinkoSolar Holding gained as much as 6.3 percent in New York on Thursday, while Shanghai-listed Tongwei gained 2.4 percent.

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“We expect some investors will interpret (the easing of restrictions) as positive for the future of solar and wind installations,” said Leo Ho, an analyst at Daiwa Capital Markets.

China, the world’s largest producer of wind turbines and solar panels, is struggling with oversupply this year due to restrictions imposed by the US and the European Union. The clean energy sector accounted for about one-fifth of China’s gross domestic product growth of 5.2% in 2023. Beijing has identified solar panels, electric vehicles and lithium batteries as the three new pillars of the country’s economic growth.

According to a Daiwa report, the oversupply problem in China’s solar industry is likely to persist into the late 2020s, even without new capital expenditure.

“If solar companies do not adopt OPEC-style supply constraints, solar industry profits will continue to fluctuate around cost levels,” Daiwa analyst Dennis Ip said in the report, adding that such a scenario is highly unlikely.

While some of the roadmap’s goals were announced earlier, Citi’s Thursday report showed the goals for this year are generally more ambitious compared to those achieved a year ago.

“We believe that clean energy goals have been considered a higher priority by the (Chinese) government,” the report said.

The US bank expects to increase clean energy capacity from large wind and solar farms, with a particular focus on deserts in China, and from offshore wind farms, as well as from large hydropower plants using biomass and hydrogen energy.

Analysts say that thanks to China’s clean energy initiatives and the country’s dual goals of achieving maximum nationwide emissions by 2030 and net zero emissions by 2060, the country’s energy consumption and carbon emissions are falling.

China’s greenhouse gas emissions fell 3 percent in March, ending a 14-month increase that followed the lifting of zero-level Covid-19 controls, Lauri Myllyvirta, a senior research fellow at the Asia Society Policy Institute, said in a report.

Meanwhile, the world’s largest coal consumer could use a peak of polluting fossil fuels next year, followed by oil in 2027 and natural gas by 2040, according to a Wednesday report by Sinopec, China’s largest oil refiner and petrochemicals producer.

Non-fossil energy is projected to dominate China’s total energy supply around 2045, and China’s hydrogen energy consumption will reach 86 million tons by 2060, creating an industry worth 4.6 trillion yuan, the report said.

He added that by 2026, the share of non-fossil fuels as an energy source for hydrogen production will increase to 93%, with solar and wind energy accounting for two-thirds of hydrogen production.