20160305-美银美林-2020_Renewable_Portfolio_Standard_roll_out_positive_to_PRC_wind___solar_sector_22页_1mb

Summary of 2020 Renewable Portfolio Standard Rollout and Its Impact on China's Wind & Solar Sector

Core Content

The document outlines the Chinese government's Renewable Portfolio Standard (RPS) policy, which aims to increase non-hydro renewable energy consumption to 9% of total energy consumption by 2020, up from 4% in 2015. This represents a 17.6% CAGR from 2015 to 2020, aligning with national model estimates. The RPS policy is seen as a sign of government support for wind and solar power development, especially in provinces with severe curtailment issues.

The policy targets provinces such as Inner Mongolia, Liaoning, Jilin, Heilongjiang, Gansu, Ningxia, and Xinjiang to have the highest non-hydro renewable energy consumption rates. This is expected to reduce curtailment rates and improve return on invested capital (RoIC) for clean energy producers like Longyuan (LY), Huaneng RE (HNR), Fuxin, and Xinyi Solar. The authors estimate that a 1% increase in utilization hours could boost EPS by 2.7% for LY, 4.4% for HNR, and 1.6% for Fuxin.

Key Policy Points

• RPS Targets: The NEA announced provincial targets for non-hydro renewable energy consumption by the end of 2020. For instance, Inner Mongolia, Gansu, Ningxia, and Xinjiang have higher targets (13%) due to their curtailment challenges.
• Utilization Hours: The NEA's guidance aims to improve utilization hours for renewable energy, with LY's utilization hours showing a slowdown in decline since late 2015.
• UHV Projects: The government is accelerating Ultra High Voltage (UHV) projects to facilitate renewable energy transmission, which should help reduce curtailment in the future.
• Emissions Trading: China plans to launch a national emission trading system (ETS) in 2017, covering key industries. The authors note that while wind, solar, and nuclear companies may not directly benefit from ETS revenue in their models, companies like MLS and Sanan Opto are well-positioned to benefit from energy efficiency improvements.

Key Provinces and Targets

Province	Non-hydro Renewable Energy Consumption (%)
Beijing	10%
Tianjin	10%
Hebei	10%
Shanxi	10%
Inner Mongolia	13%
Liaoning	13%
Jilin	13%
Heilongjiang	13%
Shanghai	5%
Jiangsu	7%
Zhejiang	7%
Anhui	7%
Fujian	7%
Jiangxi	5%
Shandong	10%
Henan	7%
Hubei	7%
Hunan	7%
Guangdong	7%
Guangxi	5%
Hainan	10%
Chongqing	5%
Sichuan	5%
Guizhou	5%
Yunnan	10%
Tibet	13%
Total	9%

Key Policies and Actions

• Renewable Energy Purchase Guarantee: The NEA introduced a draft policy to separate renewable energy generation into guaranteed purchase and direct sales parts, aiming to ensure more consistent demand for renewable energy.
• Carbon Emissions Trading: China has been piloting cap-and-trade programs in seven cities since 2011. A national ETS is expected to start in 2017, with the goal of reducing energy consumption per unit of economic output by 60-65% from 2005 levels.
• Local Government Support: Multiple provinces have shown support for clean energy and UHV projects during NPC and CPPCC meetings, including initiatives to improve power transmission and promote green power dispatch.

Investment Recommendations

The report recommends the following companies for investment due to their potential to benefit from the RPS and related policies:

• Longyuan (LY): Buy rating with a price objective of HK$8.6. It has the best balance sheet among PRC wind farms and is expected to improve RoIC and post positive FCF by 2017.
• Huaneng RE (HNR): Buy rating with a price objective of HK$2.6. Earnings estimates for 2015-2016 were lifted due to lower R&M costs.
• Fuxin: Buy rating with a price objective of HK$3.0. It is considered a lower valuation stock.
• Xinyi Solar: Buy rating with a price objective of HK$4.4. It is the top pick among PRC solar farm stocks.
• MLS: Buy rating with a price objective of Rmb35.0. Well-positioned to benefit from energy efficiency targets.
• Sanan Opto: Buy rating with a price objective of Rmb29.0. Also well-positioned to benefit from energy efficiency targets.

Outlook and Risks

• Utilization Improvement: The authors expect utilization hours to improve gradually in 2016, driven by reduced thermal power offtake, slower new capacity additions, and better policy enforcement.
• Oversupply Risk: There is a risk of power oversupply, which could impact curtailment rates and utilization hours. However, the RPS and UHV projects are expected to mitigate this risk.
• Supportive Policies: The report anticipates more supportive policies post-NPC/CPPCC that could encourage gas consumption and renewable energy output.

Supporting Data

• 2015 Wind Power Industry Statistics:

  • Total interconnected wind farm capacity: 129,340 MW
  • Total wind power generation: 186.3 bn kWh
  • National average utilization hours: 1,728 (down 9.1% YoY)
  • Average curtailment rate: 15% (up 7% from 2014)
  • Gansu had the lowest utilization hours (1,184) and the highest curtailment rate (39%)

• UHV Projects in Construction:

  • East Ningxia-Zhejiang (2016)
  • Mengxi-Shandong (2016)
  • West Inner Mongolia-South Tianjin (2016)
  • Jiuquan-Hunan (2017)
  • Huaidong-Wannan (2018)
  • Dian Northwest-Guangdong (2017)
  • Inner Mongolia Shanghaimiao-Shandong (TBD)
  • Huaidong-Chengdu (TBD)
  • Huaidong-East China (TBD)
  • Hami North-Chongqing (TBD)
  • Inner Mongolia Mengxi-Jiangsu Taizhou (TBD)

• Emissions Trading Pilots:

  • Seven major cities have been running cap-and-trade pilots since 2011.
  • Pilots have achieved varying levels of compliance, with some reporting up to 100% compliance.
  • The average quota price across all pilots was around $5.39 per metric ton of CO2.

Conclusion

The RPS rollout is a significant policy driver for the Chinese wind and solar sectors, aiming to reduce curtailment and improve clean energy utilization. The government's focus on UHV projects and emissions trading is expected to further support renewable energy development. Companies like Longyuan, Huaneng RE, Fuxin, Xinyi Solar, MLS, and Sanan Opto are highlighted as key beneficiaries of these policies.