China's Renewable Auction Sparks Investment Concerns with Low Solar Prices

China's inaugural provincial auction under a new renewable energy pricing mechanism has yielded solar power prices so low that analysts express concern over potential deterrence of future project investments. This auction, held in Shandong province, a leading region for renewable energy development, is considered a significant indicator for future nationwide auctions, suggesting a downward trend in renewable energy prices compared to the previous system. This market-based reform replaces a prior model that guaranteed project rates tied to a coal price benchmark, a system that posed a risk of encouraging over-investment. The new mechanism, implemented in June, operates by enabling local grid operators to select bids from lowest to highest until a predetermined volume target is achieved. The highest accepted bid then establishes the clearing price. Generators will be compensated if the prevailing market price falls below this auction-determined strike price. A state media report indicated that the clearing price for solar power in the Shandong auction was 225 yuan ($31.58) per megawatt-hour (MWh). This price was set within a bidding range of 123 yuan/MWh to 350 yuan/MWh. Jefferies analyst Alan Lau commented that achieving an acceptable rate of return at such a price would be challenging for investors. The significantly low prices are attributed to a surplus of solar investment, with one source noting that numerous completed projects were "desperate" to sell their power at a fixed rate. Lau expressed limited optimism for similar outcomes in other provinces, stating, "unless it's in coastal provinces with strong power [demand] growth."