Last week, China’s National Energy Administration (NEA) announced that all new onshore energy projects after 2021 must be subsidy free. On Thursday, the NEA released its final subsidy plan: $435 million will be distributed to new solar projects. In response, Chinese solar stocks plummeted and solar companies have pleaded for the government to delay subsidy cuts.

The difficult path to green energy

While tariffs and lackluster government support threaten the U.S. solar industry, China has committed to becoming a green energy powerhouse. Over the past few years, China has spent billions of dollars subsidizing its solar and wind industries in an attempt to improve energy sustainability.

China’s energy economy is dominated by coal power and solar energy only accounts for 1.7% of total energy generation. Since China has enormous coal reserves, it has historically been difficult for solar to compete with coal power.

Regional disparities within China

China’s ultimate goal is to reach grid parity, where solar energy is the same price or cheaper than coal power. China plans to cut back on subsidies because it believes the nation is close to reaching grid parity. While solar energy is competitive in some cities, regional differences in energy prices make widespread solar adoption difficult.

Despite tens of billions in subsidies, in some regions, solar power still remains significantly more expensive than coal power. Many areas of China have abundant coal mines and incredibly low coal prices. For example, in many Western regions, solar power is almost three times more expensive than coal power. In areas like these, solar companies will almost inevitably go bankrupt without support from the Chinese government.

Next steps for China

Previously, Chinese solar companies dramatically increased solar output due to generous policies and subsidies. This rapid expansion of solar infrastructure lowered solar production costs and paved the way for the rapid expansion of subsidized solar projects.

Although China is cutting back on subsidies, they are still providing incentives for the solar industry. For example, China offers power-purchase guarantees for companies that voluntarily choose to become subsidy-free. Essentially, China promises to buy energy from subsidy-free solar-producers for a number of years.

While China’s cut-back on subsidies will harm the solar industry, China’s solar capacity will still increase over the coming years. The Chinese government is also clearly unwilling to be completely laissez-faire with the industry. It is safe to assume that as long as pressure for a cleaner environment remains, China will continue to help the solar industry grow.