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Small-scale, “distributed” PV has become a significant part of the world’s biggest solar market but it is now butting up against the same grid constraints that have frustrated utility-scale PV in China and other parts of the world.
Distributed-generation (DG) solar arrays in China have evolved to rival utility-scale sites. National Energy Administration (NEA) data revealed around 96.3 GW of the 216.3 GW of solar generation capacity added in China in 2023 was commercial and industrial (C&I), residential, and other small- and medium-scale systems. The 23.8 GW of distributed systems installed in the first quarter of 2024 outpaced the 21.9 GW of ground-mounted project capacity.
Where utility-scale solar led, C&I systems followed, with residential PV gaining in recent years. Installations were helped by initiatives such as the Golden Sun Project and the Top-Runner Program that were introduced in 2012 after trade disputes with the United States and Europe hit Chinese solar exporters.
In 2014, China’s National Development and Reform Commission (NDRC) introduced distributed PV regulation and subsidies, attracting investors. Small solar even survived the shock of the “5/31” subsidy cuts introduced by Beijing at the end of May 2018, leveraging its inherent advantages over utility-scale solar projects.
Attractive arrays
Distributed arrays can be installed on rooftops in land-constrained population centers on China’s eastern coast and can comfortably supply the lower electricity loads typical of residential buildings, reducing curtailment of excess generation compared to big solar sites.
C&I electricity prices can be much higher than ordinary consumer tariffs, bolstering the case for C&I solar. In Jiangsu province, C&I electricity costs around CNY 0.90 ($0.10)/kWh, versus CNY 0.50 to CNY 0.60 for residential consumers. C&I tariffs can top CNY 1/kWh in southern provinces, including Zhejiang and Fujian.
Since 2014, distributed PV arrays – typically considered up to 6 MW in scale – have gained popularity due to ease of grid connection at a lower cost than big solar, minimal need for boosting and transforming equipment, site flexibility, and low transmission losses, thanks to their proximity to end users.
Rise of residential
Government subsidies for home electricity prices meant residential PV lagged C&I solar for a while but falling panel and inverter prices since 2019 have boosted the segment. Subsidies for home solar have accelerated the process further. In 2019, 5.3 GW of residential capacity was added. This soared to 43.5 GW of new capacity in 2023 and could surpass 50 GW in 2024.
Northern provinces including Shandong, Hebei, and Henan have traditionally hosted more than 70% of China’s residential solar generation capacity thanks to the available solar resources, prosperous rural communities, and well-established electricity distribution networks. Since 2023, provinces in central and eastern China – including Jiangsu, Zhejiang, Hunan, and Jiangxi – have experienced rapid home solar deployment.
Policy setback
In June 2021, the NEA announced the CNY 1 trillion-plus initial phase of its Countywide Promotion, which aimed to incentivize state-owned utilities and county-level governments to install solar on government buildings, educational institutions, healthcare facilities, and other public structures, as well as on private homes. Policymakers identified 24% of China’s counties – 676 authorities – to take part.
State-owned electric companies are more accustomed to utility-scale solar development, and face difficulties with the intricacies of distributed PV deployment and the dynamics between local government, residents, private companies, and other stakeholders. Many of the countywide projects stalled before completion and in some cases, private companies sidelined by the policy were re-engaged so they, or the counties themselves, could perform development to achieve policy objectives. By the end of 2023, less than 15% of the policy’s generation capacity ambition had been realized.
Key challenges
The solar boom experienced in China since 2016 has outpaced grid capacity, driving excessive curtailment of clean electricity generated by utility-scale sites in northern and northwestern China. The NDRC responded by capping permitted curtailment at 5% and many investors shifted focus to distributed PV in central and eastern China. As a result, distributed arrays are now beginning to encounter the same grid capacity issues.
Since 2023, more than 20 provinces and municipalities – including Liaoning, Hubei, Henan, Guangdong, Anhui, and Jiangxi – have introduced policies to restrict distributed PV, including through suspending project filing, bans on construction, and refusing grid connection requests. Even Shandong, Hebei, and Henan are experiencing grid constraints on rural solar arrays, casting doubt on the future of the residential solar segment’s growth trajectory.
“The intermittency, volatility, and counter-peak-shaving [nature of their generation] are the main reasons affecting the grid connection of solar PV,” said Zhang Jinping, director of the China Electric Power Research Institute. Distributed arrays bring over- and undervoltage and line and transformer overloads, he said. The resulting volatility was underlined by 2023 data from regional network operator State Grid Corp. of China showing that intraday power fluctuations reached 256 GW.
Path forward
The state-owned utility and Beijing are exploring solutions to address grid constraints including policy, technology, pricing, and market strategies.
Enthusiasm remains for distributed PV, thanks to falling equipment prices since 2023 and the curtailment limit for solar and wind power being raised from 5% to 8% by the NDRC and State Grid. Even project investment is affected by the latter move, as new installations may operate at reduced rates to stay within the curtailment cap.
Falling battery costs are making distributed energy storage viable, and the resulting peak shaving capacity reduces grid volatility as well as offering a revenue stream for residential and commercial battery owners. Time-of-day electricity tariff reform is currently being used by some provincial grids in China to nudge power consumers to adjust their electricity usage times in response to price signals. That strategy aims to enhance the overall efficiency of the power system. Several provinces across China have adopted different time-of-day tariff mechanisms, with notable changes observed since 2023 in provinces including Shandong and Henan. Those provinces have transitioned their daytime peak power zones to “valley” periods, to accommodate significant solar power contribution. The result has been low, or even negative electricity prices during high daytime loads. The shift has incentivized electricity users to move consumption patterns from night time to daytime, boosting the consumption of electricity from solar power projects. While time-of-day tariff reform can influence electricity consumption and boost PV project consumption rates, it may also lead to decreased solar project revenue and can disrupt project financial models.
Despite the sophistication of time-of-day tariff mechanisms, energy industry insiders suggest such systems are less effective than real-time pricing in the spot market. Many power-industry specialists advocate for an enhancement of the market-based power price formation mechanism, moving away from a planning-oriented approach to embrace real-time spot pricing instead of time-of-day tariffs. Supporters of real-time pricing believe it could be crucial to unlock the grid’s efficiency potential and foster the further advancement of distributed PV systems.
Some 47.3% of China’s non-fossil energy in 2023 – chiefly solar and wind power – participated in power market trading, according to State Grid and NEA statistics, but most of that volume came from utility-scale plants. Most of China’s C&I solar arrays operate for self-consumption with any excess exported to the grid rather than traded on electricity markets. Most of the nation’s residential solar energy is sold at fixed prices, so there is plenty of potential for market-based trading from distributed arrays. Despite the significant market potential, the Chinese government has proceeded cautiously in promoting market trading for distributed PV. That approach is primarily due to the fact that existing power plants receive subsidies on their electricity prices. Any adjustments to tariffs could jeopardize government commitments, potentially undermining Beijing’s credibility and hindering industry development.
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