Navigating the Challenges of Distributed Solar Power: A Call for Rational Development in China’s Energy Sector

The distributed photovoltaic (PV) industry can no longer afford to “race ahead” without proper guidance. The aim is to use market price signals to efficiently allocate distributed PV resources instead of developing them indiscriminately on any available rooftop.

In February 2023, the National Development and Reform Commission and the National Energy Administration jointly issued a notice to deepen the market-oriented reform of renewable energy grid connection prices. This initiative aims to promote the high-quality development of renewable energy, including wind and solar power, by allowing all electricity generated from these sources to enter the market and establishing pricing through market mechanisms.

Since the second half of last year, efforts to integrate renewable energy, especially distributed energy, into the market have gained momentum. Hebei Province was among the first to implement policies for the market entry of distributed PV. The previous “guaranteed quantity and price” purchase policies have become inadequate, leading to mismatches between supply and demand and challenges in energy absorption. This issue is particularly pronounced in the distributed PV sector.

On one hand, there is a rapid increase in newly installed capacity; on the other, the “red zones” where new distributed PV connections are suspended are expanding. How much change can “market entry” bring to resolve this conflict?

In the Minning Town of Yongning County, Yinchuan City, Ningxia, there are distributed PV installations on rooftops. The expansion of “red zones” reflects a growing mismatch. As the capacity of distributed PV increases, absorption issues have emerged, manifesting as an ongoing expansion of “red zones” where new projects are no longer permitted to connect to the grid.

The Guidelines for Assessing the Grid Connection Capacity of Distributed Power Sources categorize the grid’s capacity into red, yellow, and green zones. A red zone indicates that distributed energy sources have caused electricity to flow back into the grid at 220 kV or above, leading to a suspension of new project connections until the grid’s capacity is improved. Last year, the spread of restricted access in red zones continued, affecting provinces such as Zhejiang, Shandong, Guangdong, Henan, Heilongjiang, and Fujian, where new distributed energy connections were halted.

In the power system, the grid is structured by voltage levels, with transmission networks classified as high voltage and distribution networks as low voltage. Generally, grids at 220 kV and above belong to the transmission network, while those below 110 kV are part of the distribution network. Higher voltage levels indicate larger capacity and stronger absorption capabilities. When distributed PV cannot be absorbed by lower voltage networks, there is a push to feed back into higher voltage networks. However, as distributed PV installations grow in certain regions, even 10 kV, 35 kV, and 110 kV networks struggle to absorb the surplus.

Previously, electricity flowed from the supply side to the demand side. However, with distributed PV located on the user side, feedback changes the flow direction, impacting the safety and quality of the power system. Consequently, the guidelines have not permitted feedback into grids at 220 kV and above, signifying that distributed PV must be absorbed within lower voltage networks.

In regions with rapid growth in distributed PV installations, absorption challenges have already surfaced. In October 2023, the Henan Development and Reform Commission issued a notice promoting the healthy and sustainable development of the distributed PV sector, indicating that yellow and red zones in the province offer little to no absorption capacity, while green zones with favorable conditions are scarce, scattered between red and yellow zones. In 2023, Henan ranked first in the nation for newly installed distributed PV capacity.

The random, intermittent, and fluctuating nature of renewable energy generation often leads to issues such as wind and solar curtailment. However, distributed PV faces even more severe absorption challenges compared to centralized systems. According to Zhou Feng, head of the Clean Power Project at the Energy Foundation, “From the demand side, centralized PV can be managed through planning or market mechanisms, like cross-province transmission. In contrast, distributed PV typically feeds into local grids with limited absorption space.”

The absorption dilemma is fundamentally a supply-demand mismatch. In June 2023, the National Energy Administration initiated a pilot project to assess the grid connection capacity and improvement measures for distributed PV in six provinces, including Shandong and Henan. Li Wenlong, a chief engineer at Tianjin University involved in these assessments, noted that evaluations were conducted at the county level. “According to our research, as long as there is sufficient load, capacity is not an issue. However, in some counties in Shandong, the generated PV electricity can exceed the total electricity consumption,” he explained.

This mismatch is particularly evident in rural areas with rapidly growing household distributed PV installations. “Industrial and commercial users typically have high electricity demands, making it easier to accommodate distributed PV on rooftops. However, rural households may only use a few kilowatt-hours daily, leading to a situation where household distributed PV primarily feeds into the grid.” Zhou Feng emphasized that the rapid development of distributed PV in villages and towns contributes to these “red zones,” as a single farmer’s roof can accommodate between 10 kW and 20 kW of capacity, effectively creating a concentrated distributed PV installation.

Although conditions vary by region, household distributed PV accounts for about half of the total installed capacity, and in some areas, it is trending to surpass that of industrial and commercial PV, predominantly in rural locales.

Besides the supply-demand mismatch, the infrastructure of the distribution network also determines the absorption capability of distributed PV. “The power system must maintain real-time balance between supply and demand, employing various means such as voltage boosting and transformation. The grid can be likened to a water pipe; if the inflow exceeds the capacity without increasing pressure or widening the pipe, the flow rate will decrease or even stop. The grid has capacity limits,” Zhou explained. Centralized PV can be sent through a large-capacity transmission line, while the locations where distributed PV connects are very dispersed. Each connection point’s infrastructure, such as distribution transformers, dictates its absorption capability. Even within the same province, the conditions of distribution networks can vary significantly between cities, leading to different absorption capabilities.

Clearly, some regions have not adequately prepared their distribution network infrastructure to handle the surge in distributed PV installations. In July 2022, Liu Weipeng from the State Grid Hebei Electric Power Company reported that in Longyao County, a pilot area for the “whole county advancement” initiative, the local power bureau processed around 200 new PV user applications weekly, with an average capacity request of 30 kW per household. Longyao County, primarily agricultural, sees 28% of its load originating from agriculture, leading to low demand during non-irrigation periods. The disparity between the capacity of the basic rural power grid and the installed PV capacity has resulted in some PV generation being unable to be absorbed locally, causing transformers to experience reverse overload, increasing the risk of failure.

Industry insiders have pointed out that the explosive growth of distributed PV in recent years has not matched the growth in the grid company’s absorption capacity. “From the perspective of the grid company, there’s a focus on ensuring the safe operation of the power system, leading to strict controls on the connection of distributed PV. In certain areas, the criteria for defining ‘red zones’ have been overly stringent.” Based on Li Wenlong’s experience, during the 2023 capacity assessments, the feedback into grids at 220 kV and above was not solely due to distributed PV; centralized PV and wind power also contributed. However, in some regions, a “one-size-fits-all” approach was applied, prohibiting any new distributed PV connections if feedback occurred at a 220 kV substation, exacerbating the spread of “red zones.”

In October last year, the National Energy Administration reported several typical issues regarding the integration of distributed PV, including violations by power supply companies that expanded “red zones,” restricting access for distributed PV projects. For instance, a power supply company in Harbin, Heilongjiang Province, classified the carrying capacity of distributed PV in corresponding regions as zero due to feedback from biomass and centralized renewable energy plants at 220 kV and above.

The distribution network is indeed a weak link in the power system. The Southern Power Grid has prioritized the construction of distribution networks, planning an investment of 320 billion yuan, accounting for about half of its 670 billion yuan grid investment during the same period. The State Grid has proposed that, during the 14th Five-Year Plan, investment in distribution networks will exceed 1.2 trillion yuan, making up over 60% of its total grid construction investment.

In some regions, the increase in demand for electricity has not been matched by adequate infrastructure preparation, yet the new capacity of distributed PV has surged in recent years. Will the move to “market entry” end the disorderly development?

It is not an exaggeration to describe the rapid increase in distributed PV installations since 2020 as a “frenzied advance.” From 2020 to 2024, the newly installed distributed PV capacity across the nation was 15.52 million kW, 29.28 million kW, 51.11 million kW, 96.29 million kW, and 120 million kW, with the growth rate slowing only last year, after nearly doubling each year in the previous three years.

What has driven this surge in newly installed distributed PV capacity? Zhou Feng explains that the primary driver behind the rapid growth in household PV installations, particularly in rural areas, is commercial interest. At the national level, there is a push for energy transition, encouraging the development of distributed PV to utilize idle rooftop spaces, especially in the central and eastern regions where land resources are limited. Some provinces have also implemented policies to encourage the development of distributed PV, like the “whole county advancement” policy, which showcases local achievements in renewable energy transition while stimulating industrial development.

Li Wenlong believes that in addition to commercial interests and policy support, technological advancements and market demand have also played significant roles in the surge of newly installed distributed PV capacity. The decline in the costs of supporting components in the PV industry has greatly enhanced the economic viability of distributed PV. The application of smart grid technology allows distributed PV to collaborate more effectively with the grid, while advancements in storage technology, such as decreasing lithium battery costs, provide more stable energy output solutions for distributed PV.

In June 2021, the National Energy Administration initiated the “whole county advancement” program for distributed PV, subsequently confirming a list of 676 pilot counties. Tianfeng Securities estimated that the total scale of this initiative could exceed 100 million kW, assuming a development scale of 200,000 kW per county.

Li Wenlong believes that the explosive growth of household distributed PV in rural areas results from the convergence of interests among the government, distributed PV developers, and farmers. The government can achieve energy transition and economic growth, farmers can earn rent by leasing their rooftops, and distributed PV developers benefit from local government subsidies and the previously stable revenue model of guaranteed grid purchases.

Since 2022, various local governments have rolled out policies to support distributed PV, most notably providing subsidies. For example, in September 2022, Yongkang City in Zhejiang Province announced a new policy to subsidize rooftop distributed PV projects built between January 1, 2022, and December 31, 2024, at a rate of 0.1 yuan per kWh based on actual generation for three years.

Beyond subsidies, the previous principle of “self-consumption with excess fed into the grid” meant that grid companies would ensure purchases, aiming to “collect all that can be collected.” In Shandong, for instance, the previous grid purchase rate was based on a coal benchmark price of 0.3949 yuan/kWh. However, with distributed renewable energy participating in market trading, the profitability of distributed PV projects now faces increased uncertainty.

On October 30, 2024, the National Development and Reform Commission released the “Guiding Opinions on Vigorously Implementing Renewable Energy Replacement Actions,” which mentioned prudently and orderly promoting the participation of distributed renewable energy in market trading and facilitating nearby absorption. Following this, several provinces quickly responded. For instance, in December last year, the Shandong government issued measures to improve the renewable energy absorption system, gradually increasing the market trading ratio for renewable energy. From 2025 to 2026, new photovoltaic projects (including distributed PV) can autonomously decide to participate with either their entire output or 15% of their output in the electricity market. By 2030, all new wind and solar projects will be fully integrated into the market.

In the second half of 2024, as news about the “market entry” of distributed PV emerged, market sentiment shifted to a wait-and-see attitude. Some central enterprises and PV developers even halted projects in their distributed PV divisions in the second half of last year, fearing that “market entry” would directly impact profitability, undermining the profit thresholds set by developers and complicating financial calculations. This was one of the reasons behind the slowdown in the growth rate of newly installed distributed PV capacity last year. With the “market entry” policy becoming clearer by the end of last year, many distributed PV developers have initiated research into market entry strategies, forming dedicated teams or commissioning specialized electricity trading teams for analysis.

Zhang Peng, director of the Industrial Finance Research Institute at Great Wall Securities, stated, “For central power enterprises like the ‘Five Big and Six Small,’ the typical return on distributed PV projects is around 6%. These projects are usually developed by private companies such as Trina Solar and LONGi Green Energy, then packaged and sold to the ‘Five Big and Six Small,’ who have higher return expectations. However, once distributed PV enters the electricity market, pricing will follow market dynamics. For instance, during peak solar generation hours, prices may drop below 0.1 yuan per kWh, even approaching zero. This has previously led to negative pricing in the Shandong electricity market, making revenue calculations more complex and necessitating more cautious development.”

Research conducted by Shi Jingli, an analyst at the Energy Research Institute of the China Macro Economic Research Institute, indicates that in the central and eastern regions, with photovoltaic module prices at 0.8 yuan per watt and an annual utilization of 1100 hours, if storage is not equipped, distributed PV needs to achieve a revenue of approximately 0.26 yuan per kWh to break even. With 50% of installed capacity and 2 hours of storage, this requirement rises to about 0.32 yuan per kWh; extending storage duration to 4 hours raises this to approximately 0.37 yuan per kWh.

Zhou Feng believes that “although there is no specific market entry plan from the national level, provinces facing absorption pressures are taking the lead in implementing distributed PV ‘market entry’ policies, which will promote orderly development. The direction of energy transition remains unchanged; by allowing distributed PV to enter the market, resources can be allocated more efficiently based on market price signals, guiding the placement of distributed PV in areas with better economic benefits.” Industry insiders have expressed a desire for the national level to guide efficient allocation of distributed PV through market pricing signals, rather than allowing a rush to develop PV systems wherever rooftops are available.

How can the absorption dilemma be addressed? With the market entry of distributed PV, its future deployment is expected to become more rational, easing absorption pressures. Gao Feng, deputy director of the Energy Internet Innovation Research Institute at Tsinghua University, pointed out that the complete market entry of renewable energy will undoubtedly lead to a more rational layout of distributed PV. Just as the U.S. net metering mechanism has evolved from fixed pricing to time-varying pricing, China will gradually improve its market regulation methods to scientifically guide the development of distributed PV generation. Further efforts are needed to promote effective matching between distributed PV and load, encouraging more local and nearby absorption and coordinated supply-demand interactions.

The key to solving the absorption challenges faced by distributed PV lies in “nearby consumption.” The guiding opinions explicitly state the need to promote local absorption of distributed renewable energy. “Nearby consumption” is a relative concept, aiming to reduce dependence on grid absorption. In areas like Jiangsu and Zhejiang, where industrial and commercial users have high electricity demands, distributed PV absorption issues are not prominent. However, in rural areas, aside from certain township enterprises and guesthouses with higher electricity needs, most farmers have low daily electricity consumption, creating significant challenges for local absorption of household distributed PV.

To tackle the demand-side challenges in rural areas, Tian Chongyi, a professor at the School of Telecommunications of Shandong Jianzhu University, suggests that enhancing the electrification level of end-user facilities can meet users’ growing demands for electricity, heat, and cooling. Field measurements indicate that improving electrification among rural users, such as promoting electric vehicles, heat pumps, and electric farming equipment, will significantly increase electricity consumption, effectively absorbing the abundant PV resources in rural areas.

Moreover, local absorption of distributed PV does face systemic and institutional challenges. For instance, can users sell their excess electricity directly to other users instead of selling it to the grid? Zhou Feng notes that “the concept of ‘wall electricity sales’ has been proposed for many years, allowing distributed generation to be resold to neighboring users through distribution networks. However, due to difficulties in defining reasonable standards for ‘grid fees,’ progress has been slow.” “Wall electricity sales” refers to the market trading of distributed energy, allowing distributed energy projects to sell electricity directly to nearby consumers while only paying a “grid fee” to the grid company. As early as 2017, the National Development and Reform Commission and the National Energy Administration issued documents encouraging distributed generation projects to achieve local absorption with nearby electricity users in various ways, permitting grid companies to charge “grid fees” for distributed market transactions.

The Suzhou Industrial Park successfully piloted a market trading project for distributed generation. Shi Wenbo, a senior researcher at the State Grid Suzhou Urban Energy Research Institute, pointed out that the slow promotion of “wall electricity sales” still fundamentally stems from an unfair trading mechanism. In this model, distributed PV projects sell electricity directly to consumers and pay “grid fees” to the grid company. However, the current transmission and distribution pricing mechanism does not adequately reflect the costs associated with grid infrastructure, making it unfair for other users who share these costs.

Essentially, “wall electricity sales” projects cannot exist in isolation from the larger grid, requiring the grid to provide backup support. This means that the redundancy of grid assets and investments must be recouped, but the current “grid fees” fail to account for these costs. Industry estimates suggest that existing “grid fee” standards might only be 0.015 to 0.05 yuan per kWh, and under the same voltage level, “grid fees” may even be zero. Before this standard was implemented, the transmission and distribution price, including cross-subsidies and government funds, generally exceeded 0.2 yuan per kWh.

Thus, Zhou Feng argues that the core issue lies in clarifying underlying costs and explicitly defining fees, which will inherently promote local and nearby consumption. He believes that “as the absorption pressure of distributed PV increases, some regions, including Henan, have introduced an ‘integrated source-grid-load-storage’ model. This can be seen as a new form of ‘wall electricity sales,’ but it requires meeting specific conditions, including achieving a certain self-consumption rate for distributed energy and configuring a fixed proportion of storage. Furthermore, absorption capacity is limited, depending on the ‘load-storage’ aspect of the ‘integrated source-grid-load-storage.’ The new ‘market entry’ policy breaks previous constraints, allowing for broader regional implementation of ‘market trading for distributed generation,’ facilitating scientific and efficient absorption of distributed PV.”