World’s Biggest Solar Market Moving Towards CfD Mechanism

China, the world’s largest solar PV market, has decided to move to a contracts for difference (CfD) design as part of its power market reforms. The country has been operating on a subsidy-based program thus far, which made the country a renewable energy leader globally. 

Earlier this year in February 2025, the National Development Reform Commission (NDRC) of China introduced certain measures, calling them market-oriented reforms for the power sector. This will introduce auction-based pricing for the country’s wind and solar power sectors for projects commissioned after June 1, 2025. This deadline may trigger a rush to install projects in the country. 

The new system will also do away with the mandatory requirement to add energy storage for project approvals or grid connections (see China Solar PV News Snippets: Microquanta Sets New Perovskite Module Efficiency Record & More). 

Renewable energy producers get a fixed price for electricity generated by their power plants under the CfD mechanism, which is already popular in several European markets. The government pays the difference if the market price is lower than the fixed price. Conversely, the producer pays back the extra amount if it is higher. 

This is different from Chinese producers securing generous feed-in-tariffs (FIT) from the government linked to the benchmarks for coal-fired capacity. 

On one hand, the fixed price for electricity they generated over the years ensured stable income for renewable energy producers, while also encouraging more external investment. High demand also gave a boost to solar PV manufacturing in China, which is the global market leader today. 

While the government nudges the wind and solar power sectors out of their dependence on its financial support, the market speculates if this will not squeeze profit margins, especially for smaller players since they won’t have the cushion of FIT certainty. At the same time, since most competitive projects will secure CfD contracts, this may move the market to industry consolidation. 

The government expects the competition encouraged by the CfD system to bring in lower prices for wind and solar projects. 

According to Zhang Shuwei, the Chief Economist at Draworld Environment Research Center (Beijing), clear, top-down market design and proactive policy improvements will be essential to enable CfDs to promote energy transition in China and decarbonize its power sector.

In an article for Dialogue Earth, Shuwei explained, “For CfDs to support meaningful emissions cuts, renewables must replace as much coal power as possible, not merely add new wind and solar capacity to coexist alongside it.” He added, “If CfDs remain consistently profitable, it signals that renewables are successfully challenging coal’s market dominance.” 

Another expert on the Chinese power market and Carbon Analyst at ClearBlue Markets, Yan Qin, believes this is China’s attempt at pushing for liberalization of the power market, but its success will depend on the provincial implementation of the renewable energy price settlement mechanism. 

In an X post, Qin wrote, “In the near term, more RE into China's power market will strengthen the trend of further decline in electricity tariff in China (both MLT and Spot), helping China to utilize the advantage of RE's rapidly declining costs.”  

Meanwhile, the China Photovoltaic Industry Association (CPIA) expects these reforms to impact new solar build in the country as it pegs 2025 solar PV installations to range from 215 GW to 255 GW, after having deployed a record 277.17 GW in 2024 (see China’s Solar PV Market To Slow Down To Around 255 GW In 2025).