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New research by Moody's suggests China will lead the green energy revolution thanks to ongoing policy support. Reuters

China's renewable energy sector looks set for exponential growth driven by the ambitious 13th Five Year Plan targets set by the government and its commitment to the Paris Agreement, according to new research.

In a recent research note to clients, Moody's noted that this "favorable operating environment" provided by Beijing will continue to power green energy growth in the country.

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China expects that its installed capacity from key renewable energy will reach at least 660GW in 2020 and that the share of non-fossil fuels will reach 38% of national installed capacity in 2017 and further to around 40% (based on Moody's estimate) in 2020. At end-2016, renewable energy accounted for roughly 35%.

"The strategic importance of renewable energy has been increasing in China in recent years, due to the country's rising awareness of the need to combat air pollution and the increasing diversification of its energy sources to reduce its reliance on coal-fired power," said Ivy Poon, vice president and senior analyst at Moody's.

"Moreover, China's commitment to reduce carbon risk is driving government targets and policies, thereby fostering the development of renewable energy."

However, grid curtailment and an over-reliance on government subsidies are key challenges that could somewhat hinder the pace of development in the near-term.

Wind and solar power's curtailment rates reached record highs in 2016, but supportive government policies and guidance on capacity utilisation and capacity additions will gradually ease the problem, the ratings agency noted.

In addition, the shortfall in a renewable energy fund and the resultant delays in the distribution of subsidies will increase renewable energy companies' working capital requirements and thereby their leverage.

Wind and solar power tariffs are on a downward trend in the near term, but the financial impact on renewable energy companies will be "manageable", according to Moody's.

However, lower tariffs will increase the price competitiveness of renewable energy against conventional power sources and pave the way for grid parity in the future.

The development also echoes China's reforms to liberalise the power market in the long-term, the agency concluded.