London, UK [RenewableEnergyWorld.com] Today, China is already the world’s leading renewable energy producer in absolute numbers, with an installed capacity of 152 GW out of an approximately 800 GW total.
Hydropower has traditionally been the country’s main source of renewable energy, with over 95% of renewable energy coming from large dam projects such as the famous Three Gorges Dam. The second most common source of grid-connected renewable energy is wind power. As the third fastest-growing wind power market (after the US and Spain), China’s installed wind capacity has increased from 2.3 GW at the end of 2005 to a capacity of about 12.8 GW at the end of 2008.
In contrast, solar power generation has been almost non-existent in China. While solar thermal power is in widespread use, the central government and the five major utilities have deemed photovoltaic (PV) power too expensive, particularly compared with coal, which can generate electricity at an eighth of the cost. Therefore, despite the fact that China’s solar PV industry is the world leader in terms of production, so far over 95% of the produced units have been exported.
With renewable energy in China continuing to struggle to compete with cheap, coal-fired power generation due to the country’s coal reserves, over the last decade, China’s policy makers have made considerable efforts to expand its renewable energy sector. Such efforts are not only driven by pollution problems and pressure on the country to reduce greenhouse gas emissions, but also by the desire to reduce reliance on imported oil. Despite being the world’s fifth largest oil producing country, China is currently forced to import nearly half of its oil demand. As a result, ‘green power’ is viewed as an issue of long term energy security.
Green Power as National Policy
Since the commencement of China’s power industry reform in 2002, various policy plans, laws and regulations which specifically address the renewable energy sector have been published.
The outline for the 11th Five-Year Plan for National Economy and Social Development, announced by the State Council in 2006, states that the government plans to accelerate the development of renewable energy sources and to increase the percentage of energy consumption from renewable energy generation. To realize this goal, the National Development and Reform Commission (NDRC) released its ‘Medium and Long-Term Development Plan for Renewable Energy’ in August 2007. The plan sets specific targets for 2020, such as 30 GW installed capacity for wind power, 300 GW for hydroelectric power and 1.8 GW for solar power, raising the proportion of renewable energy in primary energy consumption to 10% by 2010 and 15% by 2020. To achieve these objectives, the plan contains a commitment to invest approximately US$200 billion in the sector and establish a ‘mandated market share’ policy which sets targets for electricity from non-hydro renewable sources at 3% by 2010 and 5% by 2020.
The most influential vehicle, however, for the promotion of cleaner energy technologies has been proven to be the Renewable Energy Law and its implementing regulations. The Renewable Energy Law came into effect in January 2006 and reiterates the importance of established and future medium and long-term targets set by government authorities for the development and utilization of renewable energies.
The law itself contains a clear commitment to provide special funds and offers financial incentives to stimulate renewable energy development, including discounted lending, the details of which have been set out in various regulations. Amongst other measures, in May 2006, the Ministry of Finance (MoF) issued regulations to initiate a national programme and provide financial incentives to the renewable energy sector. Under these regulations, sponsors of renewable energy projects can apply for either donor funds or discount loans with the local department of energy and the local department of finance.
Preferential tax treatment is also available: renewable energy projects are entitled to benefit from a 50% reduction of the VAT levied on electricity generation. In addition, current tax regulations provide tax concessions of a three year exemption plus three years taxation at 50% of the full tax rate for enterprises engaging in projects involving power stations utilizing renewable energy.
Other important elements of the Renewable Energy Law include purchase obligations on the grid companies and a regime for feed-in tariffs.
Thus, under the legislation, grid companies are generally obliged to purchase the full amount of electricity generated from renewable energy projects that are located in the areas covered by their grids and must provide grid-connection services and related technical support.
The law further stipulates feed-in tariffs for renewable energies shall be determined by the relevant administrative authorities in accordance with the principle of promoting the development and utilization of renewable energy. In implementing these principles, different pricing mechanisms have been established for various types of renewable energy.
For solar PV and solar thermal power projects, a feed-in tariff, based on the principle of reasonable production cost plus reasonable profit, is set by the pricing department of the State Council once a solar power project has been approved. Obviously, this approach does not provide a high level of certainty to investors as to whether a project will be approved; nor, once a project has been approved, as to whether it will receive a feed-in price allowing it to become profitable. However, the given reason for why this approach (rather than a guaranteed-margin price with the market determining project uptake) should be adopted is that solar power remains too expensive to be supported by set feed-in prices alone, given that such prices would require additional financial support, such as government funding.
In 2001, a different approach was introduced by NDRC for large-scale wind energy projects through the concession project programme. In effect from 2003, essentially this concession model is a competitive tender system under which renewable energy developers must submit proposals for wind energy projects of 100 MW and above. The government selects potential investors through a competitive bidding process, taking power price and domestic content as the key criteria, and the purchase of all electricity generated by the project is then guaranteed through long-term power purchase agreements. The applicable feed-in tariffs are determined depending on two different periods during the project’s lifetime (typically 25 years): during the first period, the feed-in tariff is the bidding price proposed by the winning bidder up to an electricity generation level of 30,000 accumulative equivalent full load hours; thereafter, the feed-in tariff is set as the average electricity price of the local grid at that time.
Most recently, however, a benchmark system has been introduced for feed-in tariffs for wind power. Under a circular issued by the NDRC on 20 July 2009, feed-in tariffs for wind power projects approved from 1 August 2009 onwards are fixed on a centrally-determined price basis. The circular divides China into four different types of wind-power resource areas, based on their wind resources, and stipulates different prices for each of these areas and ranging from 0.51 yuan/kWh for wind power in regions with the most wind resources, such as Inner Mongolia, to 0.61 yuan/kWh for regions with the least wind resources (US cent 7.5–8.9/kWh). Furthermore, according to a recent statement, NDRC is planning to establish a similar framework for large-scale solar PV projects soon.
In the past, the concession model had been criticized for resulting in downward pressure, not only on price but also on quality. Although the Chinese government intended to select the most suitable wind farm developer by way of tendering, in practice, the main selection criterion became the lowest on-grid price offered, resulting in wind parks not operating profitably and in a lack of further capital investment and related research and development. The latest step of setting up fixed feed-in tariffs, which lie above the average offers of the successful bidders in past public tenders, is therefore seen as a measure to improve the quality of the installed turbines and to further attract investment and R&D in wind parks and their development.
Other Influences on Development
In order to achieve additional benefits, it is usually intended for renewable energy generation projects in China to be recognized and registered as Clean Development Mechanism projects, a mechanism established under the Kyoto Protocol. This has been of particular relevance for wind power generation projects. Once the project has been approved by the NDRC and registered with the CDM Executive Board (an international body set up by the United Nations Framework Convention on Climate Change), the Certified Emissions Certificates (CER) obtained can be traded on the secondary CER market.
In addition, although not directly related to clean energy, clean energy projects have also benefited from China’s Property Law (promulgated in 2007) which largely improved the legal and regulatory environment for secured lending. The new law expanded the scope of security over property and provided for the definition of mortgageable assets to include any property, property rights and assets associated with property rights, unless specifically prohibited by laws or regulations. The new law also introduced the possibility of creating a security over present and future assets and effectively established the previously unrecognized concept of ‘floating charges’ in China. This new concept enables a renewable energy project lender to take a security interest over all of the project company’s assets then existing or thereafter acquired.
The international financial crisis, which (because of its impact on export demand) has strongly affected China’s economy, has certainly also had an impact on the Chinese renewable energy sector.
In particular, Chinese solar panel manufacturers saw dramatic changes. After years of unsatisfied demand, China’s PV industry, like so many of the country’s export industries, has been hit hard by diminished overseas demand and the lack of a domestic market. According to some reports, 50%–90% of China’s estimated 350 – 400 solar PV manufacturers have gone out of business since October 2008.
In the wind power sector, declining prices for CERs caused some foreign companies to exit the Chinese wind farm development business. This exodus is largely explained on the basis that oil prices declined, credit became increasingly difficult to obtain (and costly to acquire) and an overall reduction in energy use occurred together with falling power prices throughout China.
Despite this confluence of events, the impact on the domestic wind power industry has been limited. In part this is attributable to the fact that the development of the Chinese wind industry is in large measure directed by the central government and 80% of the market is concentrated in large state-owned enterprises. Furthermore, the decision of the Chinese leadership to forge ahead with renewable energy development has also played its part in allocating a reported $146 billion (out of the $590 billion economic stimulus fund announced by the Chinese government in November 2008) to the renewable energy sector.
In line with this, chief policy makers have been recently cited as saying that the NDRC is in the process of drafting a plan for the development of the renewable energy sector, revising earlier targets and now contemplating targets which are more than threefold the level of these earlier versions. Officials have stated that the new goal for 2020 could amount to as much as 100 GW installed capacity for wind energy (as opposed to 30 GW in the 2007 plan) and 20 GW for solar energy (as opposed to 1.8 GW in the 2007 plan). The plan has, however, not yet been published and its details remain opaque.
Nonetheless, according to statements made by government officials in May this year, the National Energy Bureau has finalized a solar energy promotion plan which aims to turn China into a leading global harvester of the world’s most abundant energy source. Given the confluence of lower production costs and a decreasing overseas demand, such a plan would represent a welcome boost for domestic solar deployment.
However, concerns remain as details of the plan are yet to be made public as REW goes to press For example, although in March 2009 the government thrilled the industry with a pledge to subsidize roof-mounted panels, it has still not made clear whether such subsidies were a one-off or a permanent programme. Some industry reports then stated that the budget for such subsidies is to be capped at yuan 2.5 billion ($366 million), limiting installations under the programme to around 180 MW. In addition, the announcement failed to explain whether and how projects under the subsidy programme would be linked to the electricity grid.
Even more ambitious plans are in place with the government intending for it to be pushed forward through large-scale wind parks. According to reports, China plans to build seven wind power ‘mega projects’ with a minimum capacity of 10 GW each by 2020 in the provinces of Gansu, Hebei, Jilin, Jiangsu, Xinjiang and Inner Mongolia. Once completed in 2020, the seven bases will have a combined capacity of around 120 GW. This means that the government envisages wind energy to be a bigger source of power than nuclear power plants for which the capacity levels have been anticipated to reach around 60-70 GW by 2020. The earliest of these mega wind projects, a 10 GW wind farm in Juiquan, Gansu province, only recently received NDRC approval.
Reports also stated that strong efforts to develop offshore wind power recourses are to be made. Given China’s long coastlines and vast oceanic areas, offshore wind power is seen to provide power to the economically well-developed eastern areas of the country which suffer from a shortage of fossil fuels. The construction of the Shanghai East Sea Bridge Wind Power Plant, where the first set of 34 wind power turbines began construction in March this year, is seen as a start for the development of offshore wind power generation.
One of the remaining key issues which substantially impedes wind power generation is the deficient development of China’s power grids. The lack of a fully developed power grid in China causes difficulties in connecting the country’s wind farms which are mostly located in Inner Mongolia, Gansu and Xinjiang, with the wealthier, cities and towns on the east coast thousands of kilometres away. Recently, the Inner Mongolian government announced detailed plans to accelerate the construction of power grids and to increase transmission capacity. It is also expected that some of the funds under the central government’s stimulus package will go toward grid improvements and thereby facilitate the development of wind energy by supporting wind base projects located in remote areas.
Foreign Investment Opportunities
The enormous volume of the stimulus package announced by the central government in 2008 immediately raised hopes amongst foreign market players. However, foreign investments in this sector generally face a number of obstacles and uncertainty remains as to how much foreign companies can benefit from recent plans. Under the foreign guidance catalogue (a centrepiece of China’s foreign investment policy covering all industry sectors and specifically classifying investment projects into encouraged, permitted, restricted and prohibited categories), foreign investments in the renewable energy sector are mostly encouraged projects. Whereas foreign investments in power grids are restricted (a foreign investor can hold only a minority stake in a Chinese-foreign joint venture constructing or operating power grids), in particular the ‘operation of power stations using new sources of energy’ (including solar and wind power) belongs to the encouraged category. Principally, foreign investments into wind or solar farm projects as well as in the supply and manufacturing industry are therefore possible and can, in principle, benefit from the same investment incentives that are available for domestic companies.
In fact, in the past, China’s wind power equipment manufacturing industry had been predominantly owned and operated by foreign companies. After several years of development, Chinese competitors caught up quickly and increased their market share to over 50% in 2007. This share is continuously increasing, supported by a policy implemented by the NDRC as early as July 2005 and which requires that 70% of the equipment for any wind farm project is produced in China. In addition, in April 2008, the MoF announced the elimination of tariff-free importation of wind turbines of less than 2.5 MW, a move further supporting the domestic wind turbine industry. At the beginning of 2009, international wind farm equipment manufacturers therefore raised their concerns. A statement by the president of the European Chamber of Commerce in China, who was cited in June this year saying that bidding criteria for wind projects were set in a way that made it difficult for foreign suppliers to win, caused some tension and was answered by Chinese trade organizations complaining about preferential treatment of foreign products by the authorities.
It remains to be seen whether foreign market players in the wind manufacturing industry will be able to gain some of their earlier market shares back. Some hope comes from the most recent move towards a fixed price system for feed-in tariffs for wind power generation. Today, foreign wind farm equipment, although usually not capable of competing in price with Chinese products, is still generally considered to be at the forefront of technological development and preferable in terms of long-term cost efficiency. The latest introduction of fixed feed-in tariffs, aimed at improving the quality of the installed turbines, might therefore be generally welcomed by the international wind power manufacturing industry.