China [RenewableEnergyAccess.com] It came as a great shock to nearly everyone in the wind industry. In January, China’s National Development and Reform Commission (NDRC) issued a regulation reversing its earlier intention to price wind power through a “feed-in tariff,” a pricing policy that analysts and industry insiders had hoped would provide a big boost to Chinese wind energy development. Instead, according to the January 4 regulation, wind power prices will be determined through a competitive bidding process.As a core element of China’s first Renewable Energy law, which took effect in January, the pricing regulation had been anticipated eagerly since the National People’s Congress approved the renewables law in February 2005. Drafts of the regulation, circulated for public comment in September and November, had stated clearly that the grid price for wind power would reflect the “nominal tariff of local desulfurized coal-fired power plants,” plus a subsidy of Yuan 0.23 ($0.028 US) per kilowatt-hour (kWh). The November draft also stipulated that the return on investment for renewable energy power projects should be higher than the average return on investment of traditional power projects. Yet the final version of the regulation shows no trace of this language. In the two months since its adoption, the new pricing measure has sent shock waves through China’s wind industry. Experts worry that pricing through public tendering generates greater uncertainty, reducing investors’ ability to control risks and thus reducing their incentive to invest in this nascent industry. Xu Hongliang, General Manager of China Fulin Windpower Development Corporation, believes the regulation will “throttle the whole industry.” The industry has reason to worry. The Chinese government has used a public tendering process to issue wind concessions since 2003, and the results have been meager at best. Under this process, provincial governments are responsible for selecting and opening proposed wind power sites to public bidding, and the developer that offers the lowest feed-in tariff wins the contract for long-term power purchasing. The first concession project, Jiangsu-Rudong #1, attracted six developers, including investors from Germany and Spain. While five bidders offered a price ranging from 7.6 to 9 cents per kWh, one private company, Jiangsu UniPower Wind Power Company Limited, submitted a price of 5 cents per kWh. Deeming this to be too low to cover costs, experts suggested that the offer be rescinded. To their dismay, NDRC accepted it. This “suicidal” low-bid discouraged private developers — both local and foreign — from entering China’s wind market. All seven remaining concession projects went to state-owned power companies, with the winning bid ranging from 4.6 to 6.5 cents per kWh. According to Shi Pengfei, Senior Engineer of the New Energy Project under the China Hydropower Engineering Consulting Group, the current average cost of wind power in China is between 6.3 and 8 cents per kWh; thus, all the projects authorized so far will suffer a net loss. Both private companies and state-owned enterprises have been lured by the huge market potential of wind energy in China. Since 2003, the country has faced severe electricity shortages, and more than two-thirds of its provinces suffered blackouts in 2004. The price of coal, which generates more than 70 percent of China’s electricity, has been rising steadily since then, making wind power a promising alternative. Most developers have their sights on more than just the profitability of a single project. In offering its seemingly unreasonable bid price, UniPower, a real estate company, was seizing an opportunity to break into the energy field, the traditional turf of state-owned enterprises. Unfortunately, after winning the bid in 2003, the company experienced two years of difficulty in securing bank loans and equipment, and has only recently begun construction. State-owned companies, on the other hand, are jostling for wind power concessions because they expect the country’s new Renewable Portfolio Standard (RPS), which is still under deliberation, to require them to meet specific renewables targets as China aims to ensure a greater share of renewable energy in its electricity portfolio. At the same time, these companies must cajole NDRC decision makers for other large hydropower and coal power projects, from which they make the lion’s share of their profits. Blessed by close ties with China’s state banks, they have an advantage over private enterprises in obtaining bank loans, regardless of the profitability of the project. Experts also worry that the new pricing regulation is not practical: it lacks a detailed plan on how to implement the bidding process and leaves considerable room for maneuvering. “It seems to have set up a platform for fair competition, but there is indeed a big hole,” said Shi. “There are no concrete rules to follow, and every bidder can be vindicated as the winner.” Past experience has shown that China’s unique governing structure, where the regulator is also the implementer, makes it nearly impossible for any real commercial bidding to take place. Ren Dongming, Deputy Director of the Renewable Energy Development Center of NDRC’s Energy Research Institute, believes this situation won’t last long. “There should be rules of the game,” he said, referring to the process for selecting “winners” in future tendering processes. A new round of tendering is likely to start in about a month, with the results to be announced in September. Experts in China’s wind industry are hoping the new regulation is just temporary, and that it won’t take long for regulators to make adjustments. Xu hopes the regulation will be “the last severe chill before the spring fully ushers in,” while Shi is “patiently waiting to see what happens.” An authority with Gangdong Mingyang, a private Chinese company that recently began collaborating with the German manufacturer L’Aerodyn on turbine development, believes the regulation will not hurt his business, noting that it will be at least two years before the designs are completed and the new turbines are manufactured for commercial use. Cooling down the heated market, he believes, provides the venture precious time to grow. But, he added, “If the low bid pricing lasts too long, investors will lose interest and confidence in the market. We are concerned with follow-up investment in our research and development endeavor.” But Yu Wuming, a senior manager with GoldWind, is concerned that by causing market volatility, the regulation may still harm domestic manufacturers. “Sound development of the entire industry, including the manufacturing sector, requires stable market demand,” he explained. Introducing greater competition through a more favorable policy, he believes, will force the sector to improve itself. “It’s not that the higher the price is, the less the industry develops,” he said, “In fact, it’s the other way around.” Though no fundamental revision in the wind power pricing regulation is foreseen, the measure is temporary and thus always subject to change. As Shi Pengfei puts it, “The wind industry in China is at a crossroads. One road leads to a planned economy under the banner of ‘bidding’, the other to sustainable development.” It will take patience, and a learning curve, to find out which path the wind industry will follow. China Watch columns, a joint initiative of the Worldwatch Institute and Beijing-based Global Environmental Institute, report on energy, agriculture, population, water, health, and the environment in China — with an emphasis on analysis relevant to policy makers, the business community, and non-governmental organizations.