At the end of 2019, China dominated the world's generation of installed capacity and consumption of renewable energy, with wind power capacity accounting for one third of the world's total and PV power capacity accounting for one fourth. 1 China has invested more in clean energy infrastructure than the United States and the European Union combined. 2
This article discusses current issues facing the industry and its regulatory regime amid its rapid expansion.
The rapid and large-scale development of renewable energy projects has largely benefitted from a national feed-in-tariff ("FIT") support scheme introduced in 2012 under which power generated from renewable sources is purchased at a fixed price higher than coal-fired power, with the price difference subsidised by the Renewable Energy Development Fund (the "Fund") set up by the central government. The FIT scheme has propelled an installation rush, making China the largest renewable generator in the world. However, the subsidies have placed significant financial burden on the Fund. By the end of 2018, the Fund had already accumulated a deficit of over 100 billion RMB. 3
Due to the excessive addition of wind and solar farms in remote areas and a shortage of long-distance grid transmission capacity, the country has experienced large wastage of renewable power, as unneeded power is "curtailed". 4 In 2015, 2016 and 2017, the average curtailment rates for wind power were 15%, 21% and 12%. In some regions, such as Gansu, Xinjiang, Jilin and Inner Mongolia, power curtailment is even more prevalent, with rates of 33%, 29%, 21% and 15% being experienced in 2017. 5
In China, regions with abundant wind and solar energy resources (northwest, north and northeast China) are remote from electricity demand centres. It takes at least 2 to 3 years for grid companies to build new transmission lines, which requires planning, feasibility study, evaluation, land acquisition and construction. On the other hand, wind or solar projects can be built within several months. Driven by the incentive of governmental subsidies, installed generation capacity investment is greatly outweighing new transmission capacity investment.
the National People's Congress, China's legislature, released its five-year plan for the period from 2016 to 2020 that sets out the policies and targets for various sectors at national level (the "13th Five Year Plan"). For the energy industry, the 13th Five Year Plan requires at least 15% of energy to be supplied from non-fossil fuels. In addition, wind and solar projects should be developed more evenly across all regions and the power curtailment should be decreased.
Under the direction of the 13th Five Year Plan, the National Development and Reform Commission ("NDRC") released the 13th Five Year Plan for Renewable Energy Development (the "Renewable Energy Plan") in 2016. Recognising the financial burden placed on the Fund and the issue of power curtailment issues, the Renewable Energy Plan identified the following goals for the industry:
- To reduce government subsidies. In 2020, the wind power price should be able to compete with that of the coal-generated electricity, and photovoltaic projects can reach the grid parity free from any government subsidy.
- To reduce power curtailment. In areas with high electricity demand, the purchase of all wind and solar power should be fully guaranteed.
- To actively develop projects near the power centres in eastern and southern China and promote distributed wind power.
- Order development projects in northwest, north and northeast China and focus on increasing the cross-country transmission capacity.
The government aims to reach the grid parity targets in 2020, so that electricity created can be sold at the grid at the same price as coal-fired power. Starting from 1 January 2021, the NDRC requires that all projects that have been approved should reach grid parity. All projects approved after 1 January 2019 but still not connected to the grid by 2021 will not be subsidised. In order to achieve this goal, the government is leveraging a range of regulations.
Grid parity incentives
On 7 January 2019, the NDRC and the National Energy Administration (the "NEA") released the Circular of Positively Promoting the Work on Subsidy-free Grid Price Parity for Wind Power and Photovoltaic Power, in which the the following key incentives for the development of grid-parity projects were outlined:
- Grid parity projects enjoy favourable policy treatment, such as land use.
- Under the supervision of local authorities, gird companies should guarantee the full purchase of electricity generated by gird-party projects. Grid companies should commit to a power off-take agreement for at least 20 years with grid-parity projects.
- Financial institutions should provide financing services creatively for grid parity projects.
Grid parity projects were prioritised for interconnection and authorities halted the bidding rounds for projects requiring subsidies until the first batch of grid parity projects were determined in 2019. 6 Authorities also encouraged developers to voluntarily convert previously approved projects to unsubsidised/grid parity projects, of which grid companies should earmark the power take as their highest priority. On 20 May 2019, NEA released the first batch of grid parity projects. 7
Auction to select most competitive projects
Once the grid parity projects are selected, the remaining quota is allocated to subsidised projects, which can only be selected by local authorities through a competitive auction based on the project's proposed FIT and level of technological capabilities. 8 The government has moved away from a fixed FIT to a guidance FIT, under which the developers can propose a lower FIT. The lower the FIT proposed, the more competitive the project would be. The local auction results will then enter a unified national bidding process from which the NEA selects the most competitive projects.
The price bureau of NDRC released such guidance FIT for PV and wind projects in April 2019 9.
2019 ES1 : Region 1-4, with 0.3 RMB/kWh, 0.39 RMB/kWh, 0.43 RMB/kWh, 0.52 RMB/kWh (respectively).
2020:Region 1-4, with 0.29 RMB/kWh, 0.34 RMB/kWh, 0.38 RMB/kWh, 0.47 RMB/kWh (respectively).
Region 1, with 0.40 RMB/kWh; Region 2, with 0.45 RMB/kWh; and Region 3, with 0.55 RMB/kWh.
Offshore wind projects will be an important technology for increasing renewable penetration near coastal demand centres. Such technology is less developed and thus government subsidy is reduced. For 2020, the FIT for offshore wind power is 0.75 RMB/kWh.
For PV projects, the FIT for "village-level" poverty alleviation PV projects remain unchanged, at 0.65 RMB/kWh, 0.75 RMB/kWh and 0.85 RMB/kWh for Region 1, 2 and 3 (respectively).
On 10 May 2019, NDRC and NEA issued the Notice of Establishing and Improving the Mechanism for Guaranteeing the Consumption of Electricity from Renewable Energy Sources. The document set up the mechanism to maintain adequate consumption of power generated by renewable resources. Specifically, it requires the minimum percentage of the renewable energy consumption in total energy consumption for all provinces or regions. It then requires the provincial governments to further allocate the specific amount of consumption obligations (quota) among grid companies and power wholesalers.
In addition to the mandatory purchase requirements, the government has introduced other measures to improve the efficiency of resource allocation and thus achieve energy conservation and emission reduction. According to Measures for the Guaranteed Purchase of Renewable Energy-generated Power in Full Amount issued by NDRC in 2016, besides achieving guaranteed purchase quantity through executing power purchase agreements ("PPAs") with gird companies, a proportion of the quantity can be exchanged in the market. For example, market players can meet their renewable energy consumption target by purchasing "Green Power Certificates", or quota from other market players that have finished their allocated quota at a negotiated price.
Subsidy in the transition period
To prepare for the non-subsidy era, the government released its plan on how to distribute government funds to subsidise the projects approved before 1 January 2021. China's Ministry of Finance, NDRC and NEA released two guiding documents, the Guiding Opinion of Promoting Healthy Development of Non-hydraulic Renewable Energy (the "Guiding Opinion") and Renewable Energy FIT Fund Management Plan (the "Management Plan") on 20 January 2020.
The Guiding Opinion sets outs the principle that the size of the subsidies should be determined by the revenue. That is, the scale of new projects are determined by the size of revenue collected from electricity purchases across the country, so as to ensure that the new projects do not cause additional deficits.
The central government will also stop publishing the Catalogue of Subsidised Renewable Energy Projects (currently seven such catalogues have been published) on a national level; rather, the process has been simplified - all applications should be submitted through NEA's Information Management Platform. The grid companies should maintain the list of qualified projects and issue disbursements within 10 working days upon receipt of the government funds.
Foreign investment policy
In general, foreign investment in the construction and operation of renewable energy projects in China is encouraged. This is listed under the 2019 Catalogue of Industries Encouraged for Foreign Investment published by NDRC. Due to the unstable nature of renewable energy generation, the Catalogue also encourages the development of hybrid generation systems of gas power and renewable power. Encouraged foreign investment projects enjoy favourable policy treatment, including tariff exemption for equipment imported for its own use, income tax reduction by 15% for projects located in the western region and preferential consideration for land use (land can be transferred at a price not less than 70% of the lowest transferring price of state-owned industrial land) 10.
Impact of the novel coronavirus outbreak
The outbreak of the novel coronavirus (NCV), along with the measures that Chinese authorities have taken to contain it, has reduced the capacity utilisation across all sectors in China, including the renewable energy industry. It has been reported that travel restrictions and work stoppage is affecting the global supply chain (e.g. for wind turbines, PV modules and inverters etc. 11), and domestic and international construction schedules. 12
The media reported that the Chinese Photovoltaic Industry Association (CPIA) had urged the government to postpone connection deadlines, and therefore the subsidy cut off dates for large scale solar projects. 13 It remains to be seen whether such proposals would be adopted. As previously noted, projects need to be constructed and interconnected to receive subsidies. Depending on when the NCV can be tamed, experts predict that the era of subsidy-free renewable energy for China may arrive later than previously expected.
1 End of The Year Wrap-Up: Five Figures Show China's Renewable Energy Growth In 2019. https://www.renewableenergyworld.com/2019/12/01/end-of-the-year-wrap-up-five-figures-show-chinas-renewable-energy-growth-in-2019/#gref
2 China Storms Past US And Japan To Take Lead In Wind And Solar Power. https://asia.nikkei.com/Business/Energy/China-storms-past-US-and-Japan-to-take-lead-in-wind-and-solar-power
3 Is China Ready For Subsidy-Free Renewables? https://www.greentechmedia.com/articles/read/is-china-ready-for-subsidy-free-renewables
4 Renewable Energy Purchase Norms To Ease Grid Problems In China. https://www.scmp.com/business/article/1933550/renewable-energy-purchase-norms-ease-grid-problems-china
5 NEA. Wind power grid operation in 2017.
6 See Notice on Submitting the List of Wind and Photovoltaic Grid-parity Projects in 2019 (《国家能源局综合司关于报送2019年度风电、光伏发电平价上网项目名单的通知》), effective 12 April 2019.
7 For a list of the grid-parity projects, see http://www.tzxm.gov.cn/flfg/normativeDoc/201905/t20190524_10876.html.
8 See the Notice Regarding Wind and Solar PV Projects Construction in 2019 (《关于2019年风电、光伏发电项目建设有关事项的通知》), effective 28 May 2019; the draft Notice Regarding Wind and Solar PV Projects Construction in 2020 (《关于2020年风电、光伏发电项目建设有关事项的通知(征求意见稿)》) has been distributed to solicit feedback.
9 See Circular on Improving Issues regarding Feed-in-Tariff for Photovoltaic Projects (《国家发展改革委关于完善光伏发电上网电价机制有关问题的通知》) and Circular on Improving Issues regarding Feed-in-Tariff for Wind Power Projects (《国家发展改革委关于完善风电上网电价政策的通知》), effective 1 July 2019.
10 See Q & A regarding Expanding the Encouraged Foreign Investment List and Further Promote Foreign Investment in China, 30 June 2019, https://www.ndrc.gov.cn/xxgk/jd/jd/201906/t20190630_1182912.html .
11 It has been reported that about 90% of the silicon "wafers" used in the United States — the bedrock of solar cells — originate in China. See https://www.eenews.net/stories/1062310667.
12 See PV Industry Will Be Impacted Significantly. http://guangfu.bjx.com.cn/news/20200214/1043632.shtml .
13 See Coronavirus Could Cause Solar Panel Price Spike. https://www.pv-magazine.com/2020/02/04/coronavirus-could-cause-solar-panel-price-spike/.
Originally published 17-02-2020
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