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China Rationalizes Its Renewable Energy Policy

2 August 2010
Mayer Brown Article

China’s over-reliance on thermal power generation, especially coal-fired power stations, is well-documented.  While nuclear power continues as an option to coal, China’s strides in renewable energy are unprecedented.  Recent amendments to the Renewable Energy Law, first promulgated in 2006, attempt to rationalize the regulatory regime governing wind, solar, hydropower and biomass projects in China, currently fraught with inadequate interconnection and tariff shock issues.

The keen interest of the People’s Republic of China (the “PRC”) in developing a variety of renewable energy sources is largely driven by the country’s surging demand for energy to support its unprecedented economic growth.  There is also a need to address the country’s energy security and environmental concerns.  China imports more than 55 percent of its oil demand despite being the world’s fifth largest oil producing country.1

Development of renewable energy helps to internalize the source of energy production.  Currently, more than 87 percent of the energy generated in the PRC is coal and oil-fired;2 and the annual per capita carbon dioxide emission by the PRC was at 4.3 tons in 2005, which was already approximately one-third of the level of high-income economies.3  Given the rising demands for energy, the PRC government has gradually developed a legal framework and various policies to encourage the development of renewable energy generation in the country to address these challenges, aiming to provide secure, affordable and environmentally sustainable energy.

Administrative Machinery

Prior to 2002, the former State Power Corporation monopolized the PRC power sector.  In February 2002, the PRC government unveiled the Plan for the Reform of the Electric Power Industry (State Council [2002] No. 5), which marked the end of the monopoly by the former State Power Corporation.  As part of the restructuring:

The transmission assets of the former State Power Corporation were transferred to two national grid companies, namely State Grid Corporation of China based in Beijing and China Southern Power Grid Company Limited based in Guangzhou; and the power generation assets of the former State Power Corporation were distributed to the Big 5 Chinese IPPs (as defined below), newly-established state-owned power generation companies, namely China Huaneng Group, China Huadian Corporation, China Guodian Corporation, China Power Investment Corporation and China Datang Corporation.

In the early 1990s, the China power sector greeted a number of foreign investors, including independent power producers (IPPs) from Europe and Stateside, as well as major utilities from Asia and the West.  Several dozen power-related joint ventures and wholly foreign- owned enterprises were subsequently established.  However, due to the restructuring of State-owned enterprises, which resulted in decreases in power usage nationwide, and the compounding effects of the Asian financial crisis in 1997, many foreign-invested power producers vacated the Chinese power sector as many long-term power purchase agreements faced potential renegotiation as the Chinese power sector transitioned into a pool market system.

Following the Plan for the Reform of the Electric Power Industry, the PRC government made concerted efforts to diversify the sources of energy, shifting from the traditional dominance of reliance on coal to cleaner energy sources.  Such concerted efforts included the revamping of the energy management structure at the national level.  The State Electricity Regulatory Commission (SERC), the independent power regulator, was established in March 2003 as part of the restructuring.  The National Development and Reform Commission (NDRC) has been tasked as the national policy maker for the PRC energy sector.

In July 2008, the National Energy Administration (NEA) was established to replace NDRC’s Energy Bureau.  The NEA’s mandate includes the drafting of energy plans and policies, the management of PRC’s energy industries and approving foreign energy investments.  With a view of strengthening the country’s energy sector management, the National Energy Commission (NEC)4 was also formed to coordinate energy development within the PRC and discuss major energy security and development issues.

Policy on Renewable Energy

The National Development and Reform Commission (NDRC) issued the first PRC policy statement on climate change in June 2007.5  This policy statement was made with reference to the United Nations Framework Convention on Climate Change,6 providing general guidelines and principles to tackle climate change in China.  It first set a target of raising the proportion of renewable energy to 10 percent of the primary energy supply by 2010.

In another policy document titled Medium and Long-Term Development Plan for Renewable Energy in China released by the NDRC on Aug. 31, 2007 (NDRC Energy [2007] No. 2174), NDRC reiterates the same target for 2010 and establishes a longer term goal, that the national target of 15 percent of China’s total energy generation to be originated from renewable energy generation by 2020.  The policy document also specifies targets for various renewable energy sources.  These targets are based upon the installed generating capacity rather than the actual amount of electricity connected to the power grid.  It should be noted that some wind farms, in particular, have suffered in respect of the inadequacy of the power grids reaching the isolated locations where many of these wind farms are located.  We have set out below the target for various types of renewable energy to be achieved by 2010 and 2020 respectively:

Source of Energy

2010 (GW)

2020 (GW)

Solar

0.30

1.80

Wind

5.0

30

Hydro

190

300

Biomass

5.5

 30

In January 2006, the Renewable Energy Law of the PRC (Renewable Energy Law) came into effect.  The Renewable Energy Law serves as the legal framework for the development of renewable energy in China.  Besides providing for the compulsory interconnection of renewable energy to the grid, the Renewable Energy Law also provides guidelines on the structuring of power tariffs and cost-sharing arrangements, and the establishment of a renewable energy development fund to further the development of the renewable energy sector.

The Renewable Energy Law is an umbrella legislation where the details on the implementation is supported by various ministerial regulations and measures.  The Regulation on Administration of Power Generation from Renewable Energy (NDRC Energy [2006] No. 13) and the Measures on Supervision and Administration of Grid Enterprises in the Purchase of Renewable Energy Power (SERC [2007] No. 25) obligate power grid companies to purchase the full amount of electricity generated from renewable energy projects that are within the geographical coverage of their grids.

To remove the cost barriers to the purchase of renewable power by grid companies and utilities, the Renewable Energy Law also provides for cost-sharing arrangements with the introduction of a feed-in tariff.  The concept of a feed-in tariff was further elaborated in the Provisional Administrative Measures on Pricing and Cost Sharing for Renewable Energy Power Generation (NDRC Price [2006] No. 7).  The measures essentially require the end users of electricity to pay a surcharge to cover the difference between the price of renewable energy power and the average price of conventional power.

Separately, the grid connection expenses incurred by power grid companies to purchase renewable power and other reasonable expenses may also be included in the power transmission cost.  In relation to wind power, the NDRC issued the Circular on Refining the Policy for On-Grid Pricing of Wind Power (NDRC Price [2009] No. 1906) on July 20, 2009, which provides that feed-in tariffs for onshore wind power projects approved from Aug. 1, 2009 onwards are fixed using a centrally controlled price determination mechanism.  Under the circular, China is divided into four different types of wind power resource areas and different prices are set for each of these areas.  For solar power, tidal power and geothermal power, the pricing department of the State Council will set an appropriate feed-in tariff based upon the principle of reasonable production cost plus reasonable profit.

Tax Incentives & Financial Subsidies

Besides the various measures to promote the development of renewable energy in the PRC, the Renewable Energy Law commits to offer financial incentives to stimulate renewable energy development.  One of those incentives includes the Implementing Regulations for PRC Enterprise Income Tax Law promulgated on Jan. 1, 2008, which provides a tax concession consisting of a three-year exemption plus three years of taxation at 50 percent of the full tax rate for enterprises engaging in projects involving energy conservation and improvement on emissions reduction technology.  Such tax incentives clearly demonstrate the commitment of the PRC government to promote the development of clean energy and this should promote investments in the renewable energy sector.

In the solar sector, the Chinese government introduced various subsidies in March 2009 and July 2009 to bolster the development of the solar power sector.  On Mar. 23, 2009, the Ministry of Finance (MOF) announced that the PRC government would provide subsidies of RMB20 per watt peak generated by qualifying solar power projects that have generating capacities of not less than 50 kW peak.  In July 2009, the PRC government took a step further in the promotion of the development of the solar sector with the announcement of the implementation of the “Golden Sun” pilot project.
Under the “Golden Sun” pilot project, the PRC government will subsidize 50 percent of the total investment for photovoltaic projects and the associated transmission and distribution systems.  Such subsidy will rise to 70 percent for independent photovoltaic power generating systems in remote regions with no power supply.  However, the projects must meet certain criteria in order to qualify for such subsidies.  Among others, each of the projects must have a generating capacity of not less than 300 kW peak, be completed within one year and be operative for at least 20 years.  The PRC government has also limited the scale of such solar power projects to no more than 20 MW in total for each province to ensure even development across all provinces.

Through a statement issued by the Ministry of Finance dated July 21, 2009, the PRC government announced plans to install more than 500 MW of solar power pilot projects in two to three years.  Such ambitious plans, together with the subsidies mentioned above, clearly demonstrate China’s commitment to promote power generation from renewable energy sources.  Recent developments clearly illustrate China’s commitment—construction has begun on Asia’s first solar thermal power plant in Dahan, a suburb of Beijing not far from the Great Wall.  The Dahan solar project will feature:

  • A 1.5 MW power plant (designed by the Chinese Academy of Sciences).  The output from the Dahan plant is expected to be increased to 5–10 MW by 2015
  • A total investment of 100 million yuan (US$14.7 million)
  • Offtake will provide power to 30,000 households by 2010
  • The plant will cover an area the size of 10 football pitches, or 0.13 square km
  • Unlike photovoltaic solar panels, which produce electricity directly from sunlight, solar–thermal power is based on an array of mirrors that focus the Sun’s rays onto a receiver.

Since the promulgation of the Renewable Energy Law and various policies, there has been a surge in renewable energy technology investment, production and installation in China.  For example, China ranked second for the absolute US dollar amount invested in renewable energy in 2007, and is only slightly behind Germany as a percentage of GDP.7  As of the end of last year, China has doubled its wind power generation capacity for the fourth running year, with 25,104 MW wind power capacity installed, third only to the USA and Germany.8  It is expected that if China’s wind power installation continues to develop at this breathtaking rate, it will overtake Germany to take second place this year.9  China also became the world’s largest producer and consumer of solar water heaters, accounting for half of the world’s total production and 65 percent of all installations.10  Furthermore, China supplies 30 percent of the world’s demand of solar photovoltaic cells.11 Although predictions have shown that China might surpass some of its renewable energy targets, the country is faced with a transmission bottleneck between renewable energy production and connection to the nation’s power grid, as the country’s power grid facilities and planning fails to keep up with the rapid increase in the generation capacity of renewable energy sources.

Amendments to the Renewable Energy Law

The existing Renewable Energy Law provides for:

  • National renewable energy targets in both medium and long term
  • The compulsory connection of renewable energy to power grids
  • The structuring of power pricing arrangements
  • The provision of subsidies and tax incentives to encourage renewable energy projects
  • The establishment of a renewable energy development fund to support research and development of renewable energy technology.

Since the implementation of the Renewable Energy Law, there have been significant developments in the renewable energy sector, particularly with respect to wind and solar power.  Yet, the rapid expansion of renewable energy capacity could not be adequately supported by the existing power grid facilities and planning.  The amendments to the Renewable Energy Law (the “Renewable Energy Law Amendments”) appear to be mainly driven by a stark realization by the PRC authorities that the legislative framework did not match the unprecedented progress of the renewable energy sector, specifically the wind power sector.  It has been widely reported that despite the tremendous growth of the wind power sector, the power grids servicing wind power generators have not been able to dispatch all of the potential energy generated.

Since 2008, there have been various proposals from the National People’s Congress (NPC) to amend the Renewable Energy Law.  A draft amendment to the Renewable Energy Law was submitted for first reading to the Standing Committee of the NPC in August 2009.  Following that, the draft amendment was opened for public comment and the public comment period ended on Sept. 30, 2009.  The NPC Standing Committee adopted the Renewable Energy Law Amendments on Dec. 26, 2009, which will become effective on April 1, 2010.

The Renewable Energy Law was amended to address the following systemic problems:

  • Inadequate coordination between national energy strategy and renewable energy development
  • Lagging development of power grids in support of newly constructed renewable energy sites and
  • Lack of assured interconnection of renewable energy projects to the grid.12

Coordination of national energy development strategy

During the consultation period, concerns were raised with regard to the lack of coordination between the development of renewable energy and the country’s overall energy development strategy.  In devising national plans for the development of renewable energy, there seemed to be a lack of consideration on resources evaluation, technical limitations and local conditions.  For example, most of the regions with wind power potential are concentrated in remote areas of northern China and the southeastern coastal areas, such as Inner Mongolia, Gansu and Xinjiang.  These wind power-rich regions are at the edge of the existing national power grids, and thus the interconnection from these regions to the power grids is problematic.

More than 20 percent of China’s wind power facilities did not generate electricity as these facilities were not connected to the national grid. The lack of supporting infrastructure creates a major obstacle for China to reach its renewable energy targets.  The construction of a supporting power grid is explicitly stated in the Renewable Energy Law Amendments as one of the steps to be taken by the relevant energy administration departments in renewable energy planning.  The Renewable Energy Law Amendments provide that such planning must take into account local conditions before implementation in an orderly fashion.  Although it did not specifically stipulate how renewable energy planning should be organized, this broad brush approach, common in PRC framework legislation, might serve to discourage over-expansion of renewable energy facilities.

The Renewable Energy Law Amendments emphasized the participation and coordination of relevant government departments, both at the State Council (the PRC’s supreme legislative body) and local levels.  The relevant government departments responsible for energy management are required to take into account the technological development of renewable energy generation in structuring the national renewable energy development strategy.  Local governments responsible for energy administration are then explicitly required to devise local renewable energy development plans based upon the national renewable energy development strategy.  These local government departments are also specifically required to notify the NEA and the SERC of its renewable energy plan after obtaining approval from the local government.

Guaranteed grid connection

The Renewable Energy Law, together with the relevant rules, the Regulation on the Administration of Power Generation from Renewable Energy (NDRC Energy [2006] No. 13) and the Measures on Supervision and Administration of Grid Enterprises in the Purchase of Renewable Energy power (SERC [2007] No. 25), obligates power grid companies to purchase and dispatch the entire amount of electricity generated from the renewable energy project when entering into interconnection agreements with these renewable energy projects.  The power grid companies are also required to provide grid-connection services and related technical support.

The lack of clarity in the requirement leads to enforcement difficulties.  The complete purchase of renewable energy is currently solely based upon the private, negotiated agreements between the grid companies and renewable energy projects.  As mentioned previously, many of the renewable energy project sites were built in remote regions without a developed power grid.  As a result, far from encouraging the interconnection of existing grids to newly constructed renewable energy sources, grid companies have been reluctant to provide such interconnections.

The Renewable Energy Law Amendments strengthen the obligation for the complete purchase of electricity generated from renewable energy sources by implementing a minimum acquisition quota system.  In line with NDRC’s national policy for medium and long-term development of renewable energy, the NEA, SERC and the Ministry of Finance shall determine periodically the proportion of power to be generated by renewable energy sources in relation to the total electricity generation under the Renewable Energy Law Amendments.  Power grid companies are required to abide by these periodic targets and to enter into agreements to purchase the entire amount of electricity generated by renewable energy sources within the geographic coverage of their power grids.

To facilitate the development of supporting infrastructure and to further enhance power grid operations, the Renewable Energy Law Amendments also require power grid enterprises to improve power transmission technologies and grid capacity to dispatch more power produced by renewable energy generators.  Power grid companies are encouraged to adopt advanced technologies, such as smart grids and grid energy storage, to enhance power grid operation and management, which will in turn improve their capacity to absorb the power generated by renewable energy sources.

As electricity generated from renewable energy sources is generally less stable than the energy generated from conventional sources, electricity generating enterprises are required, under the Renewable Energy Law Amendments, to ensure that the renewable energy produced meets the technical standards for electricity dispatch and to cooperate with power grid companies to maintain power grid safety and efficiencies.

Renewable energy development fund

Another deterring factor for interconnection is that the cost of connecting to renewable energy sources is still inevitably higher than connection to conventional energy sources.  Under the Renewable Energy Law, a development fund had been established.  The source of funds for the current development fund is not specified.  It is used to provide grants for renewable energy project development.  The Renewable Energy Development Fund (Renewable Energy Fund) established under the Renewable Energy Law Amendments will be administered by the Ministry of Finance.  The Renewable Energy Fund will source funding via surcharges on electricity generated from renewable sources and specific funds provided under the annual national fiscal budget.

Under the Renewable Energy Law, the difference between the costs incurred in interconnecting electricity generated from renewable sources to the grid and the costs normally incurred in interconnecting electricity generated from conventional sources is levied on the ultimate end user.  The subsidies provided to the grid companies may be delayed and this created financial pressure on these companies.  In comparison, the Renewable Energy Law Amendments provide subsidies from the Renewable Energy Fund to cover such shortfalls.

To the extent that the sale of electricity is not sufficient to cover the interconnection fees and other relevant expenses, power grid companies may also apply for subsidies under the Renewable Energy Fund.  In the process of reviewing the Renewable Energy Law, the NPC acknowledged that the solution for the determination of the tariff of renewable energy lies in the proper implementation of the relevant legislation, not in the amendments to the relevant provisions of the legislation.14

To further encourage the consumption of renewable energy in China, the Renewable Energy Fund will be used to support other projects that further renewable energy development as stated under the Renewable Energy Law, such as scientific research, rural clean energy projects and independent power systems construction in remote areas and outlying islands.  According to the NPC, a new set of administrative rules regulating the Renewable Energy Fund is currently being drafted jointly by the Ministry of Finance, the NEA and the Department of Pricing of NDRC and is expected to be issued soon.15

Recent Developments

Recent policies for individual renewable energy sector are also likely to attract further development in the renewable energy sector in the PRC.  For example, in the wind power sector, the NDRC published the Circular Regarding Requirements of the Administration of Wind Power Construction (NDRC Energy [2005] No. 1204) in 2005, stipulating the requirement that at least 70 percent of the wind turbine equipment needs to be produced in China in order for the project be approved.  In a major turnaround, the requirement was removed pursuant to the Circular Abolishing the Requirement on the Rate of Localization of Equipment Procurement on Wind Power Projects (NDRC Energy [2009] No. 2991) issued by the NDRC on Nov. 25, 2009.

In order to improve the management of the development of offshore wind power, the PRC government issued the Provisional Measures for the Administration of Offshore Wind Power Development (NEA [2010] No. 29).  Offshore wind power is still relatively undeveloped compared to onshore wind power in the PRC.  It is envisaged that the promulgation of the new measures will mark the new dawn in the development of offshore wind power in China.  However, the guideline requires offshore wind farm projects to be tendered by Chinese companies and Sino-foreign joint ventures with Chinese majority control (i.e., the Chinese party holding more than 50 percent of equity interest in the joint venture).  Such restriction may dampen the interests of some international offshore wind power developers.  Circumstances may change over time, leading to such restriction being relaxed or abolished altogether.  Until then, foreign participation in the Chinese offshore wind power sector will be restricted to holding minority interest in a sino-foreign joint venture.

Draft Energy Law

Notwithstanding the ambitious approach that the PRC government undertook to facilitate renewable energy development, China has yet to implement a consolidated legislative framework for the energy sector.  The drafting of the Energy Law commenced in 200616 and the first draft was published for public consultation on Dec. 4, 2007.17  The draft Energy Law maps out, among others, the overarching principles on the integrated administration of the energy sector, the strategic planning and development of the energy sector, the production of energy, the transport and supply of energy and the conservation of energy.  The draft Energy Law encourages the development of renewable energy in China and would provide further guidance on the country’s energy development in conjunction with the Renewable Energy Law Amendments.  The draft Energy Law was still under consultation with both Chinese and overseas experts at the end of last year18 and there is no concrete timetable as to when the draft Energy Law will be implemented.

The PRC government has clearly demonstrated its commitment to promote renewable energy generation to the global community.  The Renewable Energy Law Amendments, together with currently existing rules and regulations and prospective legislation to be promulgated, will provide a clearer legal framework and a more favorable environment for the actively expanding renewable energy sector in the PRC.  It is hoped that with the promising policies issued by the PRC government and increased market competition, the Chinese renewable energy industry will continue to develop and prosper.
To date, foreign participation in the wind power sector has been mixed, as the Big 5 Chinese IPPs tend to dominate the wind power sector, propelled by their larger balance sheets and the national directive to exploit wind power resources.  Though not the subject of this article, wind and solar power manufacturers—both domestic and foreign-invested enterprises—face potential consolidation as a result of lower prices for wind turbines and photovoltaic cells.  Interestingly, though several of the world’s leading wind and solar power developers have embarked upon initiatives to enter the China market, their track records have, on balance, lacked that of the Chinese players.  China’s effort to rationalize its renewable energy legal regime may mark the first step to making the Chinese renewable energy market more attractive to foreign investors.


Endnotes:

1. Top World Oil Producers, 2008, US Energy Information Administration, at http://www.stats.gov.cn/tjsj/ndsj/2008/indexeh.htm; China Statistical Yearbook 2008, National Bureau of Statistics of China, at http://www.stats.gov.cn/tjsj/ndsj/ 2008/indexeh.htm.
2. China Statistical Yearbook 2008, Id.
3. World Bank, World Development Indicators 2009, at http://web.worldbank.org/WBSITE/EXTERNAL/DATASTATISTICS/0,contentMDK:21725423~pagePK: 64133150~piPK:64133175~theSitePK: 239419,00.html.
4. Notice on the Establishment of the National Energy Commission, State Council [2010] No. 12, at http:// www.gov.cn/zwgk/2010-01/27/content_1520724.htm (Chinese); China Daily, China sets up national energy commission, Jan. 27, 2010, at http://www.chinadaily.com.cn/bizchina/2010-01/27/content_9387215.htm.
5. National Development and Reform Committee, National Climate Change Program (2007), at http:// www.china.org.cn/english/environment/213624.htm.
6. China approved the United Nations Framework Convention on Climate Change (UNFCCC) on Aug. 30, 2002 http://unfccc.int/kyoto_protocol/status_of_ratification/items/2613.php.
7. REN21, Renewables 2007 Global Status Report, 2008, at 16; The Climate Group, China’s Clean Revolution II: Opportunities for a Low Carbon Future (Aug. 2009), at 5.
8. Global Wind Energy Council, Global Wind Power Boom Continues Despite Economic Woes, Feb. 3, 2010, at http://www.gwec.net/index.php?id=30&tx_ttnews%5Btt_news%5D=247.
9. Global Wind Energy Council, U.S. and China in race to the top of global wind industry, Feb. 2, 2009, at http:// www.gwec.net/index.php?id=30&tx_ttnews[tt_news]=177.
10. The Climate Group, China’s Clean Revolution II: Opportunities for a Low Carbon Future (Aug. 2009) at 5.
11. The Climate Group, China’s Clean Revolution II: Opportunities for a Low Carbon Future (Aug. 2009), Id. at 25.
12. The drafting notes of the Renewable Energy Law Amendments are posted on the NPC Web site, at http://www.npc.gov.cn/huiyi/lfzt/kzsnyf/2009-08/28/content_1516753.htm.
13. China Daily, China Plans for Renewable Energy, Aug. 25, 2009, at http://www.chinadaily.com.cn/bizchina/2009-08/25/content_8611790.htm.
14. http://www.npc.gov.cn/huiyi/lfzt/kzsnyf/2009-08/28/content_1516753.htm.
15. NPC, ___________at http://www.npc.gov.cn/huiyi/cwh/1112/2009-12/27/content_1533406.htm.
16. PRC government’s website, ____________, at http://www.gov.cn/gzdt/2006-01/25/content_171599.htm.
17. PRC government’s website, ____________, at http://www.gov.cn/jrzg/2007-12/04/content_824794.htm.
18. PRC government’s website, ____________, at http://www.gov.cn/jrzg/2009-11/10/content_1461214.htm.

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