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China's Burgeoning Solar Power Sector

16 November 2009
Mayer Brown Article

Although solar power projects pale in comparison to the scope of hydropower and wind power projects in China, a series of announced solar power projects have created a new interest in this sector by domestic and foreign power developers. The recent solar power projects include: (i) First Solar's 2 GW solar power project in Ordos, Inner Mongolia, which will be the world's largest solar power plant, sufficient to power about three million Chinese households; (ii) ReneSola's 150 MW on-grid solar project in the Taiyangshan Development Zone in Wuzhong, Ningxia Hui Autonomous Region, to be constructed at an estimated cost of RMB 4.8 billion; and (iii) the Chinese Government's Dahan solar project, a 1.5 MW solar thermal power plant near Beijing, which will be increased to 5 to10 MW by 2015 at a cost of US$14.7 million. In addition, China's largest solar photovoltaic cell manufacturer, Suntech, is set to surpass Q-Cells of Germany and is steadily gaining ground on the world's largest, Arizona's First Solar.

This growth is taking place within an overall legislative framework in China for the solar power sector.  An analysis of that framework provides a useful perspective to understand recent commercial and legal developments for solar power in China.

Renewable Energy Law

The Renewable Energy Law (REL) was enacted in January 2006 to provide the legislative guidelines for renewable energy, which encompasses the solar power sector. It outlines the key policies for the strategic development of renewable energy:

  • The establishment of national renewable energy targets for both the medium and long term
  • The compulsory connection of renewable energy to the grid
  • The structuring of power pricing arrangements (including feed-in tariffs and competitive tendering systems)
  • The structuring of cost sharing arrangements to divide the costs of renewable energy generation and grid connection equitably between utilities and electricity end users
  • The provision of subsidies and tax incentives for the financing of renewable projects
  • The establishment of a renewable energy development fund to support research and development for renewable energy technology.  

Following the enactment of the REL, the Chinese government promulgated various rules and regulations to provide further detail on the key policies outlined in the REL. In a bid to address some of the issues encountered in the promotion of renewable energy, a draft amendment to the REL was submitted for first reading to the Standing Committee of the National People’s Congress in August 2009. The draft amendment was opened for public comment and the public comment period ended on September 30, 2009.

Renewable Energy Targets

The National Development and Reform Commission (NDRC) established, in a policy document dated September 2007 and entitled Medium and Long-Term Development Plan for Renewable Energy in China, targets to be achieved for renewable energy generation by the years 2010 and 2020. The specific targets for solar power generation by the years 2010 and 2020 are 0.3 GW and 1.8 GW respectively.  Such targets are based upon the installed generating capacity rather than the actual amount of electricity connected to the grid.  In view of the aggressive promotion of renewable energy, NDRC's Energy Research Institute reported that the new goal for 2020 may be revised so that the installed capacity for solar power may amount to 10 GW or more. 

Compulsory Grid Connection

One of the biggest challenges faced by renewable energy developers has been the lack of assured interconnection to the grid. Grid companies have been reluctant to provide interconnection of electricity generated from renewable energy sources due to the instability of the electricity supply from renewable energy power plants and the costs involved in upgrading the grid for such interconnection.  Smart grid technology is being considered by the State Grid Corporation but has not been implemented to date.

To address these interconnection issues, the REL, together with 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 (State Electricity Regulatory Commission [2007] No. 25), obligates the grid companies to purchase the full amount of electricity generated from renewable energy projects that are within coverage of their grids.  They must also provide grid-connection services and related technical support to such projects.

Power Pricing Arrangements and Cost Sharing Arrangements

To remove the cost barriers to the purchase of renewable power by grid companies and utilities, the REL also provides for cost sharing arrangements requiring 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 grid enterprises to purchase renewable power and other reasonable expenses may also be included in the power transmission cost.

The concept of a feed-in tariff was introduced by the Chinese government under the REL and this concept was further elaborated in the Provisional Administrative Measures on Pricing and Cost Sharing for Renewable Energy Power Generation (NDRC Price [2006] No. 7).  For solar 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. On July 20, 2009, NDRC issued the Circular on Refining the Policy for On-Grid Pricing of Wind Power (NDRC Price [2009] No. 1906), which provides that feed-in tariffs for onshore wind power projects approved from August 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. This may set the precedent for the introduction of a similar centrally controlled price determination mechanism for large-scale solar power projects.  Ideally, the new development on the tariff-setting mechanism could provide power developers with the necessary comfort on the commercial viability of such projects.  

Financial Incentives

The REL commits to offer financial incentives to stimulate renewable energy development.  Among those measures, the Implementing Regulations for PRC Enterprise Income Tax Law promulgated on January 1, 2008, provides a tax concession of a three-year exemption plus three years of taxation at 50% of the full tax rate for enterprises engaging in projects involving power stations that use renewable energy, including solar power. 

In the latest move to boost the solar power sector, the Chinese government unveiled unprecedented and long-awaited subsidies in March 2009 and July 2009. On March 23, 2009, the Ministry of Finance (MOF) announced that for this year, the 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. On July 16, 2009, the Chinese government announced the implementation of the "Golden Sun" pilot project, under which it will subsidise 50 percent of the total investment for photovoltaic projects and the associated transmission and distribution systems. For independent photovoltaic power generating systems in remote regions with no power supply, the subsidy will rise to 70 percent.  To qualify for the subsidies, besides other requirements, the projects must each have a generating capacity of not less than 300 kW peak, be completed within one year and be operative for at least 20 years. Moreover, to ensure all the provinces benefit from such subsidies, each province should limit the scale of such solar power projects to no more than 20 MW in total.

According to an MOF statement dated July 21, 2009, the government plans to install more than 500 MW of solar power pilot projects in two to three years.  Such ambitious plans, coupled with the subsidies mentioned above, send a strong signal to the global community that China is serious about developing its domestic solar power market. 

Going Forward

The Chinese government recognises that in order to reach the country's renewable energy target, the country’s power grid development must be greatly accelerated.  In August 2009, the draft amendment to the REL was submitted for first reading to the Standing Committee of the National People’s Congress in a bid to address some of the issues encountered in the promotion of renewable energy.  The draft amendments provide for: (i) the extension of the grid coverage for renewable energy and the development of advanced technology such as the smart grid, (ii) the relevant government departments to map out development plans to achieve the country’s medium- and long-term renewable energy targets based upon the national energy strategy and the development of renewable energy technology, (iii) the establishment of the annual national benchmark for the purchase of renewable energy and the associated implementation plan, and (iv) the establishment of a government fund to support the research and development of renewable energy technology.

The future for China’s solar power sector is promising. With the various incentives introduced by the Chinese government and the gradual maturity of the supporting infrastructure, we would expect increased participation from industry players. Furthermore, the proposed amendments to the REL, the eventual passage of the draft Energy Law that prescribes the overall framework for energy legislation in China and the financial incentives introduced by the Chinese government will all combine to create a more favourable environment for investment in the solar power sector.

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