China’s deployment of renewable electricity generation – starting with hydropower, then wind, and now biomass and solar – is massive. China leads the world in installed renewable energy capacity (both including and excluding hydro) and has sustained annual wind additions in excess of 10 gigawatts (10 GW) for four straight years. Half of the hydropower installed worldwide last year was in China. And solar and biomass-fired electricity are expected to grow ten-fold over the period 2010-2020. Most striking amidst all these impressive accomplishments has been the Chinese government’s seemingly unwavering financial support for renewable energy generators even as other countries scale back or restructure similar support programs.

The balance sheets of the central renewable energy fund are changing, however. Supplied primarily through a fixed surcharge on all electricity purchases, it has faced increasing shortfalls in recent years as renewable growth picked up, which may have contributed to late or non-payment to generators. Especially as more costly solar comes online, both the revenue streams and subsidy outlays to generators will require difficult modifications to keep the fund solvent. More broadly, investment decisions are largely influenced by the historically high penetration of state-owned energy companies in the renewables sector, which have responsibilities to the state besides turning a profit.

Recognizing these challenges of solvency and efficiency, the central government is facing a crossroads in its policy support for renewable sector, of which one possible approach would be migrating to a hybrid system of generation subsidies coupled with mandatory renewable portfolio standards (RPS). This fourth and final post in the Transforming China’s Grid series looks out to 2020 at how China’s renewable energy policies may evolve and how they must evolve to ensure strong growth in the share of renewable energy in the power mix.

Policy Support to Date

Investment in renewable energy has risen steadily in China over the last decade, with the wind and solar sectors hitting a record $68 billion in 2012, according to Bloomberg New Energy Finance (BNEF). These sums – together with massive state-led investments in hydropower – have translated into a surge of renewable energy capacity, which since 2006 included annual wind capacity additions of 10-15 GW and a near doubling of hydropower (see graph). Renewables now provide more than a quarter of China’s electricity generating capacity.

Early on in both the wind and solar sectors, the tariffs paid to generators were determined by auction in designated resource development areas (called concessions). These auctions underwent a number of iterations to get at rates the market will bear before policy support was transitioned to the fixed regional feed-in-tariffs currently in place: 0.51-0.61 yuan / kWh (8.3-10.0 US¢ / kWh) for wind, and 0.90-1.00 yuan / kWh (15-16 US¢ / kWh) for solar. The result of this methodical policy evolution was the steady growth of wind and solar power capacity year-after-year. Contrast these with the uneven capacity additions of wind in the U.S., attributable to the haphazard boom-bust cycles in U.S. wind policy (see graph). Hydropower project planning is directed by the government and rates are set project-by-project (typically lower than the wind or solar FITs).

Also important to developers – thought not captured in BNEF’s investment totals – are reduced value-added-taxes on renewable energy projects, preferential land and loan terms, as well as significant transmission projects serving renewable power bases socialized across all ratepayers. On the manufacturing side, the government has also stepped in to prop up and consolidate key solar companies.

Guiding these policies has been continued ratcheting up of capacity targets beginning with the Medium to Long-Term Renewable Energy Plan in 2007. These national goals – while not legally binding – shape sectoral policies and encourage local officials to go the extra mile in support of these types of projects. The most recent iterations call for 104 GW of wind, 260 GW of hydro, and 35 GW of solar installed and grid-connected by 2015 (see table). In addition to these “soft” pushes, generators with over 5 GW of capacity were required under the 2007 plan to reach specified capacity targets for non-hydro renewables: 3% by 2010 and 8% by 2020. However, there appeared to be no penalty for non-compliance: half of the companies missed their 2010 mandatory market share targets.

China’ renewable energy targets as of September 2013
(GW, grid-connected)

Sources
 

Rubber Missing the Road in Generation

Amidst the backdrop of impressive capacity additions, a separate story has unfolded with respect to generation. Wind in China faces twin challenges of connection and curtailment, as I outlined previously, which result in much lower capacity factors than wind turbines abroad. These have persisted for several years, so one might think that wise developers would demand higher tariffs before investing and a new, lower equilibrium would be established.

But the incentives to invest in China’s power sector are rarely based on economics alone. The vast majority of wind projects are developed by larger, state-owned enterprises (SOEs). In recent years, SOEs have been responsible for as much as 90% of wind capacity installed (for comparison, SOE’s are responsible for an average of 70% for the overall power mix). In 2011, the top 10 wind developers were all SOEs which faced some scrutiny under the 2010 mandatory share requirements because of their size. In addition, because generators only faced a capacity requirement, it was more important to get the turbines in the ground than get them spinning right away (though as we saw, many still missed their capacity targets). Grid companies, on the other hand, had generation targets (1% by 2010 and 3% by 2020), which were also unmet in some locations. The next round of policies have sought to address both generation and connection issues.

Other Cracks in the Support Structure

Though generation lagged capacity, it was still growing much faster than predicted, leading to shortfalls in funds to pay the feed-in-tariff. A single surcharge on all electricity purchases supplies the centrally-administered renewable energy fund, which fell short by 1.4 billion yuan ($200 million) in 2010 and 22 billion yuan ($3.4 billion) in 2011. Prior to the recent surcharge rise, some estimated the shortfall will rise to 80 billion yuan ($14 billion) by 2015. The difference would either not make it to developers or have to be appropriated from elsewhere.

In addition, from 2010-2012, there were long delays in reimbursing generators their premium under the FIT. The situation was so serious that the central planning ministry, the National Development and Reform Commission (NDRC), put out a notice in 2012 demanding grid companies pay the two-year old backlog. These receivables issues are particularly damaging to wind developers who operate on slim margins and need equity to invest in new projects.

To address the solvency of the renewable energy fund, in August, the NDRC doubled the electricity surcharge on industrial customers to 0.015 yuan / kWh (0.25 US¢ / kWh), keeping the residential and agriculture surcharge at 0.008 yuan / kWh (0.13 US¢ / kWh) (Chinese announcement). With a little over three-quarters of electricity going to industry, this will increase substantially the contributions to the fund. At the same time, solar FITs were scaled back slightly by instituting a regional three-tier system akin to that developed for wind: sunny but remote areas in the north and northwest offer 0.90-0.95 yuan / kWh (15-15.5 US¢ / kWh) while eastern and southern provinces close to load centers but with lower quality resources offer 1 yuan / kWh (16 US¢ / kWh) (Chinese announcement).

Additionally, distributed solar electricity consumed on-site (which could be anything from rooftops to factories with panels) will receive a 0.42 yuan / kWh (6.9 US¢ / kWh) subsidy. Excess electricity sold back on the grid, where grid connections and policy are in place, will be at the prevailing coal tariff, ranging from 0.3-0.5 yuan / kWh (5-8 US¢ / kWh). It is unclear if these adjustments will mitigate the expected large financial demands to support solar (whose FIT outlays per kWh are still more than double wind).

Wind, whose FIT has been in place since 2009, may not be immune to this restructuring either. Some cite the falling cost of wind equipment and the fund gap as cause for scaling back wind subsidies.

Where to Go From Here

Despite this budget squeeze, the Chinese government seems intent on sustaining the clean energy push. Even as it weakens financial incentives for renewable energy, the central government is getting smarter about how to achieve its long-term clean energy targets. Last year the National Energy Administration (NEA) released draft renewable portfolio standards (RPS), which would replace the mandatory share program with a tighter target focused on generation: an average of 6.5% from non-hydro renewables by 2015. Grid companies will have purchase requirements ranging from 3% to 15%, and provincial consumption targets range from 1% to 15% (more details here, subscription req’d). This approach appropriately recognizes the myriad regulatory barriers to increasing wind uptake by putting responsibility for meeting targets on all stakeholders.

China is paving new ground as it shifts further toward low-carbon sources of electricity. What has worked in the past, when wind and solar’s contributions to China’s energy mix were minor, will likely not be sufficient to meet cost constraints and integration challenges out to 2020. As with all policies in China, designing the policy is less than half the battle; implementation and enforcement are central to changing to the status quo.