Introduction

Forum

Distribution generation

Legislative developments

Issues

Comment

Introduction

Between October 29 and 31 2016, the National Energy Administration (NEA), the International Renewable Energy Agency and the People's Government of the Jiangsu Province held the second international energy transition forum in Suzhou, which caught the attention of experts and scholars in the energy sector. The forum's theme was the coordinated development of the energy transition process, with specific focus on:

  • the coordinated and innovative development of:
    • clean and low-carbon fossil energy;
    • renewable energy;
    • the energy internet; and
    • distributed energy; and
  • the transformation of:
    • terminal energy consumption;
    • the power system; and
    • transportation, building and regional energy.

Forum

Delegates from around the world shared their experience in formulating energy policies and developing the energy transition process. They also discussed how to advance existing global energy systems to develop a global clean, low-carbon and sustainable development model.

The delegates reached the following consensuses:

  • The global energy revolution is entering a new phase and generating greater momentum in fostering change.
  • The revolution is replacing the main energy sources and profoundly changing how energy is exploited and utilised.
  • The revolution depends on global action and will benefit the international community.
  • Clean and intelligent terminal energy must be further developed.
  • Electric power is leading the revolution.
  • Technical progress and sustained cost savings are the fundamental driving forces of the expanding clean energy sector.
  • Renewable energy investment must be increased.
  • International cooperation regarding the global energy revolution should be strengthened.

Distribution generation

One of the forum's sub-sessions focused on distribution generation. As the conflict between energy and the environment continues to intensify, distributed generation systems are increasingly preferred by governments and enterprises. 'Distributed generation' includes:

  • gas multi-generation;
  • industrial waste heat and pressure generation;
  • coal mine methane power generation;
  • biomass power generation (including waste power generation);
  • small hydropower generation;
  • solar power generation (including photovoltaic (PV) and heat generation); and
  • wind power generation.

In China, distributed generation first emerged in the form of small self-generated hydropower facilities. In recent years, distributed generation regarding natural gas and other new energy sources has also developed. Following the rapid bidding for the PV power station and the Golden Sun Demonstration Project in 2009, distributed PV generation took off. Since 2013, governments at all levels have supported distributed PV generation and, as such, many enterprises have moved into the sector. According to statistics, the installed capacity of PV generation in China amounted to 43.18 million kilowatts (kW) by the end of 2015, exceeding that of Germany. China is now the leading country in terms of PV installed and generating capacity.

Legislative developments

Interim measures On July 18 2013 the National Development and Reform Commission (NDRC) formally promulgated the Interim Measures of Management on Distributed Generation. Article 2 of the interim measures defines 'distributed generation facilities' as:

  • power generation facilities that:
    • are constructed or installed on or near sites where end-users are located;
    • rely primarily on end-users' self-generation of power for self-use and utilisation of surplus power in the grid; and
    • balance power in the distribution network; or
  • multi-cogeneration facilities with comprehensive cascade energy utilisation and electricity output.

In essence, distributed generation is the generation of power for self-use, after which surplus power is sold to the grid. Distributed generation can take full advantage of nearby clean energy and the power generated can be consumed without geographic restriction. As a result, it can:

  • reduce power wastage during transmissions;
  • ease power shortages; and
  • reduce environmental pollution.

The interim measures apply to the generation of wind, solar, biomass, ocean, geothermal and other new forms of energy in various voltage classes (Article 3). Distributed generation projects can be undertaken in a range of locations, including industrial parks, office buildings and other commercial buildings or facilities (Article 7). Enterprises, specialised energy service providers and all electricity users, including individuals, are encouraged to invest in the construction of and operate distributed generation projects, which are exempted from the power generation licence requirement (Article 12). State grid operators must ensure that surplus power resulting from distributed generation is prioritised with regard to being stored in the grid, and that all surplus power is purchased (Article 21).

Other legislation

In addition to the interim measures, the government has promulgated several other policies, laws and regulations since 2013 to support distributed PV generation. For example, on July 4 2013 the State Council promulgated Certain Opinions on Promoting the Healthy Development of the PV Industry. Further, the NEA promulgated consecutive regulations for the management of distributed PV power generation projects, namely:

  • the Interim Measures for the Administration of PV Power Station Projects (August 29 2013);
  • the Interim Measures for the Supervision of PV Power Generation Operations (November 26 2013); and
  • the Interim Measures on the Management of Distributed PV Power Generation Projects (December 18 2013). These measures stipulate that distributed PV generation players need to register their projects, but do not need to obtain a power generation licence. Further, all eligible distributed PV generation projects are included in the renewable energy subsidies directory and entitled to national renewable energy subsidies.

In addition, the NDRC promulgated a pricing policy to promote the distributed PV generation industry by subsidising the price.(1) National financial and tax departments also promulgated fiscal subsidy and tax reduction policies, which stipulate that all registered PV generation projects will:

  • enjoy central government fiscal subsidies(2) and tax reductions at a rate of 50%;(3) and
  • be exempt from government-managed funds.(4)

Further, on November 7 2016 the NEA formally promulgated the 13th Five-Year Plan of Electric Power Development (2016-2020), which estimates that solar power capacity will be more than 100 gigawatts by 2020, of which:

  • more than 60 million kW will be from distributed PV generation; and
  • 5 million kW will be from solar thermal electric power generation.

Issues

Encouraged by the above policies, a large number of enterprises emerged in the upstream, midstream and downstream distributed PV generation sectors. However, some issues have yet to be resolved.

First, distributed PV generation projects require significant investment, but have little economic benefit, which – in addition to their long recovery periods – has led to a bottleneck. For example, the proprietors of distributed PV generation projects cannot acquire loans for the divided ownership of multi-storey buildings. Although governments have provided significant support to this industry, commercial banks are still cautious, primarily because there are no feasible business models or financial products in the distributed PV generation sector for financial institutions and investors to follow. As such, many enterprises have encountered financial trouble and some have even filed for insolvency. At present, the cost of distributed generation projects is higher than that of coal-fired power and hydropower projects, and any profit mainly depends on fiscal subsidies. According to the media, about Rmb55 billion in subsidies had been defaulted as of August 30 2016.(5)

Second, distributed PV generation projects have little independence and rely heavily on grid operators' support and coordination. Distributed PV generation players can achieve profitability only where grid operators cooperate regarding:

  • project registration – distributed PV generation projects established by individuals on their own roofs or in their residential area will be collectively registered by local grid operators and energy authorities;
  • grid connection – surplus distributed PV power must be purchased by grid operators without any market competition; and
  • subsidies – all subsidies for distributed PV generation projects should be paid by grid operators on behalf of the state.

Therefore, distributed generation players are subject to the mercy and red tape of grid operators, which, to a significant extent, dictate the success of a distributed PV generation project. As a result of existing legal provisions, grid operators lack the motivation to promote distributed PV generation projects, as they must assume extra costs – including those of operating and controlling the power grid – and responsibilities, such as receiving intermittent PV power. Fortunately, grid operators' attitudes towards distributed generation players have started to change.

Comment

Despite the above issues, it is expected that, in light of increasing pressure regarding energy and the environment and the support provided for the development of IT and smart grid technology, governments will begin to pay more attention to distributed generation and try to provide a reliable legal and institutional framework for the sector. China still has some work to do to achieve this goal, including:

  • enacting and improving relevant legislation,
  • creating feasible business models; and
  • making innovative technology breakthroughs that will enhance competition in the distributed generation sector.

For further information on this topic please contact Libin Zhang or Meili Tan at Broad & Bright by telephone (+86 10 8513 1818) or email (libin_zhang@broadbright.com or meili_tan@broadbright.com). The Broad & Bright website can be accessed at www.broadbright.com.

Endnotes

(1) See Notice of Execution on Leveraging Prices to Promote the Healthy Development of the PV Industry (issued by the NDRC on August 26 2013).

(2) See Notice of Issues such as Implementing the Subsidy Policy according to the Amount of Distributed PV Power Generation (issued by the Ministry of Finance on July 24 2013).

(3) See Notice of Execution on VAT Policies for PV Power Generation (issued by the Ministry of Finance and the State Administration of Taxation on July 25 2016).

(4) See Notice of Exemption of Distributed PV Power Generation for Self-use from Government-managed Funds (issued by the Ministry of Finance on November 19 2013).

(5) Yang Kunpeng, "PV subsidies gap of 55 billion yuan arrears urgent cure," www.guangfu.bjx.com.cn/news/20160830/767835.shtml.

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