To date, the main failings of China’s renewable energy regime have centred around grid constraints. Around 25 per cent of PRC wind projects are not grid connected and there are problems with dispatch of renewable energy to the grid in many provinces during peak periods.
In this briefing we examine the amended Renewable Energy law. In particular we look at four key amendments designed to address grid issues.
The original Renewable Energy (RE) Law provides that the grid must purchase all of the power generated by a RE project. In practice this has not always been observed and until very recently power purchase agreements (PPAs) in some provinces still contained provisions that only required the grid to purchase a set amount of power each year.
The amendments to the RE law both strengthen and at the same time soften the grid’s offtake obligations. On one hand the amended RE Law directs the grid to expand its network and improve its capacity to offtake power from RE projects through the application of technologies such as smart grid. On the other hand it provides that the grid does not need to offtake power from projects that do not comply with the PRC renewable energy plan or are not properly grid connected. The details of these exceptions to the obligation to offtake will need to be carefully monitored by project developers when they are clarified in further more detailed implementing regulations.
The amended RE law also provides that the grid must provide compensation for any losses arising from the failure to purchase RE. This is already noted in the original RE law and should give some comfort to project developers. However, in practice although PRC grid companies are already under an obligation under most PPAs to compensate the project company if they fail to purchase power, these obligations are rarely if ever enforced.
Some commentators have said that the amended RE Law appears to take some steps toward requiring the grid to purchase a set percentage of power from renewable sources. The details in the amended RE law are not clear in this part and it will require further implementing regulations to clarify how this will work. However, if the grid were subject to a clear obligation to purchase a set amount of RE, then provided the target was high enough, it should see much more efficient grid connection of RE projects and priority dispatch for RE.
Developing grid capacity
Under the original RE law the grid itself was responsible for all build out of grid infrastructure. The amended RE law provides that the grid together with the local government shall be jointly involved in developing grid infrastructure. The aim of these changes is to put more pressure on the grid to ensure that it meets grid expansion targets that are set by the government.
On grid prices for RE are significantly higher than the retail prices for power charged by the grid to the ultimate consumer. This has often left local grid companies cash starved, particularly Inner Mongolia grid companies which are purchasing large amounts of RE.
For a number of years, China has implemented an inter-province trading system so that grid companies in provinces with lower amounts of RE are required to compensate grid companies in provinces with higher amounts of RE. In the past this trading scheme had created receivables issues because the grid only paid project companies the wind subsidy component of the power tariff when it had received it every six months under the inter-province trading scheme.
The amended RE law provides for the creation of a government managed fund funded by a premium added to retail electricity prices paid by consumers. The new fund should be better positioned to firstly collect the additional premium from consumers and secondly allocate it more efficiently to grid companies in provinces with more RE.
In general, the amendments to the RE Law are a step in the right direction. However, given that many of the core problems in China’s renewables market stem from failings in grid infrastructure and failure to implement the existing laws, it is unlikely the amendments will lead to significant improvements in the short to medium term.