It has been three years since the People’s Republic of China (“PRC”) passed its Renewable Energy Law. In that time the PRC has enacted several key pieces of follow-on legislation and policy that fit together to form a comprehensive renewable energy program, although some issues remain unaddressed. This article aims to provide a general review of relevant law and policy, with a view to highlighting points likely to be of interest to a renewable energy project developer.
China Energy Sector Background
China relies heavily on coal to meet its power generation needs. China’s installed generating capacity as of 2005 was roughly 519 gigawatts (GW).1 At that time, China’s energy generation mix was as follows: 73.41 percent coal, 15.22 percent large hydropower, 7.32 percent small hydropower, 1.93 percent gas, 1.35 percent nuclear, 0.19 percent wind and 0.39 percent other sources.2
China’s electricity sector has undergone significant reform in the last decade. Until 2002, China’s power industry (including both generation and transmission capacities) was monopolized by the State Power Corporation (“SPC”), which owned 46 percent of China’s generation assets and 90 percent of its distribution assets. The State Council, as part of power restructuring policy, dismantled SPC to facilitate the separation of plant and grid asset ownership. Eleven smaller companies were formed, namely:
- two grid operators: State Grid Corporation headquartered in Beijing and China Southern Power Grid Company Limited headquartered in Guangzhou;
- five power generation companies: China Power Investment Corporation, China Datang Corporation, China Huaneng Corporation, China Huadian Corporation and China Guodian Corporation; and
- four related business companies.
Reform policy dictates that no more than 20 percent of the capacity in each region can be controlled by any one power generation company, although all power generation and transmission companies continue to be controlled by the state. The State Electricity Regulatory Commission (the “SERC”) was also established as part of this round of reforms.
The national regulator and policy maker for China’s energy sector is currently the National Development and Reform Commission (the “NDRC”). The National Energy Administration, a sub-department under and supervised by the NDRC, was established in July 2008 to be in charge of national administrative work in respect to the energy sector, including the renewable energy industry.
China has indicated it sees renewable energy as playing a significant part in meeting its future power demands. In its long-term development planning, the NDRC has set the goal of increasing the share of renewable-based energies to be 15 percent of the national generation mix by 2020.3
Renewable Energy Law
The Renewable Energy Law of the People’s Republic of China (the “RE Law”) came into effect on January 1, 2006. The RE Law takes the form of an umbrella document, providing the overarching framework of renewable energy policies, which are to be further detailed in ministerial-level legislation and eventually, provincial policy.
The chief high-level policies touched on in the RE Law are the following:
- Special tariffs to be set by the price authorities of the State Council or by public tender, with any cost above that of fossil fuel-based power, resulting from interconnection or otherwise, to be shared in a manner determined by the State Council;
- Interest rate subsidies for the financing of renewable projects and tax incentives to be determined by the State Council;
- Requirement that grid operators must connect to and purchase all available power from and provide related services to licensed renewable energy generators;
- Conduct of resource surveying and development planning (including the setting of deployment targets) by the energy authorities of the State Council, with expert consultation;
- Preference and support for renewable energy technology R&D and the establishment and publication of technical standards for renewable energy; and
- The establishment of a renewable energy development fund to support research, pilot projects and rural electrification.
Around the time the RE Law was enacted, a guidance document was made available titled the Renewable Energy Industry Development Guidance Catalogue (NDRC Energy  No. 2517) (the “RE Catalogue”). The RE Law together with the RE Catalogue define renewable energy sources in customary terms as being wind, solar (both photovoltaic and concentrated), hydro, ocean (in respect to tidal and current movement and temperature differences), geothermal and biomass (including biogas). Notably, the RE law and Catalogue treat hydropower specially in some respects and expressly exclude the burning of organic material in low-efficiency stoves. The RE Catalogue further provides that government support extended under the RE Law would also be offered for ancillary activities such as design, manufacturing and support of systems, equipment, components and materials.4
The RE Law imposes many obligations on the State Council, which as of yet, have almost all been handled by the NDRC.
Ambitious Development Plan
Pursuant to the RE Law, in September 2007 the NDRC issued the Medium and Long-Term Development Plan for Renewable Energy in China (the “RE Plan”), a keystone policy document setting out renewable energy targets. In addition to the nationwide generation mix target mentioned above, the RE Plan sets out, among other things, nationwide installed generating capacity targets in 2010 and 2020 in respect to each form of renewable energy and renewable portfolio standards (RPS) for the large generating companies.
Click here to view the targets which are set out in the September 2007 RE Plan
The targets set out in the RE Plan were deemed by experts as highly ambitious, but now some goals have already been met, such as the 2010 wind power target of 5GW, which was met in 2008. As a result, it is likely the medium- and longterm targets for wind and also solar power will be revised upwards5 (rumored targets as high as 100 GW of wind and 9 GW of solar in 2020 have appeared in recent Chinese press) and there is even talk of revising the nationwide renewables target for 2010 from 15 percent to 20 percent of China’s generation mix.6
The targets in the RE Plan are based on installed generating capacity rather than actual deliveries to the grid. As such, the large power generation companies have been concentrating on deploying capacity as quickly as possible to meet the mandated RPS, sometimes without assurance that the projects will be able to connect to the grid and deliver power in a timely fashion.
RE Law Implementing Regulations
Under China’s institutional framework, the State Council sets the country’s general policy and appropriate government ministries are charged with formulating the rules addressing issues within the national regulation framework that pertain to their capabilities and responsibilities. The ministerial regulations then guide the provincial governments as they form the implementing rules. Many ministerial regulations and provincial implementing rules have been passed to implement the RE Law, with more regulations expected.
Tariff Setting and Cost Pass Through to End Users
Viable tariffs are the most important factor for developers in overcoming the cost challenges attendant to renewable energy projects. As noted above, tariffs can be set by the government (feed-in tariffs) or determined through public tender (although the RE Law stipulates that a winning price is not to exceed the rate paid to grid-connected projects of a similar nature). The ministerial regulation covering this issue is the Provisional Administrative Measures on Pricing and Cost Sharing for Renewable Energy Power Generation (NDRC Price  No. 7) (the “Pricing Reg”), which came into effect on the same day as the RE Law, January 1, 2006. The Pricing Reg provides the following guidelines for tariff determination:
- Prices for biomass projects may be either feed-in tariffs or set by bid. For feed-in tariffs, biomass projects enjoy a subsidy of RMB 0.25 per kWh for 15 years following commercial operations. The subsidy offered to new biomass projects will be reduced annually from 2010 by 2 percent. Hybrid systems employing both traditional fossil-fired and biomass components will not receive the subsidy if over 20 percent of the heat consumption for power production is from traditional sources. For tariffs set by competitive bid, there is no subsidy;
- Solar, ocean and geothermal power projects will receive government-set tariffs (but detailed calculations such as those for biomass are not provided);
- Hydropower project tariff determination is covered under a separate existing law; and
- The “price authorities of the State Council” will be responsible for setting tariffs or conducting competitive bid processes, as applicable, in connection with renewable energy projects.
The RE Law provides the added cost of developing renewable energy will be “shared in the selling price.” This concept is further detailed in the Pricing Reg, which provides that a renewable energy surcharge be paid by all end users of electricity. The surcharge may be adjusted annually and will cover (a) the portion of the average purchase price of renewable energy paid by grid operators over the average purchase price of energy from coal-fired projects, and (b) the cost of connecting renewable energy projects to the grid. The surcharge was initially set at RMB 0.001 per kWh by the Renewable Energy Surcharge Level Regulation (NDRC Price  No. 28-33).
Although the Pricing Reg originally provided that wind tariffs would be determined by competitive bid, a July 2009 NDRC announcement revealed that as of August 1, 2009 onshore wind projects will receive fixed tariffs of RMB 0.51, RMB 0.54, RMB 0.58 or RMB 0.61, depending on geographic region. The new benchmark tariff system effectively eliminates the downward pressure on on-grid prices exerted by bid competition and allows developers to plan wind farms around a known price. Tariffs for offshore projects will be determined separately.
As of yet, instruction on investment incentives has been limited to the generalities of the RE Law and the provision of feed-in tariffs and subsidies in the Pricing Reg (which are only really fully explained in respect to biomass projects). Regulations dealing solely with the special financing terms and tax treatment for renewable projects mentioned in the RE Law have not yet been passed. Recent nonrenewable
specific regulations have touched on tax incentives for new renewable projects and equipment manufacturers, including:
- Reduced VAT rates or whole or partial VAT rebates for certain types of renewable power developers7;
- Three-year income tax holidays with reduced (12.5 percent) income tax rates for the three years following expiry of the holiday for “basic infrastructure projects,” including hydro, wind, ocean, solar and geothermal power projects8; and
- For certain “high and new-tech” enterprises, which may include equipment manufacturers, reduced (15 percent) income tax rates and, if incorporated in special economic zones, two-year income tax holidays with reduced (12.5 percent) income tax rates for the three years following the expiration of the holiday.9
Ensuring Grid Operator Cooperation
Assurance that renewable energy projects will be able to interconnect to the grid and the enforcement of the grid operators’ obligation to give priority to renewable energy projects in grid connection and power purchase under the RE Law are key concerns for developers. Failure by the grid operators to honor their obligations can create delays, reduce profits and increase risks, all effective barriers to the commercialization of renewable energy.
Two regulations have been enacted that address these two key components. The first is the Regulation on the Administration of Power Generation from Renewable Energy (NDRC Energy  No. 13) (the “Administration Reg”), which principally provides that the grid operators are obliged to allow renewable energy projects to connect to the grid. The second is the Measures on Supervision and Administration of Grid Enterprises in the Purchase of Renewable Energy Power (SERC  No. 25) (the “Grid Purchase Reg”). The Grid Purchase Reg provides that the national grid authority and national standards authority draft a grid code and power purchase standards and that the grid operator’s purchase of renewable-based power will be supervised by the SERC and local agencies.
So far special grid codes have only been passed to provide technical standards for the interconnection of wind, geothermal and solar PV power plants. Existing regulations have so far proved to be insufficient and grid interconnection has been a serious issue for developers. The strain on the resources of grid operators in upgrading the grid to connect to renewable energy projects is proving to be too high and in many cases the transmission companies are not complying with the RE Law. The China Wind Energy Association has reported that more than 20 percent of China’s installed wind farms did not generate any power in 2008 because of delays in connecting to the grid.
Government Approvals / Power Purchase Agreements
Developers face the risk that required government approvals for a project in China will be costly and difficult to obtain, excessively delayed and not actually available until the late stages of the development process. To help mitigate these risks, a streamlined and transparent approval process is key. The Administration Reg provides that NDRC approval is required for renewable energy projects of 250 MW or more (or for wind projects 50 MW or more), hydro projects located on major waterways and projects that require state policy or funding support. Other projects may be approved by the development and reform commission offices at the province level. In addition, compliance is needed from the grid operators in order to connect and sell power to the grid, which as noted above, is not always timely (notwithstanding the grid operator’s connection and purchase obligations under the RE Law and the Administration Reg). Other standard types of project approvals, including in respect to foreign investment, if applicable, will be required.
Also of concern for developers is the document that memorializes the agreement between the developer and the grid operator with respect to the sale and purchase of power. As of yet, model power purchase agreements` have not been published.
Recent Solar Announcements, Proposed Amendments to the RE Law and Market Outlook
Several key recent announcements have made investment in solar projects more interesting and indicate that the government is now turning its attention to solar after its initial focus on wind power. First, in March 2009, the Ministry of Finance (“MOF”) announced the government would provide subsidies of RMB 20 per watt generated during peak hours by solar projects attached to buildings with capacities of greater than 50 kW. Then, in July 2009, the MOF announced that government subsidies would be offered for 50 percent of the investment in grid-connected solar power projects and 70 percent of the investment in remote, off-grid solar power projects. To qualify, the projects must have generating capacities of more than 300 kW, be completed in one year and be operative for at least 20 years.10 Although the MOF announcements are light on detail and some unanswered questions remain in respect to the subsidies and feed-in tariffs for solar PV projects, the September 2009 announcement that U.S. firm First Solar Inc. plans to build a 2 GW solar power plant complex in Inner Mongolia is a strong sign that developers are responding to the favorable investment environment cultivated by the PRC.11 An NDRC announcement which addresses outstanding solar PV concerns is expected sometime before the end of 2009.
The NDRC has recognized the power transmission upgrade bottleneck which is preventing many projects from being able to connect to the grid. A draft amendment to the RE Law has been submitted to the Standing Committee of the National People’s Congress. The draft has not been disclosed to the public, but reports indicate that the amendments will focus on measures designed to directly or indirectly accelerate grid development, such as (1) establishing a government fund to support R&D of renewable energy and smart grid technology; (2) requiring ministries to formulate concrete plans for meeting China’s medium and long-term renewable energy development targets; and (3) setting a nationwide annual purchase quota for renewable energy.12
Additional areas of concern for developers that could be further addressed in guidance regulations include tax incentives, tariff-setting methods for ocean and geothermal energy, special loan arrangements, grid codes for certain types of energy and resource assessment methodology.
As legislation continues to be passed, the picture will become clearer for developers. The enactment of the Energy Conservation Law on April 1, 2008, the endorsement of a climate change resolution on August 27, 2009 and the imminent passage of the new Energy Law, which is under discussion and expected to be enacted in the near future, and several other policy and legislative developments do and will continue to underpin government commitment to renewable energy development, and developers should certainly take note.