In the early afternoon of October 26, a medium-sized meeting room on the third floor of the Beijing International Convention Center was packed with wind industry representatives, many standing. All were there for a session on wind power pricing policy organised by the Chinese Renewable Energy Industries Association (CREIA), Greenpeace and the Global Wind Energy Council (GWEC) as part of the three day Great Wall Renewable Energy Forum. As many as possible of the 1000 delegates from 50 countries attending the forum vied for position in the room to hear speakers from the three organisations discuss what many see as the make or break issue facing China's wind industry.
China's current pricing system for wind, based on competitive tenders submitted to either national or provincial government, should be scrapped, they were told, with a system based on standard offer contracts taking its place. If this is done, as much as 170,000 MW of wind capacity could be achieved economically in China by 2020, rather than the 30,000 MW currently targeted in that timeframe, it was claimed.
The pricing session took place on the last day of the forum, which from start to finish had been dominated by discussions on China's wind pricing system for state sponsored concession projects, with most delegates complaining that the pricing mechanism is flawed. "The current pricing policy does not match the goal of supporting wind development and it has to be changed," said CREIA's Li Junfeng, joint chair of the workshop and a leading author of a new report, Study on the Pricing Policy of Wind Power in China, produced jointly by CREIA, Greenpeace and GWEC.
China's Renewable Energy Law came into effect on January 1, 2006, and aims for 16% of the country's energy needs to come from renewable sources by 2020. Targets for wind are set at 5000 MW by 2010 and 30,000 MW by 2020. Central government sponsored "concession projects" of 100 MW or more are key to achieving those goals, as is fostering development of a local manufacturing base-a 70% local content requirement is now in force for all state sponsored projects.
So far there have been four rounds of state sponsored concession tenders. Under the law's implementing rules, the price for grid connected electricity from wind power projects 50 MW or bigger is decided through competitive public tenders in response to requests for bids, with projects and prices for the power approved by central government. Payment for a specified volume of production, typically achieved after about 12 years of operation, is set at the price submitted by the winning bidder. Once a wind plant is no longer eligible for the fixed price, its power is sold at the average electricity market price. Contracts run for 25 years.
Projects under 50 MW require local government approval only, as they have done since 2002. Historically, the prices paid for the electricity generated from most of these projects is higher than for any of those requiring national government approval. A recent study by the Delegation of German Industry and Commerce in Beijing notes that while international attention has focused on the larger state concession projects, 70-80% of wind projects in China are being developed under the policy requiring just local government approval (Windpower Monthly, November 2006).
Working well, or not
According to Wu Guihui, deputy director of the Energy Bureau of the National Development & Reform Commission (NDRC), China's wind policy is working. "The concession projects are proving positive to the industry's growth through development of scale," he said at the forum. "Requiring the developer and [turbine] supplier to reach agreement before tendering, a practice started this year, is important for the production localisation of equipment." The rapid growth of China's wind market in the past two years would seem to support Wu's contention that the national policy is working as intended. The country, with thousands of megawatt in active development, already ranks seventh on the list of the world's major wind markets.
Greenpeace, CREIA and GWEC are far from convinced, however. The policy has "created unreasonable differences in tariffs for wind power projects in regions with similar wind resources," they state in their joint report. Many industry players have complained that the successful bids for state concession projects have included prices too low to make projects financially viable, with winning bidders committing to "an unreasonably low price to win the contract," says the report. "In the process they have either over-estimated the wind resource and electricity generation or underestimated the cost of the wind turbines and maintenance."
The prices bid by the winning developers in the last round of tenders (Windpower Monthly, November 2006) ranged from CNY 0.42/kWh ($0.053/kWh) to CNY 0.50/kWh ($0.063/kWh), not unreasonably low if measured against international wind power prices (Windpower Monthly, January 2006).
GWEC's Arthouros Zervos, co-chair of the workshop, criticised China's government for ignoring the experience of the mature European wind power industry and said "the price volatility and uncertainty caused by the current regulation harms foreign and domestic private manufacturers and developers, who are discouraged by a pricing pressure they cannot sustain." Since the introduction of the implementing rules in January, no foreign or private developer has won a state organised wind concession tendering project. "This is deterring investors," says the report. "Special attention should be paid to restricting the phenomenon of unreasonably low and unreasonably high wind tariffs to facilitate the long term development of the Chinese wind industry."
For Zervos and his co-authors, this means a system based on standard offer contracts, described as "feed-in tariffs" in the report. "The message of this report is clear. The nascent wind industry in China is at a crossroads. Only one road will lead to the sustainable development of this industry and bring its full benefits to the Chinese people: a well-designed payment mechanism, based on a realistic feed-in tariff," he writes in the report.
Under the proposed standard offer contracts, developers would be paid a benchmark price plus a wind power premium of around CNY 0.25/kWh ($0.031/kWh). This would take total income from wind projects to a range of CNY 0.50-0.60/kWh ($0.063-0.076/kWh), which "should provide an acceptable level for successful investment." The premium price, the reports says, could vary slightly according to the regions and their respective wind regimes and would be paid for a specific volume of production, typically achieved after 15 years. The report suggests the price paid for wind power could be reduced as domestic manufacture matures, but to no lower than CNY 0.50/kWh ($0.063/kWh) up to the end of 2020. This protective minimum price "will help remove the concerns of investors, developers and manufacturers," it says.
Steve Sawyer of Greenpeace International told workshop delegates: "China is faced with a great opportunity for developing wind power, but the development relies heavily on an enabling pricing system." If the recommended modifications to pricing policy are made, more than the 30,000 MW of wind being targeted by the Chinese government could be achieved by 2020, said Sawyer. According to the study authors, as much as 170,000 MW could be achieved in that timeframe under the right policy framework -- more than treble the projection of 54,000 MW by 2020 made recently by yet another market observer, research company New Energy Finance (Windpower Monthly, November, 2006).
With all but one of the workshop speakers representing either wind developers or equipment suppliers, it was left to Shi Lishan of the National Development and Reform Commission (NDRC), the only the government official on the panel, to defend the government's existing policy. Shi, having faced two previous days of criticism and having been involved in the drafting the Renewable Energy Law and accompanying implementing methods, was in no mood to ease concerns.
"The government's stance is clear on this issue. Those capable of doing it will be allowed to go ahead. If you think the price is too low, you'd better not do it now," he said. The situation in China is different from that of European countries, he added. "As a large country, if we don't have a domestic industry, development will not be healthy and sustainable."
Shi said he is concerned, though, about where development is taking place. The most popular region for investment so far is Inner Mongolia, where there is relatively little demand for electricity. Already 4000 MW of wind capacity has been contracted there outside the government's concession program, all scheduled for commissioning in the next two or three years, but with no transmission lines in place to take the power.
The Inner Mongolia market may spin out of control, Shi fears. While the region has excellent wind resources, market conditions are not so good, he said. A variety of different contract prices have been agreed, all of which are pending approval by NDRC or its counterparts at provincial government level. Since the increment cost of wind power is to be shared out across electricity bills nationwide, rapid growth of wind power in one region due to higher contracted prices for power purchase may nurture grievances in other regions, said Shi.
He advises companies to divert investments to coastal areas like Jiangsu province, where resources and the market are good. Investors may encounter unpredictable difficulties if they continue to invest in the western region, he warned at the forum.
The five day exhibition that accompanied the forum was a relatively muted affair. The one exhibition hall was dominated by wind power companies. Canada and Scotland sent collective delegations and their exhibition stands made an impact in terms of position, size and décor, as was the space secured by ABB. Windey Wind Generating Engineering and Nantong CASC Wanyuan Acciona secured two prominent booths in the lobby, where the opening ceremony took place. Both firms participated in this year's tendering for concession projects, with Windey awarded the 200 MW Danjinghe project and Acciona going home empty handed (Windpower Monthly, November 2006).
The most noticeable display was mounted by a delegation from Baoding, a small city about 140 kilometres to the south of Beijing. Baoding is home to the National New Energy and Energy Equipment Industrial Base and the North China Electric Power University, each being the only one of its kind in China. Led by the city mayor, Baoding staged a side event promoting its vision of becoming the Electricity Valley of China.