Analysis: China looks at subsidy 'adjustment'

CHINA: Last month, China's National Development & Reform Commission (NDRC), the government agency responsible for the planning and regulation of China's national economy, announced plans to "adjust" the wind power feed-in tariff (FIT) rates "at an appropriate time" this year.

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The NDRC proposed continuous price reforms in a draft plan submitted to the ongoing second session of the National People's Congress convened in Beijing.

As well as reform of wind power rates, the plan includes measures on the pricing of coal-fired electricity, pump-storage hydroelectricity, non-household natural gas, and tiered cost of household water and gas.

Qin Haiyan, secretary general of the Chinese Wind Energy Association (CWEA), was quick to express concerns over the NDRC plan. He told the media that the reform should make "price cuts" as the ultimate goal.

Wind equipment costs have fallen considerably in recent years, thanks largely to the advancement of technology. So the thinking is that government subsidies to wind electricity should decrease accordingly. But there are still a host of factors that hamper price reduction, including curtailment.

In the past, years of unscrupulous development with little consideration of local electricity demands has stopped wind farm operators from generating electricity at full capacity. The curtailment problem affected almost all wind farms across the country, but was most serious in the northern China.

Things have started to improve. The latest CWEA statistics show that the average curtailment rate dropped six percentage points to 11% in 2013 compared with 2012.

Rising costs

Developers have also suffer from tight cash flow due to delayed distribution of government funding for renewable energy. The European debt crisis and the harsh global economic situations have reduced wind project's incomes from the UN's Clean Development Mechanism. Meanwhile, costs of land use, building and labour for wind farms has kept growing. Company expenses on payments relating to water conservation, environmental assessment, acceptance check and additional resources fee have also been on the rise.

Also, maintenance costs for operating wind farms is going to increase significantly once projects come out their warranty period expires. As most installations in China have not reached this point yet, it is too early to make an accurate assessment of the real cost and profit of these wind projects.

All these factors cast doubt over the price adjustment plan. And while equipment prices have dropped globally, in China some established manufacturers actually increased prices last year, as reflected in project tendering, because developers realised the importance of quality equipment and service. Although this is a healthy trend for the industry, it is likely to drive up the cost as well.

CWEA's Qin said a cut in wind prices would cause a tense capital chain for the developer and ruin the business, which is already hovering over the dividing line of profit- and loss-making. This in turn would badly affect the equipment manufacturer relying on contracts.

The ultimate goal of government subsidy is to make the wind electricity competitive against conventional power sources. The state authority has planned to achieve this by 2020.

As electricity prices directly affect a power company's revenue, reducing the price levels too early would have a negative impact on the investor's enthusiasm in developing wind power, Qin warned.


Now that smog is becoming an increasingly urgent problem in China, the government is serious about developing new clean energies. The shares for non-fossil energies in the national total are set at 11.4% for 2015 and 15% for 2020. Targets for wind power are 100GW or more of installed capacity and 190TWh of annual electricity output in 2015, and 200GW and 380TWh in 2020.

"The government policies should be aligned," Qin said, "The time for reducing wind power prices as a whole hasn't come yet. The price change should be aimed at achieving a more reasonable pricing system to support wind development."

At the present time, the government should concentrate on creating an appropriate pricing scheme for offshore wind and finetune the wind power benchmark prices for regions with different wind resources, he added.

According to Qin, in order to ensure a steady income for wind projects, curtailment must be reduced, the payment of additional renewable energy funding be accelerated, banks should be encouraged to provide more loans to wind projects, and arbitrary collection of fees by local governments be eliminated. These are pre-conditions for re-assessing and adjusting wind electricity prices, he said.

Sufficient studies should be conducted on wind electricity costs. Different wind projects under the same pricing system may have very different abilities to make a profit. It is necessary to calculate the wind energy cost on the scientific basis, taking into consideration multiple factors such as wind resources, project investment and grid conditions.

The NDRC issued a pricing standard for feeding wind electricity into the grid in July 2009. Dividing the country into four regions with different wind resources, it put forward four benchmark prices ranging from CNY 0.51/kWh to CNY 0.61/kWh ($0.083-0.099/kWh).

More wind projects now go to the central and eastern regions, where wind resources are often inferior to those in the northern parts, but electricity price levels are higher. Qin Haiyan suggested that the government provide more subsidies to these areas.

It is not easy to devise a set of systematic, refined pricing standards for wind power. "We should not adjust electricity prices simply because we intend to do so," Qin said. "At the present stage, our wind industry still needs strong policy support. Blindly putting down prices is against the initial aim of industry development. It will achieve the contrary, causing a gross waste of social resources," Qin said.

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