Analysis: China's wind industry begins to adapt to new FIT

CHINA: China's National Development and Reform Commission (NDRC), a central government department charged with the overall planning of the country's economic development, has confirmed the reduction of the onshore wind feed-in-tariff (FIT).

Turbine being installed in northern China, an area the government feels has been overdeveloped
Turbine being installed in northern China, an area the government feels has been overdeveloped
The cuts will affect the four wind regions classified by the first FIT scheme introduced in 2009. Rates will drop by CNY 0.02 ($0.003) for type 1, type 2 and type 3 wind regions, reducing electricity prices to CNY 0.49 ($0.078), CNY 0.52 and CNY 0.56 per kilowatt hour.

The CNY 0.61/kWh FIT will be unchanged in the type 4 region, which has low wind resources.

But the ruling has plenty of critics, not least the China Wind Energy Association (CWEA), which described it as unpredicable.

Although the CNY 0.02 cut is better than many had feared, there has been concern about a rush to develop projects in China caused by the impending changes. The policy gives developers of approved projects one year to complete their wind farms. This is a relatively comfortable period compared with the draft plan's 1 July 2015 deadline for all approved projects.

The new policy will not prevent a rush on installations, but it will help. And as more than 80% of the country's wind developers are state-owned enterprises, there is a strong likelihood companies will have been warned in advance about the changes.

Compared with the CNY 0.02-0.04/kWh proposed in the draft plan, the current cut margin is less drastic. However, according to (CWEA), a cutting the FIT by CNY 0.02 will lower the internal rate of return for a typical project to 9.21% and its first-decade average rate of return on net assets to 5.79%. The last figure is below the bank benchmark interest rate, causing some projects to lose investment value.

Projects in areas with good wind resources still have a chance of making a small profit, provided they are  managed well. But projects must first gain the company's internal approval, which is becoming increasingly difficult for wind projects with some big group companies, an industry observer said.


In the long run, projects in the regions with the bigger cuts will be less attractive to investors. But this is not a problem for the state decision makers who have been concerned about overdevelopment in the windy but less populous north. Although boasting good wind resources, northern China has normally low load demand. Rapid development of wind power in the past years has greatly outpaced the local grid advancement. Curtailments have plagued wind facilities in these regions, with one extreme case in Inner Mongolia reporting a 55% curtailment rate for 2014.

The National Energy Administration (NEA) issued a notice in early January calling for submission of applications for wind projects to be included in the fifth list of NEA approval. Projects located in the northern regions would not be considered, the notice said.

While the government's reduction of the onshore wind FIT is based on the notion that costs have fallen and government subsidies are expensive, the industry argues that while manufacturing costs are lower,  other costs such as land use, curtailments and labour have gone up.

The aim of the FIT reduction is to ultimately put wind power on the same price level as coal-fired electricity, a goal NEA has set for 2020. But CWEA believes this is is unfair. If exterior costs such as environmental pollution and death tolls of coal mining are included, fossil-sourced power is as expensive as wind power, if not more expensive.

And the government's wind subsidies are small compared with coal. Statistics show in 2013 wind subsidies totalled CNY 20 billion ($3 billion), while subsidies provided to coal-fired generators exceeded CNY 113.1 billion.

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