China

China

China Special - Market overview: Growth continues but so do challenges

The drivers for China's wind market remain strong, leading to another record year for new capacity additions, but the market is overheating and there are major challenges ahead.

In 2008, China was the world's second-largest market for wind energy development, adding 6.3 GW of new capacity and thereby doubling its installed capacity for the fourth year in a row. The country now ranks number four in terms of cumulative installed wind capacity and is expected to overtake Germany and Spain, and run neck to neck with the US in the coming years.

In response to the financial and economic crisis, the Chinese government put great emphasis on the development of renewable energy. The development of wind energy addresses two of the main challenges China is facing: meeting increasing energy demand to fuel its rapidly growing economy, while at the same time reducing air pollution and curbing carbon emissions. The Chinese government has shown that it has clearly understood its responsibility in contributing to the global fight against climate change. In addition to the support for renewables, the government has set itself a target of decreasing China's energy intensity by 20% between 2006 and 2010.

In the meantime, this year marks China's first foray into offshore wind development (see pages 16-18). Construction on the first offshore wind farm in Asia began in May 2009. The project, located off Shanghai, will eventually have a total capacity of 100 MW. Expected to be commissioned before the 2010 Shanghai Expo, it will consist of 34, 3 MW wind turbines, manufactured by Sinovel, a domestic manufacturer that only entered the market in 2006. Sinovel is now the largest wind turbine producer in China, and number seven in the world.

The boom of wind energy in China continues in 2009, with 5 GW of new capacity added in the first half of the year. Although there have been rumours, the government has still not officially released its plan to update its 2010 and 2020 wind targets to 30 GW and 100 GW, respectively. It seems increasingly possible, however, that the government will actually target 150 GW by 2020.

GWEC is optimistic that China's wind energy development could go even further. In the Global Wind Energy Outlook 2008, released last October, the advanced scenario projected a total installed capacity of 200 GW by 2020. This could help save up to 360 million tonnes of carbon dioxide (CO2) emissions every year in China.

This does not mean the country's soaring development is all plain sailing, however, and some significant challenges arise from the wind energy boom. The lack of adequate grid infrastructure (see page 8) and the danger of "overheating" in the manufacturing market (see page 11), if not tackled effectively, will impede the healthy growth of the industry in long term.

Growth drivers

China's wind energy boom started back in 2004, when a draft of the country's Renewable Energy Law was being discussed. It finally came into effect in 2006. Further regulations, elaborations of the original energy law, were enacted in subsequent years. For instance, in 2007, the Medium and Long Term Development Plan for Renewable Energy was introduced, stipulating a mandatory market share (MMS) of electricity from renewables. By 2010 and 2020, electricity production from non-hydro renewable sources should account for 1% and 3%, respectively, of total electricity in the grid. The plan also requires that larger power producers must produce 3% of their electricity from non-hydro renewable sources by 2010, rising to 8% by 2020.

All these policies gave great impetus to boost the development of the industry. This was further advanced by the release of the Wind Base initiative in 2008, designed to fulfill the 2020 target by establishing seven huge wind projects of over 10 GW each (see pages 20-21).

The Chinese government has given strong emphasis to the development of a domestic wind power manufacturing base - the sector has experienced unparalleled growth in the last few years. The whole supply chain is becoming increasingly comprehensive, with most parts and components now being produced domestically by a variety of manufacturers. In addition, there is a huge influx of investors into turbine manufacturing. By the end of 2008, more than 70 manufacturers were operating in the Chinese market, 40 of which had only entered the market that year. With more new entrants still preparing to enter the business, the government is now trying to slow down the overheated development of the manufacturing market. The state council recently released a policy aimed at controlling the wind manufacturing business by tightening rules for new market entrants, such as stricter rules for market access, reinforced environmental supervision and more rigid land-use permissions. This should not be taken as a signal that the government is attempting to control the country's wind energy development. It is merely trying to control the overheated manufacturing business.

Competition

Experts predict increasing market integration in the future years. It is expected that the top three domestic manufacturers, Sinovel, Goldwind and Dongfang, will continue to dominate the market. Other manufacturers, especially the 50-plus companies whose products have not yet hit the market, will have to face considerable competition and a tough fight for market share. As a result, some players are starting to look at export markets, such as Asia and Latin America (see page 14).

Another issue is the increasingly intensified competition between the domestic brands and foreign invested companies. The top four established domestic brands (Sinovel, Goldwind, Dongfang and Windey) together have an annual production capacity of over 10 GW, which is almost the size of the annual market. The foreign invested companies, such as Vestas, GE, Gamesa, Suzlon and Nordex are facing increasing competition from their domestic counterparts (see pages 12-13).

Many foreign companies started their operations in China in the early 2000s - most of them with local manufacturing facilities, expanding more recently to deal with the country's 70% local content requirement. However, with the take-off of the domestic industry, it has become increasingly difficult for them to hold onto market share. The market share of international brands has dropped continuously, from 75% in 2004 to just 24% in 2008. The 2009 equipment tendering process saw all 5.25 GW go to seven domestic companies. Foreign companies have blamed the government for setting up unfair tendering rules, but it seems that the real problem arises from the government's control of the allocation of the developing rights of wind farms, which are currently highly concentrated with state-owned enterprises (SOEs).

With SOEs dominating the project development business for wind, turbine efficiency and long-term return on investment are not of primary concern. Investment decisions tend to be based on the initial capital outlay for a project (the cost of the equipment) rather than the long-term costs of electricity production, giving domestic manufacturers a clear advantage on price, regardless of how well they perform in the long run.

An added problem is the low tariffs that wind energy projects receive, even after the introduction of a new feed-in tariff structure in July 2009, which stipulates four types of tariff levels, associated with four different wind resource regions (see page 9). The tariffs range from CNY 0.51/kWh ($0.075/kWh) to CNY 0.61/kWh ($0.089/kWh). Although this is a positive development, the tariff level still needs to be raised to encourage more diversified investors and allow developers to be able to choose turbines based on their long-term economic viability.

The take-off of China's wind industry coincides with the start of the clean development mechanism (CDM) after the Kyoto Protocol came into force in 2005. By September 2009, there were about 387 wind projects in the CDM pipeline, representing 21.6 GW of capacity.

For wind projects that are registered as CDM projects, the revenue provided by certified emissions reductions (CERs) accounts for 10-15% of a project's revenue. This has become one of the key factors for making wind projects economically attractive for investors. Over 90% of China's wind projects are, or are applying to be, registered CDM projects. On average, a 1 MW wind turbine can generate around 2000 CERs annually, generating an income of EUR20,000, assuming a price of EUR10 for each tonne of CO2.

With the recent boom of the wind industry, the country is now increasingly facing pressure from the CDM Executive Board (EB) on registration of CDM projects, particularly on the issue of additionality. Several months ago, a number of projects were put on hold because of the knock-down factors used to estimate actual energy production as compared with theoretical production. This is common practice in the industry, but it is usually done on a proprietary, commercial basis. However, it was interpreted by the EB as an attempt to artificially lower the projected income from a project to allow it to pass the additionality test. This problem seems nearly solved once it was demonstrated that this is consistent with international practice. At the same time, however, another group of projects is facing problems stemming from the Chinese tariff system, with the EB suspecting that the Chinese government had intentionally lowered the tariff for wind projects in order to gain CDM support.

Post-2012 climate

These recent questions into the additionality of Chinese CDM wind projects raise the issue of whether wind energy in China will still be eligible for CDM credits in a post-2012 agreement. Given the fact that wind energy is one of the most prominent technologies to offer carbon emissions reductions in the time frame up to 2020, cutting out the industry's access to the global carbon markets seems ridiculous, and it is crucial to find a viable way forward. This issue is also part of the discussion in the ongoing climate negotiations.

One possible way forward on this issue could be a sectoral crediting mechanism, in which a country's entire electricity sector could be treated as one CDM project in order to generate credits. This system would go beyond the current project-based mechanism to scale up the finance for emission reduction, and would do away with the whole question of additionality on a project basis.

The sectoral crediting mechanism proposals still have some technical issues to be worked out before they can be put into practice. Also, new, expanded market mechanisms of course only make sense if there is much greater demand in the market for carbon credits, which can only be created by aggressive emission reduction targets in industrialised countries. However, the EU, the US and Australia all support the idea and it is already embedded in the negotiation document under discussion.

Another option that would facilitate expanded development of wind power in developing countries into the existing CDM mechanism would be the creation of a positive list. Such a list would give categories of projects, such as wind projects, automatic eligibility. This option is also currently being discussed at climate negotiations.

Grid struggles

Other issues are also threatening the development of wind power in China. In a market that has seen its installed capacity double every year for the past four years, an adequate grid infrastructure is key. In China, this has become a significant problem, with the electricity grid expansion struggling to keep up with the rapidly increasing input from wind farms. As a result, there is currently several months' delay for a wind turbine to be connected to the grid.

China's stated target is to produce 1% and 3% of all its electricity from renewable sources (excluding large hydropower plants) by 2010 and 2020, respectively. While grid companies are obliged to accommodate this target, it is yet unclear if there will be penalties for failure to do so. In addition, grid companies are not given enough incentives to provide services to renewable energy generators, and they continue to be hostile to the development of renewable energy due to concerns over grid stability. Capacity building in the area of grid management and integration will be key for the continued growth of wind and, while the Chinese government is increasingly aware of this issue, advances in this area to date are slow.

In August 2009, the national People's Congress considered a draft amendment to the renewable energy law, which would require grid companies to purchase a minimum quantity of electricity from renewable energy sources every year. This is an attempt to clarify the question of their obligations and, if the amount is set correctly, grid companies could be held accountable for sourcing a minimum amount of electricity from renewable sources. The danger is that this amount will be set too low, which would effectively act as an upper ceiling for the amount of renewable electricity that could be fed into the grid.

Despite these issues, the prospects for wind energy development in China are very positive. The government is set on continuing the massive expansion of wind energy and investments are expected to reach CNY 90 billion ($13.18 billion) each year for the next five years. With the introduction of the seven 10 GW Wind Base projects, the country's wind development is expected to continue its unprecedented boom in the coming years.

By invitation LIMING QIAO Policy Director, Global Wind Energy Association.

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