Chapter 2 - Government Policy
2.6. Feed in Tariff
國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
30
project, which was run by the China Energy Conservation and Environmental Protection Group, was partially subsidized by the BIPV program. (Greendiary, July 20th, 2010)
A more ambitious incentive program is the Golden Sun program launched in late 2009 until 2011 aiming at 300 KW or larger PV systems in both off grid rural projects as well as grid connected rooftops, BIPV and on grid large scale systems. The government plans to install more than 500 MW of subsidized projects by the end of the program at an estimated cost of RMB 3 billion. A 20 MW cap has been set for each province in order to assure even distribution. For on grid projects this program offers to subsidize 50% of the investment which includes power transmission and
distribution systems that connect to grid networks. Off grid projects will receive subsidization of 70%
with a one year completion time. (PVGroup) Together these two programs account for the huge leap in annual installed capacity which was 160 MW in 2009 and an incomprehensible 500 MW in 2010.
Although these two subsidy programs are indeed a concrete form of direct policy the Chinese PV market remains immature and full of challenges. With the current 2010 system cost the national subsidy offered by the program is not enough to ensure a reasonable return on investment. In 2006 an on grid system cost was estimated at RMB 50,000 per KW. This includes feasibility studies and project design, parts, transportation, installation, testing taxes and other fees. The smallest on grid project eligible for government subsidies is 300 KW which is a total of RMB 15 million. The estimated PV electricity price for these scale of projects in 2006 ranged at 3.7-5.5 (Yuan/KW) with the national average electricity tariff being 0.31 (Yuan/KW). (CREIA, 2007)
With these high costs the national subsidy programs do not ensure a reasonable profit on PV projects for developers thus forcing them to rely on additional subsidies from regional and local governments. Currently, the only province which has announced a detailed subsidy scheme is Jiangsu, the manufacturing hub of China‟s PV industry. Its program is expected to support solar power manufacturers that are already established in Jiangsu and serve as a boost to the development of the entire market, with 400 MW of installed capacity expected by 2011. (SCTBR, 2009)
2.6. Feed in Tariff
More provinces have started working on direct subsidy plans that will reflect the local government‟s needs and capabilities. However, a series of routines in the form of centralized framework of
‧
國立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
31
standards and regulations are still missing. As a result local governments who lack endogenous selection factors (industry and other solar related institutions) tend to avoid Selecting PV as a future strategic investment. Lock-In is strongly felt in this situation as it takes the form of the gap between PV electricity and fossil generated tariffs, as shown above.
China is not expected however to complete its green transition on its own. Countries in Europe have been promoting alternative sources of energy for well over 30 years and best practices can be
copied and implemented. The evolutionary framework refers to the adaptation of these best
practices as „imitation‟, a process which fertilizes not only the Selection concept but also Innovation.
In terms of Bounded Rationality, the implementation of a Feed in Tariff is the most anticipated stage of the PV transitional development.
An FID offers a fixed price for electricity generation from renewable energy which is guaranteed for a long time. A premium price is paid to electricity generators by the national grid operator the power plant is connected to. The purpose of this mechanism is to encourage the adoption of renewable technology and accelerate its move toward grid parity. FID has been introduced to China‟s wind energy sector in 2009 which spurred hope for PV investors, however till date a national policy hadn‟t been implemented.
Many obstacles lie in the path for FID implementation. As shown in figure 2.5 there are several price lines for the PV market according to the amount of radiation in different regions of the
country. Western provinces such as Qinghai, Tibet and Xinjiang enjoy higher rates of radiation with more annual hours of sunshine which contributes to their system efficiency. Prices have declined considerably in the past 5 years and the average cost of solar power in 2010 was estimated at 2.95 Yuan/KW for residential use and 2.22 Yuan/KW for commercial use. (Rigter and Vidican, 2010) Price decline is associated with system efficiency and reduction in manufacturing costs, which is directly linked to innovation and technological advancements. According to several reports, China is expected to reach a price gap between PV and conventional energy that is similar to the one in developed countries by 2020. (Rigter and Vidican, 2010, CREIA, 2007) All of this assums though that its market will keep up with world PV manufacturing standards.
‧
Figure 2.5 Grid Connected PV and Conventional Electricity Estimated Cost 2006-2020 (Yuan/KW) Source: CREIA, 2007. China Solar PV Report 2007. Pg. 35. China Renewable Energy Industry Association,
Greenpeace, European PV Industry Association, WWF
Another element affecting grid parity is the regular electricity tariff. China‟s electricity prices are heavily subsidized by the state and are considered to be very low by international standards. Prices increase rate is estimated at annual 3%. (CREIA, 2007) Should the government decide to increase rates by annually 6%, 80% of all commercial and residential electricity generation could potentially become eligible to be replaced with small scale PV by 2020. (Rigter and Vidican) This is however not likely as such a decision is expected to have an adverse effect on the broader economy. With no electricity price evolution expected in the near future and fossil fuel generated electricity price likely to remain at its current rate, grid parity will only start to be achieved at 2030.
Another method for quantifying the price gap between PV and other technologies is the Levelised Cost of Electricity (LCOE). According to the EPIA, Solar PV LCOE can reach between 15.3 and 16.5 €cts/kWh. This estimate is low enough to allow PV to compete with diesel fuelled peak power prices which is higher than 16 €cts/kWh but still not close to gas fired peak power cost which is around 10 €cts/kWh. Currently PV is assumed to be able to free some hydro capacity during peak hours but is currently not used as a peak hour energy source. According to estimations, PV has the potential of reaching 5-12 €cts/kWh in China which will enable it to become more competitive than gas or oil fuelled peak power plants. (EPIA, 2010)
An experimental project for a 10 MW PV station in Dunhuang, Gansu province is expected to create a breakthrough concerning policy implementation. A tender in March 2009 have resulted
0
‧
國立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
33
with a joint venture between state run China Guangdong Nuclear Power Holding Corporation, Belgium Enfinity and a unit of private owned LDK (China) presenting the lowest bid. This project is expected to become the base for setting future feed in tariffs for PV in the future. (Kan, 2010) A FID profits trading mechanism has also been introduced to assure maximum utilization of the incentive packages. Inspired by global emission trading schemes this mechanism allows the trading of surcharges between provinces. Collected renewable energy surcharges are considered as revenue which belongs to the power transmission companies. However some provinces exceed the extent under which surcharges cover their excessive cost of renewable energy purchase. This purchasing cost, which cannot be covered can be sold in the form of credit to other provinces which have unused surcharge income. (Kan, 2010)
The REL has established a renewable energy development fund which provides electric power transmission companies with subsidies for purchasing renewable electricity. This way companies that are in the fund raising stage can more easily apply for funds. The main advantage as mentioned above is that this mechanism enhances the purchase of all renewable energy based electricity. This is an encouraging step which shows that the policy environment promoting PV electricity Selection is improving, through the usage of imitation.
The government however has a good reason for being hesitant in applying FID. As Rigter and Vidican (2010) have shown, technology advancements are causing cost reductions each year. A FID initiated at the end of 2011 is expected to be 29% cheaper than a similar program initiated in 2010.
A few years delay might further halt market development but makes financial sense today. When issued, the program will need to set different tariffs to each region in accordance with their radiation utilization potential and the construction costs. The program will also need to include a digression rate for the FIT price in order to match future technological developments.
Currently, developers have to haggle over government fiscal support on the one hand and
unenthusiastic grid operators on the other. Although the REL states that grid operators are required to purchase all renewable energy offered the case is not always such. As grid companies are
reluctant to absorb the high cost of PV, completed projects find it difficult acquiring grid connection permits. With the state forbidding grid companies from raising electricity prices the prevailing Lock-In it expected to last.
Diversity is growing in China‟s domestic PV market as the rural off grid sector‟s portion has decreased since the new incentive programs have been set in 2009. Expected projects until 2012 show a 54.6% share of the total 2009-2012 accumulated PV market. (CTCREP, 2009) China has
‧
國立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
34
shown in the last couple of years market patterns that are beginning to resemble models found in developed countries.
The case is not so when it comes to developers involved in the market. The Dunhuang project has offered 1.09 Yuan/KW as its Power Purchase Agreement (PPA) (kan, 2010) which is significantly lower than the optimal 3.89 Yuan/KW introduced by some researchers (Rigter and Vidican, 2010).
Most companies from the private sector and from overseas either stayed away from the new bids or were unsuccessful as they were not prepared to go under or near the 1 Yuan line in order to
penetrate the market.
This leaves a space which is filled by state owned companies. Such companies are more daring and loose in terms of project financing and biding as they have a long security net. The domestic
Chinese market is still very small and is still waiting for a string public drive to shake it, however at the moment there is a clear bias towards China‟s big domestic manufacturers with a focus on the state owned ones. In order to further promote local industry a cap of 25% of project financing sourced from foreign capital has been set which guarantees continuity in market hegemony in the near future.
A second round of concession tenders of PV projects is underway since mid 2010 following the 2009 Dunhuang concession. These projects spread over six provinces with a total installed capacity of 260 MW. As tendering price is expected to be even lower than the first round, previous gained experience will play an important guiding factor for the future of the market. (Ma, 2011)
2.7. Connection to the Grid
Another reason for the central government to keep the PV energy market under low fire these coming years is that its domestic grid isn‟t yet ready to accommodate the fast growing number of renewable resources. A quick look at the wind sector shows that between 30% and 50% of installed wind power capacity is not being extracted into the grid and is simply wasted. Enterprises are still reluctant to build grids and connect wind power plants to the main grid network, even though they are required to do so by the REL. Some renewable power plants have had no choice but build grid connections by themselves or share the connection costs which is a violation that is not being dealt with. (Wang et al, 2009)
The inconsistency of wind and solar power makes it technologically difficult to capitalize on the full potential of renewable power in the current grid system. Conventional grid systems can
‧
國立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
35
accommodate up to 30% of intermittent energy. In this part of the evolutionary transition wind and PV energy only play a complementary role to conventional energy resources, and is expected to account for only 3% of china‟s total energy mix by 2020.
Expectations are that when PV or wind power plants work at high output coal fired power plants will reduce their output which will prevent overloading the grid and reduce pollution. Smart grid can better manage the balance between demand and supply and is expected to play a vital role in the efficiency of future systems. Also, large scale wind and PV projects like the 2 GW project planned in Ordos city requires significant adjustments to the grid which include smart grid technology. This aspect of the system relates to the concept of Co-evolution. As China further develops its PV market it needs to develop and invest in smart grid technology as well.
Smart grid is expected to become a big player in china‟s domestic market as a part of the 12th five year plan (2011-2015). The state grid, china‟s largest power distributer is planning to increase its investment in smart grid upgrades and installments to RMB 500 billion (USD 76 billion) with the 5 year plan whereas in the 11th five year plan it invested only RMB 20 billion. (China daily, 2011) Despite considerable efforts China‟s success in promoting the PV electricity sector has been partial.
Installments rate has gone significantly up due to direct government subsidies and incentive plans.
These measures are not a complete solution however as they do not remove Selection problems from effecting the market. The low cost of conventional energy production is expected to prevent grid parity from being reached in the near future. Since the introduction of a state FID scheme is not likely in the coming few years, the market is going to continue relying on direct incentives rather than on a more general and balanced mechanism. It does seem that if FID will be introduced down the road China will be able to gradually start shifting away from the low tariff of conventional power production which is the major Lock In it is trying to break away from.
The main finding from the market analysis presented is that the strength of the recent market development is mostly due to efforts in terms of Selection. The heavy reliance on subsidies and funds for PV installations promotion is a great promotional tool that helps raise awareness to the sector in the short term. This approach is not sustainable in the long term as a direct subsidy lowers developers‟ responsibility to efficient deployment spending. Current deployments are estimated to be more expensive than deployments in China are estimated to be. In short, a subsidy program such as the golden Sun program or the BIPV program does not set criteria for project efficiency, rather only for feasibility of project return of investment. China needs to introduce a reliable FID
mechanism to allow a more efficient development of the market and guarantee that only healthy feasible projects will be carried through.
‧
國立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
36
The excess reliance on Selection patterns affects the Diversity of the market with state owned enterprises dominating the bidding auctions. Considerable efforts have been made as well in order to create a balanced mechanism that controls state subsidies. This has been done with partial success as companies still report unwillingness to enter the market due to lack of certainty concerning permits approval and building regulations.
More regulations still need to be written concerning connection to grid in terms of financing and responsibilities. Grid connection is currently a bottle neck which will need to be dealt with in order for the market to grow. This problem is the result of Bounded Rationality in the sense that some parts of the system cannot position themselves in order to encourage a balanced Selection pattern. It seems as though the central government hasn‟t done enough concerning that aspect yet.
‧
國立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
37