Policy takes the wind out of investors' sails

By Sun Xiaohua (China Daily)
Updated: 2006-12-27 06:50

China needs to change from a wind-power auction pricing system to a feed-in tariff to protect investors in developing renewable energy, the chairman of the Global Wind Energy Council said at a recent conference in Beijing.

"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," Arthouros Zervo said.

The Inner Mongolia Autonomous Region has China's richest wind power resources, and more than 100 foreign investors showed interest in developing wind farms. But about half of the enterprises gave up the investment plan, and in the end, only about 10 foreign wind companies launched their projects, according to a report in the Chinese newspaper 21st Century Business Herald.

"Most of the enterprises withdrawing from Inner Mongolia have already completed the procedures but still chose to suspend the investment, including Adxia from Switzerland, EHN (Acciona Group) from Spain and the Golden State Group from the Untied States, " the report said.

High cost and a low electricity price are the major barriers for wind power development in China, a study report on the country's pricing policy by the Chinese Renewable Energy Industries Association, Greenpeace and the Global Wind Energy Council showed.

It is also said that the solution depended on either a reduction in cost or at least an increase in the electricity price to cover the existing cost. Wind power is a new and growing industry that needs support, but the current practice of bidding for contracts is in conflict with the aim.

"China is faced with a great opportunity for developing wind power, but the development relies heavily on an enabling pricing system," said Steve Sawyer, climate and energy policy adviser for Greenpeace International.

Investors in wind power development in China fear that their investment will vanish because they just experienced a roller-coaster ride in the wind power pricing policy amendment. They went from the expectation of a high price supported by preferential policies to a low price, which resulted from bidding.

Their dream began in January 2006, when the Renewable Energy Law took effect and provided a legal framework for the development of renewable energies in China.

The law stated that the price management department of the State Council, China's cabinet, would determine the feed-in-tariffs for renewable energy generation projects.

Insiders and investors in the wind power industry said the feed-in-tariff set by the government would be fixed at 0.25 yuan (3.2 US cents) per kilowatt-hour more than the coal-fired power price.

However, also in January, the National Development and Reform Commission (NDRC) released the implementation rules of the Renewable Energy Law, stating that bidding, which has been in effect since 2002, should determine the grid feed-in rates of wind-sourced power.

And it is also said that to encourage a domestic turbine manufacturing industry, more than half of the equipment in the first phase of construction must be made in China. And in the later phases, the domestic manufacturing percentage should be increased to 70.

"The main reason to continue the auction system is to lower the wind-power cost and protect domestic equipment producers and investors," said Shi Lishan, director of the Renewable Energy Division, Energy Bureau of the NDRC.

But this approach has drawn criticism from industry players who fear that the practice will lead to low prices that deny investors a reasonable profit. In fact, during bidding, some shockingly low bids have been made.

In 2004, bidding opened for the Huitengxile Wind Farm in Inner Mongolia. The bid of 0.38 yuan (4.8 US cents) per kilowatt-hour, made by Beijing International Power New Energy Co Ltd and Beijing International Power Development Co Ltd, shocked all the bidders because the basic cost of wind power seems to hover around 0.6 yuan (7.6 US cents) per kilowatt-hour, whereas the coal-fired power generation cost is 0.3 yuan (3.8 US cents) per kilowatt-hour.

"The bidding system is sensible in line with the market rule," said Li Junfeng, Chinese Renewable Energy Industries Association (CREIA) secretary-general. "But many wind power industry players did not make good use of the market rule."

Until September of this year, the NDRC organized four rounds of bidding for 11 wind-source power projects, each designed to have an installed capacity of more than 100 megawatts.

Most of the projects were awarded at bids of 0.4 yuan (5.1 US cents) to 0.5 yuan (6.4 US cents) per kilowatt-hour to the country's big five power companies, such as China Huaneng Group, China Guodian Corporation.

"The big five power companies are using the profit they made from coal-fired power generation to make up for losses in wind-power projects," Li said.

In addition, the big five power companies, which are registered as joint ventures, benefited from some preferential tax policies, thus helping them get refunds of 0.1 yuan (1.2 US cents) per kilowatt-hour, Li said.

From that perspective, the de facto price of their wind-power project is very reasonable. "But it is not fair to other investors, especially small, private ones," Li said.

Therefore, the call has been made to amend the policy to create a fair environment for all potential investors.

However, although many small investors have complained loudly about concession bidding in general, they have had opportunities on a smaller scale.

"They have licences from local governments to build wind-power projects at a reasonable price," Li said.

For example, in Inner Mongolia, the installed capacity of wind-power projects approved through bidding by the NDRC was 1,000 megawatts. But the total amount of wind-sourced electricity generation in the autonomous region is more than 4,000 megawatts.

"The rest of the projects are granted by local governments, accounting for a very big part," Li said. "The pricing mechanism will gradually be sensible. The government will make some adjustments if the regulation is not rational."

He did not specify how the mechanism would be adjusted, however.

A report released by CREIA, Greenpeace and Global Wind Energy Council (GWEC) in October called on the Chinese Government to change the auction system for wind-power pricing to a feed-in-tariff system, which means the price is regulated directly by the government. The practice is considered successful in Germany, making it the leading wind-power country in the world.

The report said that four bidding rounds have established the basis for a shift from the auction system to a fixed tariff. Under the feed-in-tariff system, China would be divided into high, medium and low categories according to how well the wind can be exploited for power purposes.

The price should be adjusted in a timely fashion, the report said, but it would always be higher than for coal-fired power.

China has taken great strides in wind-power development in recent years. By the end of 2005, it had built 61 wind farms with a capacity of 1,260 megawatts, ranking seventh on the list of the world's major wind players. Last year the Chinese Government raised its wind-power goal for 2020 from 20,000 to 30,000 megawatts, and the report said the goal can be reached earlier if appropriate policies are in place.

(China Daily 12/27/2006 page1)

Top China News  
Today's Top News  
Most Commented/Read Stories in 48 Hours