China Sees New Energy Source Blowing in the Wind


Date: 05-03-2006

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HONOLULU (May 3) - China's Premier Wen Jiabao recently presided over a national energy task force meeting in Beijing. The purpose? To deliberate a new medium and long-term renewable energy plan. The outcome? China will look to alternative energy sources to meet up to 15 percent of the nation's energy needs by the year 2020. Alternative sources now account for only about 7 percent of China's energy supply.

China currently is heavily dependent on dirty-burning coal and an increasingly large amount of imported oil for much of its energy consumption. Something Wen and other leaders want to change. The recent Beijing meeting reinforced that by setting a revised upward target for energy generation from wind power. China hopes to have an installed capacity of 30 gigawatts (one gigawatt equals one million kilowatts) by 2020, a figure larger than the current installed power capacity of either Indonesia or Thailand.

But, energy and environmental economist ZhongXiang Zhang, a senior fellow at the East-West Center in Honolulu, points out "China's record of hitting its energy targets has been mixed." Zhang notes, "In 1995, the then Ministry of Electric Power set a target of installed wind power capacity of 1 gigawatt by the year 2000." That did not come about until 5 years after the targeted date. "Now, this revised goal for wind power," according to Zhang, "will require adding 2 gigawatts per year." Something the EWC senior fellow is cautiously optimistic Beijing will be able to achieve.

Zhang says China has embarked on a series of new policies favorable to the further development of wind power. "Beijing has cut by half the value added tax on wind power, has lowered the rate of duty for domestic investment in wind power, and has abolished duty on the importation of equipment for renewable energy technologies undertaken by joint venture companies." He sees the policies as helpful, but "not enough to ensure that China will meet its ambitious target." Zhang believes to meet its new goals, "China will have to take a different policy approach and implement it aggressively."

He says China is implementing a surprising, if not aggressive, policy instrument to support wind power generation. "Wind power industry and policy analysts in China recommended the government in Beijing follow the German model, one that has made Germany the world leader in installed capacity." The Germans adopted a feed-in tariff. That obliges the utilities to purchase electricity from renewable energy sources at a fixed rate. "But to the surprise of many who expected a 'coal-fired power indexed tariff plus subsidy' as the tariff model, China decided on a 'bidding' mechanism to determine the proposed wind power grid tariff." Simply put, bidding to determine the price at which a unit of electricity will be provided to the grid.

"The reason for not choosing the expected model," Zhang notes, "is the Beijing government's belief that under that model, the wind power tariff in the southeast coastal areas would be about double those in the western regions of the country where much of the wind resources are located. And, that would make it unlikely that investors would be interested in the western regions where their return would be much smaller."

Looking back, perhaps Beijing's decision was not that surprising. Zhang points out, "Since 2003, the Chinese government has adopted a bidding-based wind concession program as its primary strategy to promote wind power development. The government-run program auctions off wind power development rights that include a guaranteed tariff, as well as concession operation agreements. The program also lays out the specific criteria for the selection of investors." Zhang notes, "To date, there have been three rounds of bidding for wind concessions, and the fourth round is ongoing."

Although the bidding-based program has introduced competition to both the construction and management of wind farms, Zhang says it is not without its problems. "One is that investors underbid to win a project. For example, the winner in the first round of bidding offered the unprecedented grid tariff of 390 Yuan per 1,000 KWh, whereas the other offers were in the range of 600 to 700 Yuan."

Another problem, according to Zhang, is that the grid tariff is not known until after the bidding, "something that makes it difficult for firms to secure bank loans as the banks cannot assess the rate of return on the project without knowing the tariff."

The uncertainty over return on investment is probably the larger problem. Zhang says, "Wind power is still in its initial stage of development in China, and to ensure rapid development over the short-term the rate of return on wind power generation will have to be more attractive, higher, than that now being realized in conventional coal-fired power generation. That is not certain under the current bidding-based mechanism." Without the certainty of a good rate of return, Zhang is doubtful a robust and sizeable wind power industry can be sustained in China.

Apparently, Beijing is aware of the drawbacks to its present bidding system and is moving to do something about them. "In the first round of bidding," Zhang says, "the tariff was the only criteria determining the winner. Those who offered the lowest grid tariff won. But, the weight of grid tariff in the overall bidding decision has been declining. It accounted for only 40 percent by the third round last year, and only 30 percent in this current fourth round of bidding." The government hopes these adjustments, according to Zhang, will prevent irrational bidding that could endanger overall project quality.

But, simply lowering the weight of the grid tariff in the bidding process is not the answer. Zhang says, "That will simply increase the transaction costs." He believes a mechanism that would hold bidders accountable for the project is one way to lower transaction costs. "Without holding bidders accountable, the costs would rise due to the need for more site visits to carefully examine the bidder's credentials." Zhang believes a sizeable and sustainable wind power industry will not come about until the Chinese government can come up with a better mechanism to develop the sites and ensure a reasonable rate of return on wind power investment.

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ZhongXiang Zhang is a senior fellow in energy and environmental economics at the East-West Center in Honolulu. Dr. Zhang can be reached at (808) 944-7265 or via email at zhangz@EastWestCenter.org.

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