Josephine V. Yam

Clean Energy

Effective Government Policies Drive Wind Power Development in China

Josephine V. Yam, June 2010
This article will briefly discuss how China’s renewable energy policies have been very effective in creating a very robust wind power industry. Because the Chinese government has taken a central role in stimulating the country’s development of wind power, China is now a world leader in the global wind power industry.

Due to its phenomenal economic growth, coal-dominated energy structure and increasing exports (Lin & Sun, 2010), China is projected to overtake the United States to become the world’s largest energy consumer soon after 2010 (Wang, 2010). Because nearly 70% of China’s primary energy is derived from its vast coal reserves, China has overtaken the United States to become the world’s biggest CO2 emitter since 2006 (Lin & Sun, 2010). In its quest for long-term sustainable development, China has been confronted with severe policy challenges (Ding, Dai, & Zhao, 2008) caused by its rapid urbanization, industrialization and globalization against the backdrop of heightened concern for environmental protection and public health, the threat of energy security and global climate change (Ma, Li, Fu, Zhang, & Ni, 2009). These severe policy challenges have not only forced China to turn to clean renewable energy, which does not generate CO2 (Wang, 2010). They have also driven strong wind energy development in China as well (Zhao, Hu, & Zuo, 2009).

China possesses a rich resource of wind energy with great development potential because it is blessed with vast land mass and a long coastline. It is estimated that wind energy can be utilized in more than 75% of China such that its theoretical potential of wind power amounts to 700–1200 gigawatts (GW) (Wang, 2010).

In the 1980s, the Chinese government only provided vague policy support to wind power. In 2003, however, the government unleashed aggressive policy support for wind development through comprehensive renewable energy and wind power policies in order to capitalize on its abundant wind resources. These policies include the Wind Power Concession Program, the Renewable Energy Law and the 11th 5-year Renewable Energy Development Plan (Wang, 2010).

The Wind Power Concession Program provided that investors and developers of wind power projects of more than 50 MW are selected through bidding, with the goals of expanding the rate of wind development, improving the manufacturing capacity of domestically made parts, lowering power generation costs and reducing electricity prices (Wang, 2010).

The Renewable Energy Law enshrined the government’s commitment to developing renewable energy resources (Urban, Benders, & Moll, 2009) and played a crucial role of making China’s renewable energy policy gain an overarching framework (Wang, 2010). The law was designed to promote the development and utilization of renewable energy, improve the energy structure, diversify energy supplies, safeguard energy security, protect the environment, and realize the sustainable development of the economy and society (Wang, 2010). It set out a subsidized tariff structure for electricity generated from renewable energy, a compulsory grid connection mandate for renewable energy projects, and a rule that requires that utilities purchase all the renewable energy produced in their service area (Williams & Kahrl, 2008).

The 11th 5-year Renewable Energy Development Plan specified renewable energy development goals and priority areas for promotion between 2006 and 2010. Its objectives included closing down 50 GW of inefficient and small-capacity coal power plants and decreasing the share of energy produced from coal and oil (Urban et al., 2009). The goal of wind power installed capacity by 2010 was doubled up to 10 GW, compared with the 5 GW provided in previous renewable energy development plans (Wang, 2010).

Before China enacted policies of the nature mentioned above, its wind power industry developed very slowly. However, after they were in 2003, China’s wind power industry had suddenly experienced robust growth (Wang, 2010). In 2009, to cope with the impact of financial crisis, the Chinese government regarded the development of wind energy as a key economic growth point. China’s total installed capacity in 2010 is the second largest in the world, realizing the original plan of achieving the goal of 30 GW in 2020, a decade ahead of schedule. China has more than tripled its target for wind power capacity to 100 GW by 2020, making it the world’s fastest growing market for wind energy technology (Wang, 2010).

In order to determine how effective China’s renewable energy and wind power policies have been, Karl Mallon’s ten Features of Successful Renewable Markets is used as a framework for assessment (Mallon, 2006).

1. Transparency


The Chinese government’s renewable energy and wind energy policies have been visible, transparent and open to all players. They have been easy to understand and comprehensive enough to cover all the components required, thus making wind projects very attractive to private industry. They provided sufficient time frames to allow engagement from interested parties in other countries and sectors. For example, the success of the Wind Power Concession Program was evidenced by the government having dismantled the monopolies over electric power. This helped to attract investors from both China and abroad, which then encouraged competition. The concession agreement between government and project investors guarantees the power purchase agreement. Thus, market risk is reduced significantly, which in turn reduces the risk premium of the internal rate of return for wind power projects (Wang, 2010).

2. Well-defined objectives


The Chinese government has been unequivocal about its primordial objective of growing the renewable energy industry. Thus, it has taken particular policy measures to produce such outcome. For example, the central government has set a minimum percentage share of renewable energy with the generation output of large power companies. It has also launched the National Clean Development Mechanism (CDM) Project, which allows wind farm developers to sell Certified Emission Reduction Certificates (CERs) to developed countries under the terms of the Kyoto Protocol. Under this project, renewable energy has accounted for 70% of approved CDM projects in China, of which wind power ranks the first over other renewable energy technologies (Wang, 2010). To drive the localization of wind manufacturing, the government has waived import customs tariff on equipment and accessories. As a result, it has expanded the rate of development and improved the manufacturing capacity of domestically made parts not only meet the domestic demand, but also begin to supply the international market. These new policies have provided added impetus to the domestic production of increasingly large wind turbines (Wang, 2010).

3. Well-defined resources and technologies


The Chinese government’s renewable energy and wind energy policies are free of contradictory goals so that renewable technologies which are different in size and maturity are not in direct competition with each other. Recognizing its abundant wind resources as a key economic growth area, China has provided greater incentives to develop wind power such that total installed wind capacity in 2010 will be the second-largest in the world (Wang, 2010). This is juxtaposed against China’s cautious deployment of carbon capture and sequestration technologies, which are not as mature as wind power (Williams & Kahrl, 2008).

4. Appropriately applied incentives


The Chinese government’s wind energy programs have not been fine-tuned to holistically embrace the full spectrum of the wind power industry. For example, while its wind programs have supported the construction of installed wind capacity, they have not encouraged the actual generation of electricity from wind power (Williams & Kahrl, 2008). Consequently, the ability of China’s grid system to incorporate wind- generated electricity has become the main challenge faced by China. Among wind farms currently in operation, a great number have only limited access to the grid. The Wind Power Concession Program, the Renewable Energy Law as well as related laws and regulations have all articulated the policy that renewable energy should be given priority access to the grid. Yet this policy is not being undertaken due to the physical constraints of grid capacity. Without proper incentives, grid operators have little motivation to expand their services to match the rapid development of wind energy (Wang, 2010).

5. Adequacy


The Chinese government’s wind energy policies have not provided adequate leverage to private sector investments so that project investors consistently get a return on equity. For example, the pricing system of wind energy still needs to be improved. The profit for a wind project relies on the grid-connected price. A wind project currently depends on the support of the central government, regardless of how the price is initially decided. The current price for wind concession projects is too low, leading to many unprofitable projects. Low prices in turn encourage low manufacturing costs for components, which in turn lead to poor quality of manufactured goods. This will do great harm to the wind power industry in the long run (Junfeng, Jingli, Hongwen, Yanqin, & Pengfei, 2006).

6. Stability


The Chinese government’s renewable energy and wind energy policies have provided policy stability, a fundamental requirement of market certainty. This in turn has positively affected both the production price of wind energy and the development of manufacturing wind capacity. Yet, the policies have not provided the stability in respect of the relationship between wind power development and grid extension that ensures the safe operation of the grid and the reliable transmission of wind power. There have been no regulations on how to connect wind power into the grid. Management regulations and technical specifications need to be formulated in order to bring wind power into the grid planning system (Junfeng, Hu, Pengfei, Jingli, Lingjuan, Haiyan & Yanqin, 2007).

7. Contextual framework


The Chinese government’s renewable energy and wind energy policies have articulated an overarching national policy objective to guide all policy-making. However, policies and measures in this sphere at all levels of government have not been consistent and self-reinforcing. Particularly, incentive structures among central government agencies, provincial government agencies, and state-owned and private enterprises continue to be misaligned in China’s electricity sector. This misalignment results from two primary shortcomings in governance. First, as a result of China’s incomplete federalist system, central and local government interests frequently diverge, undermining implementation of central government policies. Second, economic and environmental regulations are still inadequate in scope and ineffective in implementation. Admittedly, building the legal framework in China for central government–province collaboration and regulatory institutions will likely require decades. Nevertheless, in the near term, the Chinese central government can create more effective incentives for provinces to align themselves with the central government’s environmental objectives. This includes a better design of economic incentives for improving environmental performance and the provision of encouragement and resources for the development of independent provincial regulation (Williams & Kahrl, 2008).

8. Energy market reform


The Chinese government’s renewable energy and wind energy policies have not provided enough certification or licensing requirements appropriate for wind power development. While the Renewable Energy Law encourages capacity building by establishing testing and certification for turbines and wind farms, China has not yet accelerated the establishment of complete testing and certification systems of wind power equipment. This lack of testing and certification systems has greatly restrained the localization of China’s wind power manufacturing (Zhao et al., 2009).

9. Land-use planning reform


The Chinese government’s renewable energy and wind energy policies have provided location-specific wind resource maps to provide combined technical, environmental and social impact information for informed decision-making by all stakeholders. Recognizing that the optimal means of wind power integration depends on available local energy resources and local energy needs (Justus, 2005), China has provided such maps to address the continuing location problem of its wind resources. Particularly, the problem lies in that most of its regions having abundant wind resources are located far from the regions with the highest electricity demand (Piwko, Miller, Gasca, Yuan, Dai, & Lyons, 2005), which in turn has exacerbated wind transport and storage issues (Urban et al., 2009).

10. Equalizing community risk and cost-benefit distribution


The Chinese government’s renewable energy and wind energy policies provide incentives for local employment content and local technological advancement. Due to market regulation in China that favours locally made products, foreign players that wish to enter China need to work with local Chinese companies. This in turn promotes technology transfer amongst Chinese companies and builds local expertise and local employment in China (Alliance, 2009).

In conclusion, China’s renewable energy policies have been very effective in creating a very robust wind power industry in China. Admittedly, there are still several areas in the electricity sector and the wind power sector that need to be fixed to allow for the continued trajectory growth of wind power in China. Nevertheless, China has demonstrated that its strong political will to enact and execute comprehensive wind energy policies has served as a powerful catalyst in fully developing the wind power industry. It is no wonder then that China has become one of the largest wind energy producers in the world (Zhao et al., 2009) and the world’s fastest growing market for wind energy technology (Wang, 2010).

References


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Josephine V. Yam
Josephine is CEO & Co-Founder of B3 Canada, a mission-driven organization in Canada dedicated to building breakthrough boards through innovative board matching services for businesses, professionals and nonprofits.

Josephine is a highly accomplished lawyer-social entrepreneur with significant years of professional legal, policy, leadership and entrepreneurial experiences in the private, public and nonprofit sectors in Canada and internationally. She has been admitted to practice law in New York (USA), Alberta (Canada), Ontario (Canada) and the Philippines. She has also been interviewed on international television such as CNN and CNBC and featured in the international news magazine Newsweek.

Josephine recently graduated from Stanford University's Executive Program for Non-Profit Leaders. She also completed her Master of Laws (LLM) degree at the University of Calgary, Faculty of Law. Complimenting her advanced education at Harvard Law School and the University of Toronto, Josephine currently serves as one of the Energy Futures Lab Fellows of The Natural Step Canada.

Before founding B3 Canada, Josephine was the Executive Director of the Environmental Law Centre of Alberta and Lead Advisor for Corporate Consulting at the Pembina Institute. As Board Member of Immigrant Services Calgary, a large registered charity, Josephine served as Corporate Secretary, member of the Executive Committee, Board Development & Nominating Committee, Audit & Finance Committee and CEO Evaluation Committee. In the public sector, Josephine served as Senior Legal Counsel with the Government of Alberta’s Ministry of Justice and Ministry of Energy. In the private sector, Josephine worked with the international law firm Baker & McKenzie in its Hong Kong, Manila and Toronto offices, the Asian Development Bank and Procter & Gamble.

With her significant legal and senior management experiences in the private, public and nonprofit sectors in Canada and internationally, Josephine deeply understands that cross-sector collaboration in social innovation is crucial to achieving positive change in the world. This is what drives her deep commitment to advance B3 Canada’s mission of strengthening the board leadership capacity of Canada’s nonprofit sector as a force for good in society.

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