Tuesday, February 2, 2010

China Renews Its Commitment to Renewable Energy

Discussion of the Renewable Energy Law and its implementation. Two significant changes to the original law.

Blog post: http://switchboard.nrdc.org/blogs/bfinamore/china_renews_its_commitment_to.html

Some highlights:

1. Changes to the Mandatory Connection Policy

One of the most significant aspects of the Renewable Energy Law when it was originally passed was the introduction of the “Mandatory Connection” policy, which essentially required grid companies to connect and purchase all renewable energy generated that could be fed into the grid. After four years of experience with the Mandatory Connection policy, however, it became clear that not all grid companies were complying with their obligations to purchase all renewable power and connect it to the grid.

While China has rapidly increased its installed capacity of renewable energy over the last five years, there are concerns that too much of this capacity is not promptly connected to the grid and that not all power being generated is being purchased as required by the law. For example, China’s installed wind capacity has doubled every year for the last four years, but according to recent reports, about 30% of China’s wind capacity is not connected to the grid and may be lying idle (emphasis added).

Unlike any of the previous targets, the new target created by the amendments places responsibility directly on grid companies to purchase a fixed share of their power generation from renewable energy sources, and these grid-level targets will be enforced through penalties for non-compliance (Art. 29). A Mandatory Market Share (MMS) that sets the percentage of non-hydro renewable power generation out of total power generation was introduced in 2007 in the Mid and Long Term Plan for Renewable Energy that was issued by China’s chief national economic planning agency, the National Development and Reform Commission (NDRC). (See here in English and here in Chinese) While this 2007 target is similar to the new target provided for in the amendments, this is the first time in China that an RPS-style target has been expressly provided for in the law, creating an enforceable, legal obligation with which grid companies must comply.

While much of the detail still remains to be worked out, the amendments on their face clearly impose a new obligation on the grid companies that did not exist under the original legal framework.

While setting compulsory national technical standards is a positive step, one issue with the amendments is that they do not specify who will set the standards and how they will be monitored. Although technical guidelines for wind, solar and geothermal were issued in China in 2005, compulsory national standards do not currently exist.

2. Streamlining the Renewable Energy Development Fund

One other very important change to the law is how grid companies are compensated when purchasing renewable energy instead of cheaper, dirtier forms of energy, such as coal.

Given that renewable power is generally more expensive than conventional fossil fuels, China has instituted feed-in tariffs for a variety of renewable energy technologies to compensate grid companies for the additional cost of purchasing renewable energy. The original law created a system in which these feed-in tariffs and additional costs associated with connecting a renewable generator to the grid would be funded by a surcharge on end-users of electricity.

Under the original law, the grid company would directly withhold the surcharge from the end-user’s regular electricity bill. This surcharge is set by the government and is periodically increased (as of Nov. 2009 the surcharge is set at RMB .004/kWh). Now, instead of the grid companies’ collecting the surcharge directly from the end-user, the end-user will pay the surcharge into a Renewable Energy Development Fund. Once the surcharges have been pooled, the grid company will then seek compensation from the fund for the additional cost of purchasing the renewable energy, including the costs associated with integration. Although this change might seem like a mere technicality, it is actually quite significant because pooling all the surcharges into one large fund will allow the government to use this considerable amount of money (689 million USD in 2009 and an estimated 1 billion USD in 2010) not only to compensate grid companies, but also to invest in various renewable energy development projects, including R&D (Art. 24).

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