i INTRODUCTION

The official start of the renewable energy sector in China was witnessed by the promulgation of the Renewable Energy Law in 2005 (the 2005 Renewable Energy Law). To provide a basis for the implementation of the Law, the National Development and Reform Commission (NDRC) formulated the Medium-Term and Long-Term Plans for Renewable Energy, thus providing the guiding principles, main tasks, development objectives, key areas and assurance measures for the development and construction of China's renewable energy projects. In 2009, China amended the 2005 Renewable Energy Law to make it more enforceable. In 2013, renewable energy was written into China's 11th five-year plan. As a general observation, PRC law regarding renewable energy, while successful in providing a basic legal framework, still contains many loopholes in terms of interpretation and implementation.

Under the Renewable Energy Law, as amended as in 2009 (the Renewable Energy Law), the term 'renewable energy' is defined as 'non-fossil energy, including wind energy, solar energy, water energy, biomass energy, geothermal energy, ocean energy'. The Law stipulates that the State Council will decide whether the Law will apply to hydropower. Application of the Law to hydropower generation shall be subject to regulation by the energy administration department under the State Council, and to approval by the State Council.2

Since the enactment of the Renewable Energy Law, China's renewable energy industry has been developing quickly. At present, China has the biggest volume of global wind and solar power generation equipment in the world.

According to a report by UN Environment and Bloomberg New Energy Finance, China's investment in renewable energy projects (solar, wind, biofuels, geothermal, biomass waste-to-energy, small hydro and marine) was US$126.6 billion in 2016, which is much greater than the amount of renewable energy investment in India (US$10.9 billion) and Brazil (US$6 billion). Solar and wind power are the dominant renewable energy sectors, with investments in 2016 of US$86.5 billion (solar) and US$36.1 billion (wind).3

The report states that the cost of solar projects is continuing to fall because of improved technology and management. In spite of difficulties found in absorbing solar power into the grid, solar projects are still developing rapidly, which can in part be attributed to the deployment of solar projects involving rooftops, industrial parks and other locations. Size-wise, many Chinese solar projects financed in 2017 were in the first rank globally, including the 540MW Jiangxi Municipal Poverty Alleviation Plant (at around US$653 million) and the Huanghe Hydropower Hainan Gonghe installation (at around US$605 million).4

The report further found that China's offshore wind power was prominent in 2017, with 13 projects valued between US$600 million and US$1.2 billion being green-lighted, including the 400MW CGNWP, Yangjiang Nanpengdao array. 2017 was a record year in terms of China's investment in offshore wind, with offshore wind asset financing reaching US$10.8 billion (up 180 per cent). Comparatively, investment in onshore wind in 2017 was at its lowest since 2008, and down 28 per cent from 2016. The slowdown in onshore wind is mainly attributable to concerns about curtailment and declining feed-in tariff rates. Nevertheless, China remained the biggest onshore wind market in terms of installations, with 20GW added in 2017, down from 22GW in 2016 and a record of 29GW in 2015.5

The renewable energy industry's rapid growth is due to the support of the Chinese authorities, which take a leading role in its development. At the beginning of 2018, the regulatory authorities made considerable efforts to further enhance the system's adjustment capacity and improve the capacity to adjust power. In particular, the phenomena of dumping renewable energy power and the curtailment of renewable energy have been ended and regulated.

The underlying reasons for the difficulty in connecting renewable power to the grid are that China's current energy system is structured to be more supportive of fossil energy and is not adapted to the needs of the developing renewable power sector. Solving this issue means having to deal with very complicated systems in terms of the current regulatory systems, energy planning, market mechanisms and management of the energy sector, and conflicts encountered by renewable power producers in feeding their energy supplies into the grid.6 Some public interest litigation against the state grid is being considered, but so far there have been no cases with successful results, partly because of loopholes in the legislation and partly because of a lack of judicial support in such cases.

ii THE YEAR IN REVIEW

While the Renewable Energy Law has the statutory provisions on the government obligations in place (originally promulgated in 2006 and amended in 2009), the Law has played a very limited role in reality, particularly where renewable energy generation is viewed to be at odds with fossil energy generation under the current energy structural system. For the implementation of the Renewable Energy Law, NDRC, the Ministry of Finance and National Energy Administration (NEA) have all promulgated various measures and rules regarding renewable energy development and utilisation, with some of the following detailed regulations still being effective:

  1. Administrative Measures on Renewable Energy Power Generation (NDRC, 5 January 2006);
  2. Administrative Measures on Renewable Energy Power Price and Costs Allocation (NDRC, 6 January 2006);
  3. Administrative Measures on the Renewable Energy Power Quota (NDRC, 11 November 2007);
  4. Measures on the Supervision of Volume of Power from Renewable Energy Sources to be Entirely Taken by the Grid Enterprises (State Power Regulatory Commission, 25 July 2007);
  5. Administrative Measures on the Special Funds for the Industrialisation of Wind Power Equipment (Ministry of Finance, 11 August 2008);
  6. Administrative Measures on the Fiscal Subsidy Funds for Solar Power as Applied on Architecture (Ministry of Finance, 23 March 2009);
  7. Notice on Improvement of Biomass Power Price Policy for Agriculture and Forestry Sectors (NDRC, 18 July 2010);
  8. Administrative measures on the Collection and Use of Renewable Energy Development Funds (Ministry of Finance, NDRC and NEA, 29 November 2011);
  9. Guiding Opinions Regarding the Promotion of Geothermal Energy Development and Utilisation (NEA, 22 February 2013); and
  10. Interim Measures on the Administration of Solar PV Power Station Projects (NEA, 18 November 2013).

In addition to the above regulations, local legislative bodies and relevant local governments have adopted some local legislation for implementing the Renewable Energy Law in various localities. In reality, local legislation is weak in supporting renewable energy as compared with the implementing regulations adopted by NDRC, NEA and other ministry-level bodies. Local authorities have adopted different approaches, and their attitudes towards renewable energy may vary. For instance, in a case involving the local authority in Gansu province, a local wind power producer was requested by the local authority to lower the price for selling to direct buyers of power that engage in the polluting steel manufacturing business, thereby seriously affecting the profitability of such wind power projects. Until recently, Gansu was criticised for refusing to connect renewable energy power to the state grid, and therefore failing to support the development of renewable energy. Some academic researchers have pointed out that local authorities should follow the provisions of Article 12 of the Renewable Energy Law by incorporating renewable energy-related R&D and industrial development into their provincial policies on R&D and industrial development.

To resolve the wind and photovoltaic (PV) power abandonment issue, and to facilitate the sustained and sound growth of renewable energy, NEA and NDRC issued a circular to encourage direct sales of wind and PV power from wind and solar power plants. On 5 February 2016, NEA promulgated the Circular on Duly Carrying out Works for Renewable Energy Consumption in the 'Three Northern Regions' (i.e., North Eastern China, Northern China and North Western China). Article 1 of the Circular emphasises the need for:

duly carrying out direct trading of electricity generated by renewable energy resources, promoting local consumption of renewable energy, encouraging businesses who generate power with renewable energy resources to actively participate as market entities in over-the-counter market trading to gradually expand the scope and scale of trading, and encouraging electric power generated beyond the guaranteed utilisation hours for renewable energy to be traded on the market.

At the national level, the authorities encourage wind and solar distribution generation projects. Although this policy has met with some obstacles from the grid and some local authorities that are more supportive of coal-fired power plants, we have seen some change in attitude regarding the development of distributed generation at the grid and the local government level. In the renewable power sector, the most noticeable recent regulatory measure was the issue by NEA, on 3 April 2018, of the Administrative Measures for the development and construction of distributed wind power projects (NEA Decree No. 30), encouraging all types of enterprises and individuals to invest, construct and operate distributed wind power projects under the land utilisation plan, and encouraging innovation of new business models in this regard.

iii THE POLICY AND REGULATORY FRAMEWORK

i The policy background

China's energy portfolio is still coal-dominant, and the entire nation is suffering, to different degrees, from smog in the big cities. The government has realised the need for a transition towards renewable, low-carbon energy to make the bio-system more sustainable. Therefore, China is trying to improve its energy portfolio by achieving a higher percentage of cleaner and low-carbon energy, such as natural gas, wind, solar, biomass and geothermal, which is the reason behind the enactment of the Renewable Energy Law. The development of renewable energy will also contribute to a better environment and more sustainable economic and social development. The Renewable Energy Law identifies the development and utilisation of renewable energy as a development priority.

To encourage various entities to engage in the renewable energy sector, the Renewable Energy Law requires that the state protect the legitimate rights and interests of investors in renewable energy projects (see Article 4 of the Renewable Energy Law). Article 14 stipulates that 'The State encourages and supports grid-connected power generation with renewable energy'. For this purpose, the Renewable Energy Law has incorporated a system of complete guaranteed purchase of renewable energy power (see Article 14 of the Renewable Energy Law), which imposes on grid enterprises a statutory obligation to enter into connection agreements with renewable energy power producers ensuring the 100 per cent guaranteed purchase of renewable energy power. Whether the obligation will be honoured and enforced is not certain, as such an obligation is conditional and could be easily avoided by grid enterprises using technicality excuses (such as intermittency and energy security concerns).

In overview, since 2002 China has conducted five rounds of concession rights projects for demonstration purposes, and concession contracts will be granted to selected renewable energy investors through competitive bidding. From 2008, China has moved to adopt a wind power on-grid rate system (using mainly the feed-in tariff (FIT)). In 2009, NDRC announced different benchmark rates (respectively 51, 54, 58 and 61 yuan cents) for four different types of wind resources areas. With the above measures adopted and implemented over the years, China has managed to achieve significant growth in the wind power sector.7

Nevertheless, in recent years, China has encountered problems with the grid rejecting and abandoning wind and solar power and refusing to let them connect with the grid. This phenomenon is attributable to both the monopoly of the state grid, which can easily brush aside its obligation to purchase renewable energy power, and resistance from coal power producers. Some cases have been brought against the grid enterprises. but the results have not been very satisfactory. We expect that more antitrust claims will be brought against the state grid, as some antitrust litigation was brought against Sinopec in 2014,8 and anticipate that more companies will challenge the monopoly of state-owned enterprises in the energy sector in the future.

The reform of China's power industry is being carried out on the basis of the guidelines and road map as set forth in Document No. 9 of 2015 issued by the State Council. One principle in the Document is the guaranteed purchase of electricity. To implement the Document in this regard, on 4 March 2016 NDRC promulgated the Administrative Measures on the Guaranteed Purchase of Electricity Generated by the Use of Renewable Energy Resources at Full Price.9 Under the Measures, the annual power generated by grid-connected renewable energy generation projects would be split into power guaranteed to be purchased and power traded on the market. Power subject to a guaranteed purchase arrangement must be purchased at the benchmark on-grid rate in the full guaranteed amount by giving priority to the annual generation schedule and through signing priority power generation contracts (physical contracts or contracts for difference) with power grid companies. In the case of market-trade power, renewable energy power generating enterprises may gain power generation contracts through market competition, and such contracts will be performed by power grid companies in accordance with the priority scheduling principle. However, because they are departmental regulations, the Measures are quite low in the legal hierarchy. The means of determining power, which is subject to a guaranteed purchase arrangement, is also conditional and lacks certainty, and the Measures further lack punitive provisions and terms on legal liability.

To address accountability issues, NDRC and NEA jointly promulgated the Circular on Duly Administering the Guaranteed Purchase of Wind and Photovoltaic Power at Full Price on 27 May 2016, which contains the provision that:

except where impacted by resource conditions, any province (or region or municipality) which fails to satisfy the requirements for minimum guaranteed purchases of annual utilisation hours will no longer be permitted to build new wind power or photovoltaic power station projects (including projects already under planning or which have obtained approval).

In addition, the Circular also stipulates that:

in the case of power generation subject to capacity restrictions, yet which falls within the scope of guaranteed power capacity purchases and therefore requires compensation, the grid companies shall assist electric power trading agencies in determining a specific amount of compensation based on (i) the benchmark on-grid tariff applicable to the area in which the wind and photovoltaic power generation projects are located, and (ii) the capacity so restricted. Moreover, a mechanism for apportioning such compensation must be determined.

By comparison, the Chinese arrangements for guaranteed purchase are not at all similar to renewable energy portfolio standards (RPS) (where grid companies are mandated by statute to sell a certain percentage of power generated from renewable energy), and there is no statutory RPS-type obligation created and imposed on grid companies to sell a certain percentage of renewable energy. It should be noted that under guaranteed purchase contracts, renewable power will be sold to the grid under a benchmark on-grid rate. This would be similar to the FIT if such benchmark on-grid rate is contractually certain and enforceable by giving renewable power producers some promises of profit under such rate.

In July 2009, the Ministry of Finance and other ministries issued a circular regarding the implementation of demonstration projects for the Golden Sun solar subsidy scheme, which include comprehensive fiscal subsidies, R&D support and help in using market mechanisms. In March 2018, Chinese authorities put household and village-level solar poverty alleviation on a priority list for receiving subsidies from funds fuelled by the 'renewable energy power purchase price plus' (a fee paid by power consumers for subsidising the renewable energy power sector).

China also has various tax benefit policies for wind power projects. Since 2008, newly constructed wind power projects have been subject to a unified income tax rate of 25 per cent and, commencing from the tax year when the project receives the first payment for its production and operation, it is entitled to a benefit of tax exemption for the first three years and a 50 per cent tax reduction for the following three years.10 Since 2009, after China completed its reform for value added tax, wind power projects have been allowed to deduct the input tax paid for procured wind equipment. There are also various subsidies for local wind equipment production, and the amount of import tax for importing relevant types of wind power generators, as well as relevant key components and materials, has been adjusted.

As to fiscal and tax benefits for solar power projects, solar power is sold to the grid at a rate (set forth the government) that is cost plus reasonable profit. In 2008, NDRC allowed a rate of 4 yuan per kW/hour. In 2009, through a bidding process, NEA approved the FIT for the bid winner at a rate of 1.09 yuan per kW/hour. The pricing mechanism for solar power in connection with the grid needs to be further discussed in the future.

Tax benefit policies for solar power stations are centred on large-scale power stations: if a project qualifies as an infrastructure project, it is entitled to the benefit of a tax exemption for the first three years of operation and a tax reduction for the following three years.

ii The regulatory framework

Pursuant to Article 6 of the Renewable Energy Law, the relevant energy administrative agencies within the State Council are in charge of organising and coordinating investigations into nationwide renewable energy resources, and shall be responsible for formulating the relevant technical standards for such investigation. Based on the information gathered, the relevant energy administrative agencies will determine national mid-term and long-term plans for renewable energy development. Based on these plans, provincial governments will prepare local renewable energy development plans taking into account local resources and conditions, with such plans being filed at the national energy authorities.

In China, the regulators of renewable energy at the national level are mainly NDRC and NEA, as well as the Ministry of Finance (MOF). NDRC is mainly in charge of pricing in the energy sector. NEA, which was established in 2008, is responsible for:

  1. the regulation of the renewable energy industry;
  2. the formulation of energy industry standards;
  3. the promotion of R&D for major energy manufacturing equipment; and
  4. the review and approval of fixed-asset investment projects under state plans and annual plans.

MOF is in charge of financing and fiscal policies for the support of renewable energy development.

In January 2010, the State Council established the State Energy Commission, which is a consultation and coordination commission above various ministries within the State Council. The State Energy Commission is in charge of research and formulation of state energy development strategies, and coordination of significant issues relating to domestic energy development as well as international energy cooperation.

Other ministries are also relevant in terms of the different types of renewable energy resources (such as the water, geothermal, ocean energy and meteorological authorities, the Ministry of Agriculture and the Ministry of Forestry). There has been criticism that the regulations regarding all of these energies are fragmented, therefore making regulation more difficult. Regulatory issues in China are often regulated in rules, decisions, decrees, administrative regulations, executive orders, policy statements, and judicial decisions and interpretations.

The limits of power and scope of jurisdiction over the renewable energy sector are not well defined, with the regulatory powers of different authorities overlapping, making the system burdensome and fragmented. Furthermore, there are obvious inconsistencies between the practices of the national energy agencies and local energy regulatory authorities. Sometimes, national renewable energy policies are resisted at the local level, while at other times, national rules are strictly implemented locally without taking into consideration local resources and conditions. Clearly, coordinated mechanisms and procedures at the national and local levels regarding accountability would be more desirable. Another criticism is that through recent government restructuring, the power and jurisdiction of the regulatory authorities in charge of saving energy and the development of renewable energy have been weakened, with the normal functioning of the supervision of renewable energy being negatively affected.

With respect to specific renewal energy projects, for the purpose of construction of projects for grid-connected power generation with renewable energy, sponsors of the target company shall obtain an administrative licence, or an application shall be submitted for the record, in accordance with law and the regulations of the State Council. The law further requires that, if there is more than one person applying for the construction of the same project for grid-connected power generation with renewable energy for which an administrative licence needs be obtained, the successful licensee shall be determined through bid invitations and bidding procedures.

For wind farm projects, at the project planning stage a development agreement should be signed with the local government, while a subsequent filing to the state for the approval of such project would also be imperative at this stage. Further, a feasibility study and the preliminary approval of the local authority would be necessary. If approved, the government will list the project in the national or provincial construction plan and annual development plan, and issue an approval document to the investor or sponsor of the project. A concession agreement, signed by the sponsor and the government, may also be needed.

Regarding land use, usually the party investing in such project should make sure that it obtains a land use right through a long-term lease for the location of the project. Before land is leased, due diligence should be conducted on the land to establish whether it is burdened with security interests or easements for other purposes; and whether the landlord has paid the unpaid land grant fee to the state and, if necessary, has settled with any farmers their relocation costs.

It should be noted that obtaining a licence does not necessarily mean that the investment for a project can be closed. While at this stage it is not possible for the investor or project company to sign a power purchase agreement (PPA) and a grid-connection agreement, opinions or a comfort letter, which should be obtained from the grid enterprise as to the connection or FIT for the power purchase, would be necessary and important conditions for getting financing of a project.11

Furthermore, renewable energy projects are subject to environmental laws and regulations. With respect to a particular renewable energy project, the sponsor shall try to obtain an environmental appraisal report within the approval procedures. Land use will usually take the form of a land lease. For all these approvals and prerequisite issues, including a preliminary agreement with the grid for the PPA and connection agreement, due diligence will be conducted and checked beforehand.

Development of renewable energy projects is subject to compliance with the national and local environmental protection laws and regulations. Further, feasibility studies of renewable energy projects shall comply with the national and local renewable energy development plans, which often take into account the protection of local natural resources and bio-economic considerations such as endangered or protected species and cultural resources. Renewable energy projects will also be subject to various restrictions under the PRC regulations on protection of national parks and nature reserve areas. Certain exemptions and compromise solutions should be negotiated and approved if any renewable energy project is considered not to be harmful to the biological and environmental protection of national parks and nature reserve areas.

iv RENEWABLE ENERGY PROJECT DEVELOPMENT

i Project finance transaction structures

Theoretically speaking, project financing can be used for financing renewable energy projects in China. In this case, the ownership structures used in the project financing of Chinese renewable energy projects would not differ from the ownership structure as commonly adopted in other jurisdictions. Any investors who invest equity in a project company for a renewable energy project will establish the project company pursuant to the PRC Company Law and those laws relating to foreign-invested enterprises. A lending agreement and security agreement will be entered into between the banks and the project company. A PPA would be required as a condition precedent to the closing; however, in China it is difficult to enter into a PPA at the development stage. Banks would look to the assets of the project company or even the parent company as guarantee for the financing for a project.

At present, project financing is still not common in the financing of renewable energy projects, because many Chinese banks are not used to financing in the form of project finance. Very often, Chinese banks lend money to the sponsor or shareholder of a project company under a guarantee of the sponsor's parent company based on that parent company's balance sheet, after which the sponsor would invest the loaded funds as an equity investment into the project company for the renewable energy project. Where the project company borrows directly from the banks, the sponsor or the sponsor's ultimate parent would be requested by banks to give a guarantee for such loan. In addition, banks may also request the assets of the project company and the future cash flow as security for such loan. Where there is an engineering, procurement and construction (EPC) contractor for the project company, the EPC contractor would usually be requested to extend some commercial credit by providing wind or solar equipment with delayed payment, thereby financing the renewable energy project to a certain degree.

Where renewable energy power is connected to the grid in China, such green power (as evidenced by a green power certificate) would be sold by the grid company to any purchaser of such power. According to the relevant regulations, anyone who has signed up to the green power trading platform can purchase such green power. The purchasers can be government agencies, enterprises (such as industrial companies or local utilities companies), institutional units or any natural persons. Where a renewable energy project such as a wind power plant or solar power station is established for a local community as a distributed generation project, depending on how the distributed energy project is structured, it will be the local community or local host-offtake customers that will be the purchaser of the renewable energy. There have been instances of foreign-invested companies buying green power from the grid or negotiating with renewable energy companies to establish a renewable energy power plant as a distributed generation project.

China is in the process of establishing a nationwide market for trading carbon emission trading certificates. Until then, such certificates will not function as a tool for enhancing the profitability of renewable energy power plants. Green power certificates are the result of an experiment of the Chinese authorities to encourage consumers to purchase green power rather than fossil power. According to the rules of the certificates, the State Renewable Energy Information Administrative Centre will verify the volume of renewable power connected to the grid and issue green power certificates to renewable energy power producers that qualify. The certificates have identification codes that can identified electronically. The Information Administrative Centre will also establish a trading platform in which these green certificates can be subscribed for or traded with limitations (generally limited to a one-time transfer within the validity of the green certificates). For tracking information, a qualified enterprise to whom a green certificate has been issued should file project-related power volume information on the trading platform system on a monthly basis. The Information Administrative Centre should check and verify the legality of projects and their monthly traded power volume based on the information provided by enterprises. Enterprise would be responsible for the authenticity of the filing documents.

ii Distributed and residential renewable energy

Distributed renewable energy is becoming popular in China, and certainly would be area where there is more room for solar and energy storage business opportunities. Distributed renewable energy is also considered a way to get round the grid and to have direct access to energy consumers in local communities. As extra power needs to be sold to the grid while back-up power will be necessary where the distributed power is adequate and secure, the involvement and support of the state grid is a prerequisite for distributed generation projects.

In the past few years, authorities such as NDRC and NEA have become more supportive of the concept of distributed power generation, and have issued some important rules and circulars in this regard. Since the end of 2017, NDRC and NEA have issued several decrees to encourage the development of distributed power generation by means such as pushing for the direct sale of power from distributed power generators to power consumers. Such measures are viewed as ground-breaking for distributed energy, and even for the reform of the whole Chinese power system.

NEA Decree No. 30 applies to both renewable power generation for self-use and renewable power to be supplied to the grid. The content and significance of NEA Decree No. 30 cannot be underestimated. It calls for a one-stop-shop approval process for distributed power projects, and requires grid enterprises to comply with statutory obligations and procedures for providing better interconnection operating services for power supplies of 35kV or lower voltage. As previously noted, the state grid has been not particularly cooperative in the past in connecting renewable energy, citing various technical reasons for employing curtailment. However, NEA Decree No. 30 now requires grid enterprises to manage their interconnection with the grid correctly, and to provide relevant services based on the principles of safety, convenience, timeliness and efficiency.

NEA Decree No. 30 also requires grid enterprises to ensure that state subsidies be transferred to distributed wind power projects on a priority basis. To solve the intermittency problem, the Decree requests distributed wind power providers to use their own adjustment capacity and to compensate the costs for the power control requirement. In the past, the intermittency problem has been the main reason for the grid to reject the wind power. How the stipulations of NEA Decree No. 30 will solve this issue remains to be seen.

iii Non-project finance development

Other than project financing, Chinese renewable energy projects are more commonly financed by:

  1. traditional financing (such as commercial lending, policy bank loans and fiscal subsidies);
  2. corporate bond financing (such as bank loans, enterprise bonds or bridge loans);
  3. asset-backed securitisations;
  4. financial leasing (direct leasing or leaseback);
  5. trust investment financial products (i.e., trust companies providing trust loans to borrowers with future utilities bills revenue, and fixed assets as security or based on third-party guarantees); and
  6. internet-based crowd funding (although this has not been legalised within the legislation).

State banks and commercial banks also provide 'green loans' to renewable energy projects with favourable terms.

It is interesting to note that NEA Decree No. 30 devotes a whole chapter (Chapter 6) to the financing and investment development model. It encourages local governments to cooperate with local banks and financial institutions to encourage innovation in financing distributed power projects. It also encourages:

  1. banks and financial institutions to adopt a lending facility using a power sales fee charging right and project assets as collateral for such financing; and
  2. farmers to establish various equity holding cooperatives, or to adopt other means such as mixed ownership, funds and consortium or the PPP model, in joining distributed power projects dominated by local government.

Notably, NEA Decree No. 30 will be implemented with a validity term of five years. China should promulgate more formal legislation at the national and provincial levels to support the development of distributed generation. This will be very helpful in allowing China to achieve the transition from fossil energy to non-fossil and renewable energy.

v RENEWABLE ENERGY MANUFACTURING

The manufacturing of wind power equipment and solar PV components (including turbines and solar PV panels) is developing extremely fast in China. The Ministry of Industry and Telecommunications issued the Action Plan for the Smart Solar PV Industry Development (2018–2020), requiring the upgrade of the base materials for the solar PV industry, the acceleration of the manufacturing of solar batteries and components, and the integration of internet, big data and artificial intelligence with the solar PV industry.

On 4 April 2018, the Ministry of Finance and State Taxation Bureau issued the Circular Regarding the VAT Tax Rate,12 which stipulates that as of 1 May 2018, the tariff rate that applies to the sale or importation of goods will be adjusted to a lower level. For wind power and solar PV project, this means that, with the adjustment of value added tax to a lower level (16 per cent for taxable sales or 10 per cent for the importation of goods), their profitability will be improved.

vi CONCLUSIONS AND OUTLOOK

Looking at developments in the first quarter of 2018, it is clear that the reform of the power sector has reached a critical stage, and we are convinced that the sector will be structurally improved with the political atmosphere changing towards the restriction of coal-fired power projects, and greater support and encouragement being offered to distributed generation projects (such as wind).

To progress the energy transition process, the Chinese authorities should use new ways to regulate the energy sector, including open and transparent legislation, and public hearings to hear the views of different interest groups (such as energy investors and producers, grid and infrastructure owners and operators, as well municipal utilities and public consumers). New legislation should be introduced, the natural monopoly of the grid and infrastructure should be regulated, and liberalisation and the use of market mechanisms should be encouraged. The rule of law should be established in the energy sector, especially when it comes to the judicial courts in which affected parties seek relief and justice. In this regard, given a lack of judicial independence, China still has a long way to go in establishing and operating a healthy regulatory system for its energy sector.


Footnotes

1 Libin Zhang is a partner at Broad & Bright.

2 Article 2 of the Renewable Energy Law provides that for the purposes of the Law, renewable energy means non-fossil energy, including wind energy, solar energy, water energy, biomass energy, geothermal energy and ocean energy. The Law is not applicable to the utilisation of straw, firewood, etc., through direct burning in low-efficiency stoves.

3 The Frankfurt School-UNEP Collaborating Centre and Bloomberg New Energy Finance, 'Global Trends in Renewable Energy Investment Report 2018', published on 5 April 2018, pages 27–28: http://www.fs-unep-centre.org.

4 Ibid.

5 Ibid.

6 Jiang Xin, et al., 'The Status of Renewable Energy Power and Suggestions for the Development', Gas and Heat, Vol. 38, No. 1, January 2018, pages 6–9.

7 Zhao Yongqiang and Xiong Nijuan, 'Overview and Suggestions on China's Renewable Energy Economic Incentives and Policies', Research on Economics and Management, No. 4, April 2010, page 7.

8 See Yunnan Yinding Co, Ltd v. Yunnan Branch of Sinopect, filed in court in 2014.

9 NDRC Energy No. 625 of 2016.

10 'Circular of the Ministry of Finance, the State Administration of Taxation and the National Development and Reform Commission on Announcing the List of Public Infrastructure Projects Enjoying Enterprise Income Tax Preference (2008)', Cai Shui [2008] No. 116, 8 September 2008.

11 Pursuant to Article 14 of the Renewable Energy Law, power grid enterprises shall sign a grid-connection agreement with enterprises generating renewable energy that have legally obtained an administrative licence or have submitted to the record projects to be constructed to buy the entire quantity of grid-connected power generated with renewable energy within the coverage of their power grids, and provide grid-connection services for the generation of power with renewable energy. In reality, a power grid company may find technical reasons for refusing to sign such agreement, and there has been no case yet to test Article 14 under the Renewable Energy Law where a power grid company has refused to sign such an agreement in violation of the good faith principle.

12 2018, No. 32.