Given climate-change trends and increasing public concern about environmental protection, renewable energy has become a crucial strategic emerging industry worldwide. More and more countries are trying to develop renewable energy-related technologies, and promoting their application. China – with its enormous domestic market, its capability in the manufacturing sector and the determination of the country's leadership to tackle pollution – is no exception. It has become not only one of the most important manufacturing bases for the renewable energy industry, but also the world's largest market for the sector.
It has been more than a decade since the promulgation in 2005 of the Renewable Energy Law (as amended in 2009 (the Renewable Energy Law)), which marked the beginning and laid down the general principles of Chinese legislation on renewable energy. Following promulgation of the Renewable Energy Law, the Chinese authorities, mainly the National Development and Reform Commission (NDRC), the National Energy Administration (NEA) and the Ministry of Finance (MOF), have taken over the administration and policymaking for renewable energy and have since circulated numerous detailed rules, regulations and policies for solar, wind, hydro, biomass, etc. Different categories of renewable energy will therefore be subject to different rules in terms of the formalities relating to project approval, construction, environmental protection, subsidy eligibility, etc. In addition, the various state-owned national grid companies have also been playing an important role in the development and promotion of renewable energy. The grid companies are not policymakers but are largely responsible for the industry's logistics, such as building transmission lines, formulating grid connection standards, inspecting substations, and calculating and paying tariff and subsidies.
Looking at the entire renewable energy sector, solar and wind are centre stage at present. For solar projects, the NEA issued the Provisional Rules on Project Management of PV Power Plants on 29 August 2013, which stipulated that the NEA will hand out an annual quota to each province every year to control the development of photovoltaic (PV) power plants and only those covered in the annual quota will be eligible to receive a subsidy from the National Tariff Premium Subsidy Fund for Renewable Energy. With the promulgation of these Provisional Rules, the development of PV power plants is no longer unrestrained. Developers must first compete for an annual quota before they start developing, and often this competition means a reduction of the feed-in tariff (FIT) for a particular project. Furthermore, on 9 October 2014, the NEA issued the Notice on Further Strengthening the Management on Construction and Operation of PV Power Plants, which stressed that it is forbidden to sell a project's filing documents or otherwise dispose of equity in PV power plants; should there be a material change as to the investors of a PV power plant, the project has to go through the filing formalities all over again, otherwise the project will be at risk of losing eligibility to receive the state subsidy. For this reason, developers will not usually transfer equity in a PV power plant until the plant has been commissioned, so not to be regarded as selling the project filing documents. Nevertheless, there have been cases where the developer indirectly transfers the equity in a PV power plant before it has been commissioned by structuring a deal in which the purchaser, instead of directly acquiring the equity in the plant, acquires the plant's intermediate shareholder.
As regards wind power, the NEA issued the Provisional Rules on Development and Construction of Wind Power Projects on 25 August 2011, setting out the framework and principles on the development of wind power projects in China, such as the requirements and formalities for construction and zoning, feasibility studies, project approvals, and completion inspections and acceptance. For offshore wind power projects, the NEA and the State Oceanic Administration (SOA) jointly issued the Rules on Development of Offshore Wind Power on 22 January 2010 (updated on 29 December 2016). On 6 July 2011, the NEA and the SOA further promulgated the Detailed Implementation Rules on the Administration of the Development of Offshore Wind Power. The three above-mentioned sets of regulations constitute the core legislation for the development of onshore and offshore wind power projects.
As in other countries in the world, in China the development of renewable energy is highly dependent on the subsidies from the government. With installed capacity increasing rapidly each year, collecting enough funds to cover such a huge amount of subsidy is becoming an unbearable burden for the government and, in fact, because of lack of funds it has already been delaying the payment of subsidies for eligible renewable energy projects commissioned in recent years. In practice, it is very common for a project not to receive any subsidy until three or four years after being commissioned. To alleviate this financial burden, the Chinese government has been lowering the levels of subsidy each year. With the rapid decrease in the cost of developing renewable energy projects, it is very clear that the level of the renewable energy subsidy will continue to decline in future, and eventually the Chinese government may do away with the subsidy once and for all.
II THE YEAR IN REVIEW
According to the figures released by the NEA on 28 January 2019, the total installed capacity of renewable energy power generation reached 728GW by the end of 2018, an increase of 12 per cent from the previous year; of this total, hydropower installed capacity is 352GW, up by 2.5 per cent; wind power is 184GW, up by 12.4 per cent; solar power is 174GW, up by 34 per cent; and biomass power is 17.81GW, up by 20.7 per cent. The total installed capacity of renewable energy power generation accounted for 38.3 per cent of all installed capacity for electricity generation in 2018, up by 1.7 per cent. These figures show quite astonishing rates of growth, with solar and wind power both growing by double-digit figures, with solar installed capacity in particular growing by a staggering 34 per cent.
To curb the irrational increase in solar investment, on 31 May 2018, the NEA, the NDRC and the MOF unexpectedly jointly issued the Notice on Matters Relating to PV Projects in 2018 (the 5·31 Policy), which stipulated, among other things, that (1) no quota for building PV power plants would be handed out in 2018 and, until further notice, local governments would not approve the development of new PV power plants requiring subsidy from the state; (2) distributed PV systems would again be put under quota management, with the quota for 2018 set at only 10GW, and to compete for this quota distributed PV systems had to be commissioned before 31 May 2018 (i.e., the date of issue of the 5·31 Policy, leaving no buffer period), otherwise they would not be eligible for a subsidy from the National Tariff Premium Subsidy Fund for Renewable Energy; and (3) the subsidy was to be further decreased by 0.05 yuan/kWh, which was the second time the subsidy had been lowered in 2018 – which was unprecedented. The circulation of the 5·31 Policy was a bolt from the blue and raised wide concerns and worries among both solar power project investors and manufacturers of PV modules, as it dramatically and suddenly froze the market.
On 18 May 2018, the NEA circulated the Notice on Requirements Relating to Wind Power Development in 2018, which stipulated, among other things, that all wind power projects (excluding distributed wind power projects), onshore and offshore, must compete for quota through a bidding and tendering process, with effect from the date of the Notice.
On 16 July 2018, the NEA and NDRC jointly issued the Notice on Promoting the Electricity Trading Market and Further Improving the Trading Mechanism. This Notice does not contain detailed rules or regulations, but rather general declarations on the government's position on promoting trading of electricity generated by distributed generation systems, and calling for various local governments to remove regional barriers to trading, as well as covering other matters relating to the creation of a trading market. This Notice partially echoes the Notice on the Pilot Scheme for Promoting the Trading Market of Distributed Power Generation issued by the NEA and NDRC on 31 October 2017 (the Wheeling Policy), which stipulated that electricity generated by distributed solar systems (e.g., rooftop solar) may be sold to nearby users using grid company transmission lines). According to the Wheeling Policy, only two categories of distributed solar system are eligible for wheeling: (1) systems with installed capacity of less than 20MW and a connection voltage no higher than 35KV; and (2) systems with installed capacity of between 20MW and 50MW and a connection voltage no higher than 110KV. If the distributed solar project chooses to sell its electricity through wheeling, the state subsidy it originally qualified for will be decreased by at least 10 to 20 per cent, depending on the project's installed capacity and connection voltage. The calculation of wheeling charges varies from province to province. There is no doubt that the Wheeling Policy promulgated at the end of 2017 greatly supports the sale of electricity by distributed solar projects, and opens the door for renewable energy investors to trade clean energy through the market, rather than relying solely on the government subsidy to make a profit.
According to the figures released by the NEA, the installed capacity of both solar and wind projects increased significantly in 2018. Notably, offshore wind has also enjoyed a remarkable increase. According to the data released by the Global Wind Energy Council (GWEC), the wind energy industry installed 51.3GW of new capacity worldwide in 2018, of which China installed 1.8GW, more than any other country, followed by the United Kingdom with 1.3GW and Germany with 0.9GW. Since its launch in 2017, the installed capacity of China's offshore wind power has continued to expand. According to China's 13th Wind Energy Development Five-Year Plan, the construction scale of offshore wind power will reach 10GW by 2020, and the aggregate grid-connection capacity will be more than 5GW.
Wind power is considered by many to be the most competitive source of renewable power. China's 13th Five-Year Plan raised the 2020 wind target to 250GW, and aims to shift focus from the scale of expansion towards quality and efficiency. However, despite China's achievements in wind development, the sector faces many problems, such as its increasing inability to accommodate the rapid surge in the number of wind turbines in remote areas because of underdeveloped grid networks.
There has been a notable phenomenon of offshore funds with big-name limited partners (LPs) interested in acquiring solar and wind projects in China. Experience suggests that these LPs care particularly about the 'environmental attributes' of these renewable energy projects (e.g., green certificates, carbon credits). This is largely because of the commitment to sustainability by some world-leading multinationals, such as Google and Microsoft, and the transitioning of their energy consumption from traditional power to clean energy, hence they have been making tremendous investments in the renewable energy industry.
III THE POLICY AND REGULATORY FRAMEWORK
i The policy background
It is fair to say that the renewable energy industry would not be what it is today without government support. To incentivise the development of renewable energy, the Chinese government mainly offers tax and fiscal incentives to renewable energy developers. The MOF and the State Taxation Administration (STA) jointly issued the Notice on Matters Relating to Corporate Income Tax Preferential Treatment for Enterprises Engaging in Development of Infrastructure on 23 September 2008. According to this Notice, enterprises that engage in the development of infrastructure listed in the Notice will be exempt from paying corporate income tax for three years commencing from the first year that they generate business revenue, and their corporate income tax will be decreased by 50 per cent in the fourth to sixth years.
On 1 March 2012, the MOF, the NDRC and NEA jointly issued the Provisional Rules on the Tariff Premium Subsidy Fund for Renewable Energy. The Provisional Rules stipulate that renewable energy projects such as wind, biomass, solar and geothermal power may apply to be entered into the Catalogue for Tariff Premium Subsidy Fund for Renewable Energy. After being entered into the Catalogue, the renewable energy project may then receive subsidies from the state.
On 25 July 2016, the MOF and STA jointly issued the Notice on Continuing the VAT Policy for Solar Power Projects, which provided that taxpayers selling electric power products they had manufactured through making use of solar power would be subject to a rate of VAT reduced by 50 per cent. This tax policy was valid from 1 January 2016 until 31 December 2018. At present, this tax incentive policy has not been renewed or replaced by a new policy.
In addition to fiscal and tax incentives, a discussion of the FIT policy applicable to renewable energy projects is also relevant. In most cases, renewable energy projects enjoy the benefit of a FIT (i.e., the tariff for a particular renewable energy project will be fixed when it is approved by the local NDRC, and it will be clearly stated in the NDRC approval). The FIT consists of two parts: (1) the sum equal to the local tariff for desulphurised coal-fired power; and (2) the difference between the NDRC-approved FIT and the local tariff for desulphurised coal-fired power. The sum equal to the local tariff for desulphurised coal-fired power will be paid directly by the local grid company according to meter readings; the difference between the NDRC-approved FIT and the local tariff for desulphurised coal-fired power will be covered by the central government (i.e., the Tariff Premium Subsidy Fund for Renewable Energy); and the local grid company will pay the difference to the project company upon receipt of the subsidies from the government. However, because of the rapid growth of installed capacity of renewable energies, the Tariff Premium Subsidy Fund for Renewable Energy has been unable to pay off the subsidies on time and it has become common for renewable energy projects not to receive the subsidy until a couple of years after being commissioned. In addition to the subsidy from central government, local governments, at provincial or city level, have also formulated subsidy policies or other fiscal incentives to promote the development of renewable energy.
ii The regulatory framework
As mentioned previously, the renewable energy sector is mainly governed by the NEA, NDRC and MOF. According to the present government framework, the NEA is the current energy regulator, established a decade ago under the auspices of the NDRC. The NEA is responsible for making policies for renewable energy from a macro point of view (e.g., allocating the annual quota for wind and solar development in each province, leading the creation of a unified trading market for renewable energy). The NDRC and its local counterparts are management agencies with broad administrative and planning control over the Chinese economy. In terms of their role in renewable energy, they are responsible for approving specific renewable energy projects. Without NDRC approval, investors cannot commence development of a renewable energy project. The MOF, in association with the NEA and NDRC, is responsible for making policies on state subsidies for renewable energy projects. Recent comments from senior government leaders indicate that the Chinese government intends to establish a new Ministry of Energy to streamline and consolidate authority for energy-related issues. The responsibility for these issues is currently dispersed among a variety of other ministries. However, the full extent of the new ministry's authority remains unclear, including whether it will have oversight of China's state-owned oil companies. If this materialises, in addition to expanding NEA's existing authority over energy issues, the creation of a new ministry would elevate China's energy regulator to equal status with the NDRC and the other ministries, reporting directly to the State Council, and the current approval formalities for renewable energy would have to be adjusted accordingly.
Different categories of renewable energy, such as solar, wind, hydro and biomass, have to follow different sets of rules regarding development, operation and subsidy. But generally, they all have to follow these steps: (1) consult with local government regarding the development of the renewable energy project; (2) apply to local authorities in charge of land, zoning, environmental protection, forestation, mining industry, water and soil conservation, historic relics, etc., and to the local grid company for pre-approval or a preliminary opinion on the development of the project, while also carrying out a feasibility study; (3) apply to the local NDRC for project approval by presenting the pre-approvals or preliminary opinions plus the feasibility study report; (4) apply to various local authorities for acquisition of land and construction, and arrange financing; (5) apply to various local authorities and the grid company for completion acceptance, sign a power purchase agreement and apply for a generation licence; and (6) apply for state and local subsidies. The approval formalities for distributed solar and wind projects are much simplified compared to those required for utility-scale projects.
During the complicated approval formalities mentioned above, the legal acquisition of land-use rights is often a key challenge faced by most projects. Utility-scale projects such as solar or wind farms will inevitably have to occupy a vast area of land, which is often located either on the outskirts of cities or deep in rural areas. It is therefore very common for projects to occupy farmland or forestland, which, according to current PRC law, must not be used for non-agricultural development until the designated land use has been converted to construction land, and then sold or leased to the developer. The PRC law on change of land use and selling of land is quite rigid and it always takes a long time for the local government to go through the necessary internal formalities (often taking one or two years) before the developer can legally acquire the land-use right. However, given the fact that the local counterpart of the NDRC will require the renewable project to be completed within a certain period following the issuance of the NDRC approval (usually one or two years), the developer may not have time to wait for the local land authority to clear all the land acquisition formalities. Thus, it is very common for developers to commence development and construction without clearing the land acquisition formalities, which in turn leads to non-compliance with construction formalities and completion inspection and acceptance formalities. In addition to this non-compliance with formalities, it is also common for developers to be involved in disputes with the local population (villagers) regarding the occupation of farmland or forestland.
IV RENEWABLE ENERGY PROJECT DEVELOPMENT
i Project finance transaction structures
The development of a renewable energy project requires a huge amount of investment and it will take long time before the project generates enough cash to pay off the debt. In addition, the revenue from renewable energy projects may be adversely affected by fluctuations in electricity generation due to weather conditions, changes to subsidy and tariff policies, curtailment, etc., which makes it difficult, if not impossible, for the banks to extend long-term loan facilities to renewable energy projects. However, financial lease arrangements could very well fit the needs of renewable energy projects. As a matter of fact, it is very common in China for developers to team up with financial lease companies to solve financing problems in developing renewable energy projects, and particularly for utility-scale solar, rooftop solar and certain wind projects.
There are two principal structures for financial leases: direct financial lease and the sale-and-leaseback structure. Direct financial lease means that the lessor (i.e., the financial lease company) will raise funds or use its own funds to purchase and pay for relevant equipment and facilities on the instructions of the lessee (usually the project company), and then lease the equipment and facilities to the lessee. Taking a solar farm project as an example, the project company will usually have to contribute at least 20 per cent of the total investment and the lessor, after carrying out due diligence on the project, will usually cover the remaining 80 per cent to purchase solar panels and other equipment, either from the manufacturers or from engineering, procurement and construction contractors. If the lessor finds that the solar farm cannot generate enough cash flow to cover the rent as stipulated in the financial lease agreement, the lessor will require recourse against the investor for the payment obligation under the financial lease agreement.
Sale and leaseback means that the lessor will first purchase the assets from the project company and then lease these assets back to the project company to collect a rent. This structure is usually used for commissioned projects. The term of the financial lease is more flexible and could be as short as a couple of years or as long as a decade, or even cover the entire operating period of the project.
In both direct financial lease and sale-and-leaseback structures, the lessor will always require the project company to pledge its receivables (tariff and subsidy) and the developer to pledge its shares in the project company.
ii Distributed and residential renewable energy
Distributed PV systems, such as rooftop solar, have an important role in solar energy development. On 18 November 2013, the NEA circulated the Provisional Rules on Project Management of Distributed PV Systems, which provided that the approval formalities for distributed PV systems were to be simplified and expedited (e.g., distributed PV systems were no longer required to obtain generation licences, approvals for soil and water conservation and environmental protection assessments); however, distributed PV systems were still subject to quota management similar to that for PV power plants. With effect from 16 March 2015, the NEA issued the Notice on the Photovoltaic Power Generation Development Plan for 2015, which, among other things, provided that rooftop PV systems would no longer be subject to quota management, and that local grid companies must follow simplified formalities to connect rooftop PV systems to the grid, which has since significantly boosted the development of rooftop solar systems.
Similarly to distributed PV systems, the Chinese government is also encouraging the development of distributed wind power projects. On 3 April 2018, the NEA issued the Provisional Rules on Development of Distributed Wind Power. According to these Provisional Rules, distributed wind power projects shall encompass wind power projects in which the electricity generated is to be either consumed on site or fed into the grid. The Provisional Rules further stipulated that the voltage at which distributed wind power projects may feed into the grid was to be increased from 35KV to 110KV, which significantly increased the interest of investors in distributed wind power. In addition, the Provisional Rules also require local governments to simplify project approval formalities and expedite the approval process for distributed wind power projects. Although some state-owned energy tycoons have been seen to participate, the investors in distributed wind power projects are mainly from the private sector, and include the Chinese wind turbine manufacturer Goldwind, and Envision.
As regards residential renewable energy, although there are also other forms of residential renewable energy, such as distributed wind and biomass, in some areas in China, distributed PV systems are the most popular form (e.g., rooftop or wall-mounted solar). Residential renewable energy does not involve complicated approval formalities. Households may start building a system after filling out a registration form, and may be connected to the local grid after going through a quick completion inspection and acceptance. Residential renewable energy does not receive a FIT, but instead receives a fixed subsidy for each kWh of electricity generated by the system. According to the latest government notice, the fixed subsidy for 2019 is 0.18 yuan/kWh. The level of subsidy for residential renewable energy has been decreasing steadily and it is widely expected that it could be cancelled altogether at some point in the following three to five years.
V RENEWABLE ENERGY MANUFACTURING
China is particularly strong in the manufacturing side of the renewable energy industry. There are a considerable number of factories that can manufacture solar panels and wind turbines. According to figures published online,2 of the top 20 Tier 1 manufacturers of solar panels in the fourth quarter of 2018, 17 were Chinese, and Jinko was ranked number one, followed by JA Solar, Trina Solar, LonGi, GCL and Suntech. Chinese wind turbine manufacturers have also been recognised worldwide. In its 'Global Wind Market Development – Supply Side Data 2018' report, the GWEC found that over half of the top 15 wind turbine manufacturers are based in China.
To incentivise manufacturing, the government has implemented a tax rebate policy, boosting the export of renewable energy products, such as solar panels, wind turbines and auxiliary equipment. On 1 April 2019, the MOF, STA and the General Administration of Customs jointly issued the Notice on Policies Regarding Deepening the VAT Reform, in which the export tax rebate rate for renewable energy products was adjusted to 13 per cent along with the adjustment to VAT.
VI CONCLUSIONS AND OUTLOOK
In 2018, the development of renewable energy enjoyed a rapid increase, despite the adverse impact of the 5·31 Policy, solar power capacity still increased by 34 per cent. However, because of the heavy burden of subsidies, it is believed that the subsidy for renewable energy will eventually be substantially lowered or even cancelled in future. Solar power and wind power will remain centre stage in terms of the transformation of energy structures. The central government is formulating various new policies to support the development of clean energy, including reforms on the trading of electricity, upgrading the green certificate trading mechanism, and mandatory clean-energy quotas. In the long run, improvements in renewable energy technology and the market-oriented reform of the grid will serve as a powerful impetus for the renewable energy industry. In addition, with the application of high-voltage transmission lines, cross-province transmission will become much more convenient and cost-efficient, which will greatly reduce curtailment in some areas of China and will help to establish a nationwide electricity trading network.
1 Alex Haichun Lu is a partner at Grandall Law Firm.