The Renewable Energy Law Review: China
This chapter attempts to provide an overview of China's present policy as well as the legal and regulatory framework of the renewable energy sector, the implementation thereof, and the government authorities' new policies and regulations for the intended alterations, restructuring and improvements to various aspects of the renewable energy sector. These policies and regulations are aimed at enabling China to achieve its officially confirmed nationally determined contribution (NDC).
i Renewable Energy Law
China's Renewable Energy Law, promulgated in 2005 (as amended in December 2009) (REL), came into effect in 2006. It applies to all non-fossil energy, with a qualification that the application to hydroelectric power is subject to further requalification by the relevant authorities. The REL establishes a framework to streamline the administrative functions of the various relevant authorities and sets forth certain key principles for development in the renewable energy sector. For example, it delegates the power of compiling the development planning of this sector to the named authorities2 and specifies certain means of financing to renewable energy projects in the future.3
China's efforts of exploring the use of alternative energy started long before the REL entered into force. For example, China began experimental wind farm projects in the early 1990s. Such developments were administered by different authorities, with different procedures and principles.
Despite such early efforts, China accounted for more than 27 per cent of the world's total carbon emissions in 2019.4 At the same time, China is the leading country in the world for employing renewable energy in electricity production.
China announced its climate change commitments as its NDC at the 75th United Nations Assembly in September 2020. China's official commitments are primarily to peak carbon emissions before or around 2030 and to reach carbon neutrality by 2060. This is the first time that China has officially announced its specific targets at the international arena for climate change under the terms of the Paris Agreement.
China's NDC was widely described internationally as 'disappointing', mainly due to the fact that China's NDC is silent on the level of the country's emissions peak. China has given no phase-out timetable, so no answer is available as to when China's carbon emissions would plateau before starting to drop.
The relevant Chinese authorities, on the other hand, may have made certain preparations beforehand for achieving China's NDC. As indicated from various policy announcements – especially that of the State Council and the National Development and Reform Commission (NDRC) – China's authorities realised that achieving China's NDC will not only affect the renewable energy sector, but many other sectors. For example, the sectors traditionally and presently producing or using fossil fuel, such as oil and gas or coal, and manufactures of heavy industry products will be affected. Thus, the authorities have indicated that a substantial integrated restructuring of the entire Chinese industrial structure is required by its NDC this time.
The year in review
Since China's announcement of its NDC in 2020 – or even prior to the official announcement – although China has not updated the REL, China's various authorities have issued updated rules to improve the present Chinese regime, especially in relation to the major bottleneck of issues surrounding the development of the renewable energy sector (e.g., financing for such projects and difficulty regarding connecting to the grid). Such rules, issued in haste, may not all be in line with laws and regulations prior to China's announcement of its NDC. In this case, policy would play a crucial role in reaching compromises.
On 24 October 2021, the State Council issued the Action Plan for Peaking Carbon Dioxide Emission by 2030 (APPE), which could be considered the Chinese administrative authorities' first attempt to provide the principles that guide the implementation of various efforts to achieve China's NDC goal of 2030.
Following the issuing of the APPE, there have been several follow-up circulars and rules by various authorities at the national and local levels. The most noticeable one is that issued jointly by the NDRC and the National Energy Administration (NEA) on 30 January 2022, the Opinion on Improvement of Mechanism and Policy Measures for the Conversion to a Green and Low-carbon Energy System (the Opinion). The Opinion emphasises setting up an integrated sector and its administrative system – covering policy, industrial standards, markets and market administration – and specified that it is aiming at a no-fossil-fuel, green and low-carbon system by the application of a dual control on total energy consumption and energy intensity. The Opinion, among other policy measures, explicitly mentions the perfection of supporting policies for the implementation of the Catalogue of Encouraged Industries for Foreign Investment to attract foreign investment in the green energy sector.
All the above policy announcements are seen by the players in this sector as strong signals to encourage the development of the green energy sector in the entire production chain. That said, these policies and intended measures would mean that there will be different challenges to different industrial players in China.
For example, coal producers are facing a forced reduction of output if they do not develop technology to produce clean coal (as included in the Opinion), and oil and gas producers may have to reduce their carbon emissions by adopting certain technology. Shenhua Group's coal liquefaction project is a good example. Together with other coal producers, Shenhua's years-long efforts indicated their view that coal liquefaction was an important part of China's energy security, and there have been many new coal-to-oil projects announced by many large coal-producing provinces and cities. Will such companies, which used to be and are still very powerful in the market for their fossil-based fuel and products, now have to restructure their production chains?
Certain challenges are also unavoidable for renewable energy producers. Wind farms, for example, may be facing the challenge of connecting to the grid. All players in the green energy sector may face intense market competition as more enterprises want a share in this policy-encouraged sector.
The policy and regulatory framework
i The policy background
China's present policy clearly indicates the government's support and promotion of dramatic growth in the renewable energy sector, with a view to ensuring its achievement of China's NDC. Although China has kept silent internationally about its peak emissions aim and has not committed on any clear timeline to phase out domestic coal consumption in China, its authorities may have a planned phase-out in mind. For example, the APPE specified certain targets, including:
- by 2025, non-fossil energy consumption will account for approximately 20 per cent of total energy consumption and energy consumption per unit of gross domestic product (GDP) will drop by 13.5 per cent compared to 2020 figures; and
- by 2030, non-fossil energy consumption will account for approximately 25 per cent of total energy consumption and energy consumption per unit of GDP will drop by over 65 per cent compared to 2005 figures.
The APPE also provided that the renewable energy substitution rate in urban construction will achieve 8 per cent. Urban construction will make efforts to achieve 50 per cent photovoltaic (PV) coverage of the rooftops of new public and factory buildings by 2025.
National policy plays a leading role in China's major decisions on its economic goals and actions, and any substantial redirection of the economy – for example, the development of China's wind farms. As China is rich in coal resources, coal has been the main source of fuel in China since time immemorial. In the mid-1980s, China saw a rapid increase in economic scale, which caused a rapid increase in serious air, soil and water pollution, and also saw a potential challenge from the perspective of national security regarding the lack of sufficient natural oil and gas resources in China. China began to explore ways of tacking these issues by considering renewable energy. The first experimental project decided by national policy was the development of wind farms. The equipment was imported from Denmark for the first wind farm in Shandong, which was successfully completed and on-grid in 1986. Through the implementation of the policy in three further steps (industrialisation exploration, development and scale-up), China began the construction of wind farms and experimental projects of PV power generation. Now, although coal consumption still accounted for 57 per cent of its total energy consumption in 2020,5 China has become the world's leading country in electricity production from renewable energy sources. Its wind power capacity reached 28,153kW in 2020.6
In addition to hydro, wind and solar power, China has explored other forms of renewable energy generally referred to as 'new energy' (biomass, geothermal and green hydrogen energy). Green hydrogen is a new energy source that has attracted the attention of several large energy companies. China currently has dozens of projects in progress to turn wind and PV power to green hydrogen, most of which were invested in by large Chinese state-owned companies. Foreign investors are also seen playing a role in this sector.
Shell's joint venture with a local partner has started production at a wind-powered 20MW electrolyser in Zhangjiakou, which provided green hydrogen for half of the fuel cell vehicles at the game zone in Hebei during the 2022 Winter Olympic Games. The project, stated by Shell as being its first and the largest commercialised electrolyser in the world, has an ambitious long-term plan for the second phase of the project.
Building a new renewable energy project is time-consuming and requires substantial investment. As a result, most of the major players in China's renewable energy sector are large state-owned companies. Compared to small- to medium-scaled privately owned enterprises, state-owned companies are more welcome by banks. Although several government circulars and provisions repeatedly state their support of the participation of privately owned enterprises, the sector is still dominated by state-owned companies.
That said, the Chinese government has made efforts to provide financial support to all participants in low-carbon projects, including players not owned by the state. Starting from 2015, the People's Bank of China (PBOC), based on the joint-published policy by the Central Committee of the Communist Party of China and the State Council, issued a series of circulars setting up certain schemes to promote commercial banks and the stock market for their strong financial support of low-carbon projects. Such schemes intend to attract more non-government funding (i.e., setting up private green funds; allowing green enterprises' green bonds on the bond stock market, banks' revolving credit and bank guarantees; and creating green products trading). Since then, many green industry funds have been seen in China, among which are private equity or venture capital investment funds; public–private partnership project funds; joint venture funds comprising investors from various enterprises, individuals and government agencies; and some with international investors. To date, the total capital possessed by green industry funds may have exceeded several hundred billion yuan, most of which is still from government agencies and enterprises. The PBOC's aim to secure non-government resources still seems far from reality.
The NDRC issued a catalogue in 2019 to define which industries are green and should be qualified for finance or investment by green industry funds. The catalogue sets out six categories as green industries, including environmental protection, clean production and clean energy.
Until 1 August 2021, there were schemes for feed-in tariffs (FiTs) for renewable energy, although different schemes applied to different renewable energy resources. China applies a FiT to PV power. The FiT consists of the benchmark tariff and renewable energy subsidies. The subsidies are, in principle, paid by the national government to the power plant. In practice, the subsidies are paid by the government directly to the grid7 and the grid pays the subsidies to the power plant at the end of the financial year after the final settlement of all accounts with the power plant. The benchmark on-grid tariff is decided by the NDRC, is subject to adjustment by the NDRC and varies from location to location.
There used to be a FiT for wind power, which was revised in 2019 by NDRC Notice No. 882 on amending the wind power FiT policy. Since July 2019, the original benchmark on-grid tariff no longer applies to all onshore wind farms. A price indication will be determined by the NDRC, which will vary from location to location. Such indication should be benchmarked with but shall not be higher than the local coal-powered on-grid tariff. All new onshore wind farms must bid for connection to the grid and no winner shall receive a tariff higher than the NDRC's price indication. In practice, power plants tend to accommodate the required grid parity through certain contractual terms in favour of the power plants – such as long-term electricity supply-and-purchase contracts – and the grid undertakes to not reject the supplied electricity.
Although the FiT has been maintained to the extent stipulated in NDRC Notice No. 882, the NDRC has further attempted to push for grid parity for more wind- and solar-powered electricity projects. On 30 September 2020, the NEA circulated a notice8 that listed certain newly approved solar-powered projects that have undertaken to achieve grid parity, based on NDRC Notice Fa Gai Ban Neng Yuan No. 588 of 2020. The NDRC issued a further notice on the new energy FiT policy in 2021, which further required that, as of 1 January 2021, all new onshore wind farms shall achieve grid parity. A similar pricing mechanism will also be applicable to offshore wind farms, but at a later date.
The FiT was further revised on 7 June 2021 by NDRC Circular No. 833 on the Issues with regard to the Policy for New Energy's On-grid Tariff (effective as of 1 August 2021) (Circular No. 833), which stated the abolishment of the FiT. Circular No. 833 applies to all PV power projects, regardless of their being centralised or distributed for commercial or industrial use. All onshore wind power projects that were newly filed with or approved by the authorities as at 1 August 2021 (the New Projects) shall no longer enjoy any subsidies from the central treasury. The New Projects shall go on-grid with grid parity and the benchmark shall be the coal power's on-grid price in the same region. The New Projects may trade their electricity directly on the market and the price resulting from free market trading shall be the on-grid tariff for such New Projects. In addition, as of 1 August 2021, the pricing authorities at provincial level shall decide the on-grid tariff within their territories for all newly approved or filed offshore wind farms and solar thermal power projects, and the provincial authorities may determine the local on-grid tariff through a bidding process. However, if the on-grid tariff determined through the bidding process is higher than the local benchmark price based on coal power, the grid will only pay the local benchmark price. Finally, Circular No. 833 stated that the local governments are encouraged to establish local policies to support the development of the new energy sector.
Circular No. 833 largely sets forth two messages to the players in the sector:
- the central treasury will stop financing wind and solar power projects by calling off the FiT completely and requesting grid parity for all New Projects; and
- in the meantime, local provincial governments are encouraged to establish their own policies to continuously promote the new energy sector in their areas, including by paying a FiT subsidy as described above.
On the other hand, Circular No. 833 is silent on whether FiTs will remain for the wind and solar power projects already in operation or in construction, or to any new projects filed prior to 1 August 2021. Logically, this silence should mean the continuation of the FiTs for the existing projects, at least until the end of their power purchase agreements with the grids.
From 2011, China has seen an insufficient use of renewable energy power or an abandonment of wind and solar power by the grid. For example, an NEA report stated that wind-powered electricity abnormally rejected for purchase by the grid in total amounted to 497kWh in 2016.9 In certain provinces, the abnormally ended electricity amounted to 43 per cent of their total generated electricity.10 The reason for this disappointing situation may be attributed to several factors, including that most wind and PV farms are built in the north-west, north-east and Huabei regions, where coal historically has been the dominant fuel. The electricity produced from wind and solar was in surplus for local consumption in such regions. In addition, the grid complained about the volatility of the electricity supply from wind and solar sources, and claimed that such a ratio of peak-valley difference and the peak load technically could not be handled by the grid. However, the grid, though commonly criticised as being too dominant, is not completely unreasonable nor should be considered responsible for solving technical difficulties connected to the supply of wind- and solar-powered electricity.
Solving these technical difficulties would require facilities that are capable of storing and releasing electricity to act as the mediatory service between power plants and the grid. Such electricity storage technology and facilities may be insufficient in China. The NDRC may have noted the issue, as evidenced by its issuance of the Implementation Plan on Development of Neo Type Energy Storage for the Fourteenth Five-year Period in January 2022. China's NDC will require it to go through a substantial restructuring of its entire traditional energy sector to build a non-fossil-based industrial system. Technology in all aspects will be a key factor for China's success in this regard.
There used to be a value added tax rebate enjoyable by PV power plants for a limited period,11 which has now expired. Instead of tax benefits, there are now certain other measures adopted by the authorities that aim to reduce the financial burdens of investing in the renewable energy sector, such as a reduction in costs for construction of renewable energy power plants.
ii The regulatory and consenting framework
The REL sets up the framework and certain key principles to benefit renewable energy development. China began development in the renewable energy sector much earlier than the promulgation of the REL in 2005. Before the REL, China's often-criticised piecemeal approach to legislation was typically seen in this sector. The legal provisions in relation to renewable energy were seen scattered among various regulations issued by different government authorities, and all such authorities played a role in certain aspects of the upstream and downstream chain of this sector.
The draft of the REL was inspired largely by the initiative of the Energy Foundation12 and the promulgated REL takes a clear position in favour of renewable energy development. For example, it states that China encourages and supports the renewable generation of electricity and connection to the grid.13 Further, Article 14 requires that the state shall adopt a system to ensure the purchase of all of the electricity generated through renewable energy sources. Attempting to provide systematic solutions in relation to the on-grid process, Article 14 requires advanced planning by the relevant authorities and specific regulations to ensure a priority position for renewable power plants in the on-grid process.
The desired measures under the REL to encourage and promote the development of renewable energy sources in China have not been fully implemented. For example, the purchase of electricity generated from renewable energy power plants by the grid has stalled. The difficulty of implementing the REL may partly be attributable to the fact that the various authorities involved in the administration of this sector do not necessarily have the same goals and views regarding the sector's development.
The Legislation Law defines the legislative authorisation of the Chinese government authorities at different administrative levels. Laws, regulations, provisions and circulars issued by the National People's Congress (NPC) or by various government agencies comprise the Chinese legal system. The REL is 'top-tier' law, as it was issued by the Chinese NPC. However, the REL was drafted far behind the growth of the renewable energy sector administered by various other authorities, which had already issued numerous provisions, circulars or notices to define all the pragmatic features of the industry. The REL, for the benefit of the stable operation of the sector, is not able to go into pragmatic details. It provides the framework and certain key principles to integrate various existing practices governed only by administrative regulations into the overall schema of environmental protection.
When a law like the REL is issued, various authorities with certain relevant administrative roles in the relevant sector will issue or alter a large number of regulations, provisions, decrees and guidelines to implement the law. Authorities at the national, provincial or even municipal levels will issue their own policies and regulations for implementation. The role of local governmental authorities may be of particular importance in the case of the implementation of the REL, as each province fundamentally faces different challenges, which will require different methodologies and strategies to overcome. This is especially true in relation to the achievement of China's NDC. For example, Shanxi, as traditionally and even currently the largest coal producer, needs a highly specific strategy, methodology and feasible local road map to restructure its coal sector and to convert to other industries. In addition, thought must be given to what new contributions should be expected from provinces like Qinghai, which is comparatively in a more comfortable position as it holds the largest PV production site in China.
The State Council does not engage itself in the day-to-day administration of various economic sectors. Its function is fulfilled through various governmental authorities. There are many authorities under the State Council that play a role in the administration of the renewable energy sector in China. To avoid an unnecessarily long list of such public bodies, we will focus on those of decisive power or with the most relevant functions governing renewable investments and operations, as set out below.
- The NDRC is in charge of both the macro (i.e., working out the development or restructuring (or both) plan of the entire sector) and micro aspects of the sector. It will issue, from time to time, various catalogues that set out encouraged (or, under certain circumstances, prohibited) industries. For example, on 29 November 2005, the Renewable Energy Industry Development Guidance Catalogue was issued by the NDRC. In terms of micro-administration, the NDRC is in charge of the electricity pricing policy and also is the authority issuing approval (or rejection) for specific new renewable energy projects that require approval based on certain rules.
- The NEA, under the direction of the NDRC:
- prepares drafts of laws and regulations for further review by the superior authorities;
- proposes and oversees the implementation of the renewable energy development strategy;
- carries out supervision of the electric market to ensure its operation in order; and
- may have certain power to approve or review investment project in fixed assets.
- The Ministry of Natural Resources is involved in renewable energy development to determine the ownership title of natural resources involved in renewable energy projects. For example, if an offshore wind farm requires the use or reclamation of certain areas of the sea, the Ministry of Natural Resources' approval is required to ensure that the farm's title to use such area of the sea is valid.
- The Ministry of Ecology and Environment (MEE) is the authority tasked with assessing the ecological and environmental impacts of each project waiting for approval. The MEE's report that confirms the project being free of any negative impact is vital for the applicant to receive final NDRC approval.
- The PBOC and the Ministry of Finance, although not directly involved in the administration of renewable energy projects, play a decisive role for the implementation of the financing policy applicable to the renewable energy sector.
A renewable energy project will involve the administration of multiple authorities, such as the NDRC, the MEE, the local electricity administration and the local land use administration, among other things.
To date, there is no differentiation between the approval process for fossil-fired power plants and that of green power plants under the law or regulations governing the approval for specific projects. China's approval and the applicable procedures are complex. Simply put, a renewable energy project may require a number of approvals at different phases of its progress. The major approvals are set out below.
- NDRC approval or examination and filing. The State Council issues, and updates from time to time, a catalogue14 to specify the types of projects that require prior approval or that require an examination and filing only. The NDRC is primarily in charge of the approval function. Through the policy of limiting and streamlining authorities' approvals, the list of projects requiring approval by the NDRC has been substantially shortened. The NDRC's approval comes in two steps. First, the project owner must obtain an NDRC filing confirmation, which is generally referred to as 'project establishment' (PE). Second, the NDRC's final approval is subject to the project owner obtaining other approvals from other authorities. To obtain the PE and other approvals, the project owner would have to prepare and submit different project documentations to different authorities.
- Urban or rural location planning. The project owner must obtain a pre-approval to use the intended land area from the local urban or rural planning authority.
- Environmental impact assessment and approval. Upon obtaining the PE, the project owner is required to go through a process regarding the project's possible impact on the environment. Usually, the project owner must engage a licensed third-party environmental assessment institute to complete the assessment and to deliver the assessment report to the environmental authority. Subject to local regulations and based on all obtained pre-approval filings, the project owner must obtain a pre-approval filing from the local land authority and, if water will be used in the project, a pre-approval permission from the local natural resources authority must be obtained. Final approval will only be issued following the NDRC's final approval.
- Grid connection notification and application.
With all the aforementioned documents, provided that all such documents contain no negative comments, the project owner shall return to the NDRC for final project approval. After obtaining this, the project owner must return to the local authorities to complete the formalities for the final approval documentation one by one (e.g., the land use certificate, whether through purchase or through lease for the right to use such land). The entire process for obtaining these essential approvals may take a year or even longer, subject to whether any complications may occur during the process.
Since 2014, a year in which China was facing the pressure of an economic downturn, the policy of government streamlining was initiated by the State Council. This included the revocation of certain approvals, and the decentralisation of certain powers and procedures to approve projects.15 The NDRC, following the State Council's decision, decentralised its approval power by delegating such power to its local bureaus. According to the NDRC's official news briefing, by 2018, 67 per cent of its project approval items were delegated to its local arms (i.e., provincial or municipal NDRC bureaus).16 This made the approval authorities and procedures more accessible to investors.
Following the APPE and the NDRC's implementation plan, the NDRC – together with the other 11 relevant authorities – issued a circular on 18 February 202217 that, in addition to adopting a more favourable taxation and surcharge payment scheme for renewable energy enterprises, indicated that the various local authorities involved in the aforementioned approval process shall adopt more collaborative and flexible approaches and attitudes in their approval processes. Environmental impact assessments are key steps in these processes. If the result of the assessment is negative, obtaining NDRC approval is impossible.
The MEE has issued technical guiding principles18 as a basis for the professional environmental institutes to carry out their assessments. The guiding principles appear to focus on possible air, water, soil and noise pollution. Protection of wild animals and cultural resources are not in the authorised scope of power of the MEE. Protection of wild animals is delegated to the Ministry of Agriculture under the Wild Animal Protection Law. The protection of cultural resources is under the power of the Ministry of Culture and Tourism. This may be seen as a typical example of the piecemeal methodology of China's legislative system.
Renewable energy project development
i Project finance transaction structures
A classic project financing model for engineering, procurement and construction (EPC) projects is not commonly used in China and was seen more frequently in foreign-invested projects during the early period of foreign investment into China. Most Chinese domestic enterprises were reluctant to apply the classic EPC project finance model to their projects in China, while they would generally accept the project finance model in their outbound investment projects. In 1995, several authorities jointly issued a circular19 that allowed solely foreign-invested projects in the infrastructure sector, including coal-fired power plants, to use the build–operate–transfer (BOT) model to finance their projects, which defined projects allowed to use such a model.
Most financing for green projects is still done through commercial bank loans, which still frequently come from the large state-owned banks in China. For example, China Development Bank (CDB) has announced that it will set aside 500 billion yuan in loans to finance green energy projects over the 14th five-year period (2021–2025), with 100 billion yuan earmarked for borrowing in 2021.20 Most such loans, however, go to large state-owned enterprises.
Another common source of financing is local government-sponsored subsidies. As at May 2022, over 20 provincial governments have announced initiatives to set up subsidies for electricity storage projects or renewable power and storage projects, intending to enable the further expansion of local renewable energy power projects by solving the bottleneck to the grid. Subsidies are also in place to allow green electricity trading by power plants directly with end users, so that renewable energy enterprises may substantially improve their cash flow, which will improve their borrowing positions. This is in place in the China Southern Power Grid territory as a pilot project initiated by the authorities.
In addition to these government-sponsored channels for financing, there are several noteworthy financing channels by grassroots enterprises attempting to participate in this sector, as follows:
- Chinese-style project finance, which constitutes a pledge of future income as the guarantee for a loan or pledge of future products (i.e., electricity or revenue from future products);
- financial leasing, through which the loan is guaranteed by equipment possessed by the borrower; and
- the BOT model, which is usually used by privately owned enterprises when participating in infrastructure construction projects, is now seen as a channel of financing for privately owned enterprises that wish to participate in this sector.
ii Power purchase
Following experimental carbon emission trading in several cities since 2011, China set up the national China Carbon Emission Trade Exchange in July 2021, a few months before the official announcement of its climate change pledge. The first sector that started trading on this exchange is the electric power sector.
Currently, the grids (the State Grid Corporation of China, the China Southern Power Grid and the Inner Mongolia Power Grid) are the exclusive purchasers of all electricity produced from all producers across China, except the approved captive power plants that sell power exclusively and directly to their owners. There is no differentiation in the renewable energy sector. All renewable energy producers directly sell their electricity to their regional grid, and the grids then distribute green and non-green electric power accepted and purchased by the grid without differentiation to the sub-grids, which will further distribute power to various cities at different administrative levels. Once the electricity reaches a city, it is transmitted to the electricity distribution network, which further distributes electricity to various end users. Under this single-channel supply system, there is no way to identify which end users are in favour of green electricity. As such, the grids are in a dominant position. That said, since the announcement of China's NDC, direct trading of green electricity – although presently only a limited experiment – may soon become allowed nationwide.
Recently, the authorities have decided to allow more freedom of direct trading by green electricity producers. The NDRC and the NEA, in a letter dated 7 September 2021 addressed to the State Grid Corporation of China and the China Southern Power Grid, confirmed the beginning of an experimental green electricity trading scheme to start immediately. This scheme allows green electricity producers to sell their electricity directly to customers willing to purchase green power, sold at a slightly higher price than fossil-fuelled electricity. At the first Green Electricity Trade Fair in September 2021, over 200 enterprises entered into purchase agreements with green electricity producers located in the experimental region, among which are Guangzhou Tencent, Global Data Solutions Ltd and BMW (China). BASF (China) and CGN Grid Power Investment Co Ltd were also mentioned in local media reports as large customers.
iii Non-project finance development
China has certain financing schemes for renewable energy projects. For example, as mentioned in Section III, China has established the Green Industry Bonds Market as driven by the PBOC, where certified green industry enterprises are allowed to issue green industry bonds. Several green industry funds for investing from institutional green investors have also been established. According to statistics by the Asset Management Association of China, in total there were over 700 green funds operating across China as at May 2021. However, as most such funds are established and invested mostly by the government and large-scale companies, the PBOC's desire to attract more funds from private resources seems to be enjoying limited success.
Most renewable energy in China was developed using non-classic project finance structures. The project owners in general prefer to use their own design and construction resources rather than an EPC contractor appointed by the financial institution. Most such projects are financed partly by Chinese banks – such as the CDB, commercial banks and investment funds – and partly by the projects' own financial resources (e.g., the group company's financial pool). The project owner often acts as the chief manager of the project's design, procurement and construction.
Distributed and residential renewable energy
Distributed PV generation has seen a noticeable increase since 2014 in China, especially in the regions of Jiangsu, Zhejiang, Shanghai and Anhui, encouraged by comparatively higher government subsidies to distributed PV generation that has mostly been used for factory buildings in industrial development zones in those regions. Local factories have created the tripartite corporation model, under which the user, the bank and a third-party energy internet platform jointly finances and operates the installed distributed PV generation. This financing structure has been replicated in several factories. Along with further local subsidies granted by local governments, local residents in these areas welcome the installation of PV generation facilities at their private homes.
This first wave of increase may see the use of distributed PV generation growing continuously, including at both commercial and residential addresses. Until 2019, China's eastern, far eastern and northern regions were the lead users of distributed PV generation, accounting for over 60 per cent of total distributed PV generation in China.21
Other regions in China seem less enthusiastic about using distributed PV generation. For example, for most residential homes in apartment buildings, such as those in Beijing, it would be difficult to get every homeowner's consent for PV equipment installation. For rural areas, despite distributed PV generation's apparent status as a good solution for farmers to gain access to electricity, it currently seems not to be widely used due to the lack of proper infrastructure in such areas.
In most cases, the owner of the building wishing to install distributed PV generation facilities must purchase the entire solar panel and other equipment as well as pay for installation. Certain local governments have discounts or subsidies for initial costs. In such cases, the owner has the title to all installed solar power equipment.
The main players in the above case are homeowners. Installation is organised by the local power supply bureau, which is responsible for connecting the installed PV equipment to the local grid.
The Chinese government has been promoting the concept of the low-carbon city since the late 1990s because over 75 per cent of the country's total carbon emissions come from urban areas.22 This promotion is re-emphasised in the APPE in several paragraphs. For example, the APPE specifies the requirements to:
- implement urban energy-saving and lower-carbon engineering;
- update construction, transportation, lighting and heating supply facilities; and
- promote cutting-edge green construction technology.
The APPE further reinforced the concept of converting current urban and rural development to a low-carbon green model. The implementation of this goal may require a substantial change of construction technologies and present power supply infrastructure in urban areas.
Renewable energy supply chains
i Wind power turbines
Prior to the 1990s, China had no local manufacturers of renewable energy power turbines, or any parts or components. The earliest experimental wind farm was built in 1986, with all parts and components imported from Denmark. Until the mid-1990s, importation of parts and components was the sole means through which the first wind farms could be built. The Chinese authorities could see that entirely relying on imports with high costs for building wind farms in China would not be a sustainable path for the growth of a wind power industry.
In 1996, the NDRC started the Cheng Feng Plan (CFP) to promote the local manufacture of wind power turbines, parts and components by Chinese enterprises. The CFP's implementation involved many machinery and technical research institutions and universities, although importing technology may be unavoidable. At the same time, the NDRC organised the establishment of the first generation of wind power turbine manufacture enterprises in China.
As a result of the scheme, which was promoted and funded by the government under the CFP until around 2015, China is now able to set up an entire production chain to manufacture wind power turbines that is not only sufficient for domestic wind farm demands, but also able to export wind farm equipment to the world market. For example, in 2018, China exported 27,406 complete sets of wind power turbines.23
This, however, does not mean that China has no need for imported wind power turbines. In 2018, in parallel with its export performance, China imported 293 complete sets of wind turbines.24 This may indicate that China's technology and manufacturing quality is still insufficient for certain special types of wind farms (e.g., offshore wind farms) and its technology is still behind that of the same trade overseas. For example, China still lacks design capacity and experience in producing axel bearings, especially those above 3–4MW. The Chinese-made wind blades may have a shorter life cycle.
ii Solar power
The authorities that directly oversee solar power development are the NEA and the Ministry of Industry and Information Technology rather than the NDRC, although approval for such projects is still within the NDRC's domain. Development of solar power equipment began later than that of wind power in China and a more grassroots path was taken. It started with China becoming the original equipment manufacturer of silicon processing and, later, solar cells were assembled into modules for foreign manufacturers by local processing enterprises. Following defeats in two anti-dumping cases in the United States and the European Union in 2011 and 2012, respectively, these enterprises decided to develop their own solar products instead of providing processing services only.
Since 2013, the Chinese authorities have issued a series of policies, including financial injection and rules to expand their market, which led these enterprises to start a period of rapid growth in the scale of production of PV generation equipment. As a result of the history of the development of PV generation in China, more privately owned companies participate in this industry than in the wind power industry.
China now possesses an entire production chain to manufacture PV generation equipment. The country has emerged as the largest global producer of PV generators, which have been exported to over 200 countries and regions. In 2019, China's output of polysilicon accounted for 67 per cent of the global total. The figure for solar PV cells was 79 per cent and, for solar PV modules, 71 per cent.25
As detailed in Section III, PV electricity that has already been generated currently still receives a FiT. The rapid expansion of information technology and the internet in China has inspired the expansion of distributed PV generation nationwide using online platforms, especially in eastern China, which is undergoing rapid economic growth.
No Chinese law or policy provides localisation requirements in relation to wind power or PV generation in relation to the entire production chain in the renewable energy sector, or to any parts or components of the applicable equipment. The NDRC and the Ministry of Commerce jointly issued the updated Foreign Investment Negative List in December 2021, effective as of 1 January 2022 (the 2022 Negative List), in accordance with the administrative regime governing foreign investment into China under the Foreign Investment Law (effective as of 1 January 2020). The 2022 Negative List will be updated from time to time. In the 2022 Negative List, foreign investment is only restricted from investing in nuclear power plants and there are no other restrictions in the power sector.
Other key considerations
i Operations and maintenance
There are certain different operation and maintenance (O&M) requirements and standards applicable to renewable energy enterprises in different subsectors, such as wind or solar. Usually, these technical rules are prepared by relevant research or technical institutions and issued by the NEA.
For example, the NEA issued 87 industrial standards, including seven for wind farms, effective as of 1 October 2018. The Wind Power Turbines Maintenance Technical Standards were issued in 2018, and the Offshore Wind Turbines – Requirements for Operation and Maintenance were issued in 2019. Various other national standards have been issued more recently.
Third-party O&M service companies are in high demand and count large power plants among their customers. In 2021, online tendering by wind farms took place to acquire such third-party O&M services, covering ability for 70,000MW.26 The development of distributed PV generation is also a driving factor for the rapid increase in demand for certain third-party O&M services.
ii Mergers and acquisitions
Despite the covid-19 pandemic, the level of mergers and acquisitions (M&A) activity in China has been high in the new power sector. There were over 20 M&A transactions in 2021 in the lithium battery industry – some of which were for acquiring raw materials while others were for battery products and modules – including foreign inbound and outbound transactions. Inbound acquisitions include LG Chemical's investment in a Chinese company that produces copper foil in Jiangxi in 2021, and BASF's establishment of a new joint venture with Shanshan Technology to produce precursor cathode active material and cathode active material.
M&A transactions in the renewable energy sector in relation to power plants are less common. The largest M&A transaction was between two state-owned companies – GD Power Development Co, Ltd and China Shenhua Co, Ltd – and began in 2017. The transaction was structured as a spin-off and merger of their coal-powered thermal electricity plants so that the two companies could have a coal-to-power strategy for their traditional assets.
The new energy automobile industry (NEAI) may have to go through a government-driven restructure in the near future.27 Following a wave of investment into the NEAI, partially driven by government policy and high subsidies, there were 39 passenger vehicle manufacturing companies that had zero sales while their designed productivity was as high as over 3.6 million vehicles, of which most were new energy automobiles. As at the end of 2021, the total productivity of the NEAI had exceeded 20 million vehicles.
In addition, there has been small-scale M&A activity in the renewable energy sectors from around 2017, despite such activity not being the focus of official news reports in China. In such transactions, the sellers are usually privately owned companies that own small to medium-sized PV generation plants and the buyers are small state-owned companies. The sellers are those who have incurred financial difficulties prior to the completion of the plants. Foreign-funded investment funds that used to be active on the market have gradually withdrawn from China since 2017, leaving state-owned enterprises to dominate the funding market. Such transactions often conform to the pre-acquisition acquisition model. Under this model, the seller remains the legal owner, and the buyer takes actual control of the construction or operation and provides funding for the target plant until the plant is in commercial operation. When the plant obtains official confirmation that it is in commercial operation, the acquisition can begin. This model is designed to circumvent the NDRC's circular from April 2014, which forbids any change in project owner before the project is in commercial operation.28
iii Repowering and decommissioning
The NEA issues provisions and standards for the repowering of wind turbines and wind turbine generation systems, together with standards and requirements for overhauling regulations and repowering rules.
China's first-generation wind farms were mostly built in and begun operating around 2000, with some earlier ones built in and around 1995. These wind turbines are currently facing the end of their life cycle. China has no experience with handling the decommissioning of wind turbine generation systems. The authorities have realised that they must face the issue of decommissioning in the near future. The authorities, especially the NDRC and the NEA, have taken the lead in preparing China's decommissioning strategy. In July 2021, the NEA prepared the first draft of the Wind Turbine's Repowering, Technology Update and Decommissioning Administration Experimental Provisions to solicit expert opinions and comments, and the MEE has organised technical institutions to further study these issues. The NEA included such issues in its 2020 list of projects for further research.29 It seems that China has no experience but has realised the issues and is attempting to prepare solutions.
Conclusions and outlook
China has officially committed to reaching peak emissions by 2030 and to reaching carbon neutrality by 2060. Although China has not specified the level of emissions that will constitute its peak or specified any phase-out timetable for the fulfilment of this commitment, it is still a step forward in fulfilling its obligation regarding climate change under the Paris Agreement.
To accomplish its commitment, a substantial restructure of China's current energy consumption pattern is necessary. For example, although China is the leading country in the world for using wind and solar power, coal is still the essential source of its energy consumption. However, China has managed to reduce the use of coal for energy consumption from approximately 90 per cent of total energy production in the 1950s to above 60 per cent in the 2010s and, for the first time, to 57 per cent in 2020. Further reductions in the use of coal may present more challenges not only to China's coal industry, but also to other power industries, and cause related social issues.
China appears to be exploring an integrated restructuring of its power sector. If this is the case, China must overcome great challenges from its traditional energy producers:
- to adopt or even to innovate new technologies to produce, store and distribute clean energy;
- to integrate the efforts of various government authorities that have played a role in certain aspects of the energy sector; and
- to avoid a slow-down in China's planned economic growth that may be caused by such restructuring.
There is no doubt that China was sincere when it officially announced its committed target at the United Nations Assembly. Whether China is able to successfully achieve its pledge will be subject to whether China is able to overcome challenges at the domestic and international levels in the coming years.
1 Ren Jiang is of counsel, and Yuping He and Lei Shi are partners at Anjie & Broad.
2 REL, Article 8.
3 id., Article 24.
4 Rhodium Group report dated 6 May 2021, quoted in 'China's Carbon Emission in 2019 accounted for 27% of the World Total, the First Time Exceeding the Total Emission of the OECD Countries'
<www.tanjiaoyi.com> (accessed 16 March 2022).
5 Bingjiang Liu, Director of the Atmosphere Environment Administration of the Ministry of Ecology and Environment, 'Regular press conference of the Ministry of Ecology and Environment, P.R.C in February' (Beijing, 25 February 2021) <www.mee.gov.cn/xxgk2018/xxgk/xxgk15/202102/t20210225_822424.html> (accessed 27 February 2022).
7 There are two major grids in China: the State Grid Corporation of China, which is the largest, and the China Southern Power Grid. In addition, there is the Inner Mongolia Power Grid.
8 Notice of Guo Neng Zong Tong Xin Neng No. 107 of 2020.
11 Notice No. 66 on Value-added Tax Policy on Photovoltaic Power Generation (2013).
12 The Energy Foundation is a US non-governmental organisation registered in California, with an office in Beijing.
13 REL, Article 13.
14 Catalogue of Investment Projects Subject to Governmental Approval.
15 State Council Decision No. 5 on Cancelling Administrative Approval Requirements or Delegating Approval Power to Lower-level Authorities for a Batch of Items (Guo Fa) (2014).
16 NDRC New Briefing Conference (1 September 2018).
17 Circular No. 273 on the Issuance of Certain Policies to Promote the Steady Growth of the Industrial Economy (2022).
18 Ministry of Environmental Protection Announcement No. 73, Technical Guidelines for Environmental Impact Assessment of Construction Projects – General Principles (2016).
19 State Planning Commission, Ministry of Electricity and Ministry of Transportation Joint Circular for Issues in Approval of Sole-foreign invested projects as Experimental Projects (August 1995).
20 CDB online news broadcast dated 11 June 2021 <www.cdb.com.cn/xwzx/spxw/202106/t20210611_8648.html> (accessed 28 February 2022).
22 Bin Wu article dated 14 January 2022, 'Urban Carbon Emission Exceeding 75%, How to Tackle This Main Battlefield?', 21st Century Business Herald (Shanghai) <www.21jingji.com> (accessed 14 March 2022).
25 State Council Information Office of China, 'Energy in China's New Era' (December 2020).
28 NEA Notice No. 477 regarding Administration on Regulating the Order of Investment and Development of Photovoltaic Power Plants (2014).
29 Energy Industry Standards Program, 2022 Guidelines for Project Initiation.