China’s Projected Renewable Electricity Quota Regime and its Role in Wind-Generation
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China’s Projected Renewable Electricity Quota Regime and its Role in Wind-Generation

This post is from Nat Green, a second year law student at Vermont Law School and a joint research project student for 2011-2012 with the VLS U.S.-China Partnership for Environmental Law. 

On February 27, 2012, China’s National Development and Reform Commission announced a new plan to develop a national quota regime intended to encourage renewable energy development.  This system will require that electrical grid operators purchase electricity from renewable sources to fulfill quotas that vary according to region.  The planned regime, which bears resemblance to portfolio standards employed elsewhere in the world, signals a departure of sorts from China’s renewable energy policies.  While China’s renewable energy development has shown great success, the systems used to this point to encourage the development and integration of such sources continue to face significant challenges. Given the special focus of central government planners on wind generation, any shifts in renewables policy will manifest especially strongly in this sector.

In a sense, China’s wind power industry is a victim of its own success.  In 2010, installed wind capacity was estimated at 42 GW.  While this is still small compared with China’s hydropower capacity, it represents remarkably rapid growth given that the vast majority of this generation capacity has only been installed over the past decade.  Moreover, in the 12th Five Year Plan and associated policy circulars, the Chinese government projects that this growth will continue for decades, with the ultimate target calling for 17% of national electricity production being accounted for by wind generation.  However, this growth has come too quickly for existing grid operators to entirely accommodate the new industry’s particular needs.

While the Kyoto Protocol’s Clean Development Mechanism (CDM) has historically provided much of the capital for China’s wind power sector, China’s Renewable Energy Law (REL) provides the policy and financial backbone of the industry.  The REL established what essentially is a feed-in tariff, meaning that renewable energy developers are guaranteed a fixed rate of sale into existing electrical grids in order to provide a certain return on investment.  Unfortunately, the strong incentive that the REL provides developers is not mirrored by strong enforcement where grid operators are concerned.  The REL requires that grid companies connect renewable generators and that they purchase their electricity, but these requirements place significant burdens on grid operators given the limitations of existing technology.  As a result, enforcement of the grid-connection requirement is uneven.

Recently, The China Renewable Energy Society, a China-based NGO, estimated that generators wasted 10 billion kilowatt hours of wind-generated electricity at installations across China in 2011.  This comes as somewhat of a surprise.  In 2009, many international media outlets reported that as much as 30% of wind capacity went unconnected to electrical grids, and Chinese policy-makers appeared eager to solve this problem in part through strengthened central government oversight.

However, the wind sector’s massive growth in the past two years has simply outrun the grid’s ability to incorporate the new types of load and the new requirements of long-distance transport.  As a result, policy-makers intend to slow wind power growth to a manageable rate.  A Oct 31, 2011 article in the China Energy News, a newspaper put out by the People’s Press and focused on China’s national energy industries, predicted just such a cool-down phase.  In this piece, Han JunLiang, board chairman of the HuaRui Group (a major state-owned renewable energy developer), claimed that wind power in China had come to a “re-adjustment period,” where annual increases of 100-200% are simply not sustainable.

An article in the same publication, published in February 2012 by Wang Xiuqiang, connected this cool-down stage of development with the new need for a quota system.  The quota system, according to Wang, will require that markets incorporate a specific percentage of electricity from renewable sources, varying by region.  In the process, generators and grid operators will earn credits, which in turn they can trade on a domestic market.  According to Wang, this system will serve to better unite the interests of generators and grid operators through both market forces and the threat of greater penalties where grid operators fail to connect renewable sources.

China’s renewable energy quota system, now only in its early development, appears to offer a potential solution of some of the problems associated with enforcement of the REL.  Unfortunately, the technological difficulties associated with China’s wind-generation goals still exist.  New grid technologies and long-range high-voltage transport do not come cheap, and ultimately Chinese policy-makers may need to develop yet more market mechanisms simply to deal with the associated costs.