China faces a serious challenge as it attempts to meet the rising energy demand that fuels its economic growth, at the same time as it strives to reduce its reliance on coal and imported oil. Developing renewable energy is of particular importance in ensuring security of energy supply by increasing China’s share of domestic energy production. It is also necessary as part of the country’s long-term effort to transition to a low-carbon economy and alleviate climate change effects. Renewable energy resources – especially wind resources – are abundant, but significantly under-utilised at present in China.
The European Union is the biggest importer of Chinese-manufactured goods, at the same time as it hopes to take a position of leadership on crucial climate-change issues. There are obvious mutual interests, which should drive both sides to engage in renewable energy cooperation.
China has a huge potential for wind resources utilisation. According to the China Meteorological Administration, China’s on-shore and off-shore exploitable wind resources represent a potential power generation capacity of 253 gigawatts (GW) and 750 GW respectively – a total estimated wind power potential of about 1,000 GW. Even 60% of this could meet China’s entire current electricity demand. By 2030 it is estimated to be the country’s third-largest power resource after coal and hydroelectric power.
The situation today
It has been 20 years since wind energy first commercialised in China. By the end of 2006, there were over 65 wind farms distributed across 15 provinces in China, particularly in the provinces of Guangdong, Inner Mongolia, Xinjiang and Fujian. The majority of wind turbines were installed with a capacity that ranged from 600 kilowatts (kW) to 1.5 megawatts (MW); the total grid-connected installed capacity of wind power was 2,604 MW in 2006. (The installed capacity increased more than 100% since 2005, when capacity stood at 1,260 MW.)
Apart from large scale grid-connected installations, China also has over 200,000 stand-alone small-scale wind turbines that provide electricity to households in rural areas. Generally speaking, China is now taking substantial measures to promote the commercial development of wind energy use and encourage the establishment of large wind farms. China will have 5,000 MW and 30,000 MW wind power capacity installed by 2010 and 2020 respectively, according to the Renewable Energy Medium-Long Term Development Plan set by China’s top economic planning body, the National Development and Reform Committee (NDRC).
Barriers to development
But despite the rapid growth of wind power in China, there are several constraints associated with further wind power development:
• The technology gap: At present, there are over 20 domestic wind turbine generator manufacturers in China. China currently has the technological capability to manufacture wind turbines with a generating capacity of 750 kW or less, and is in the process of developing megawatt-scale turbines. Several demonstration wind farm projects have been up and running since 2005, with capacities of 1.2 MW and 1.5 MW. However, compared to more advanced technology produced elsewhere, there are still substantial gaps in the design and manufacturing of China’s large wind turbines. Large wind turbine manufacturers from Denmark, the Netherlands, Germany, Belgium, Spain and US still dominate the Chinese market.
• The management gap: China has built up a wind farm operation and management capacity. The nation does have qualified technical personnel in the areas of wind power design and construction, however, the accumulation of skills and capacity in wind farm management has lagged behind the projected future demand for wind power.
• The high cost of developing wind power: The high cost of renewable energy in comparison to coal-fired generation continues to be the most significant barrier. In particular, the high up-front costs of wind power development and its small size and limited capacity are the primary contributory factors. As a result, the average electricity unit price with a coal-fired power plant is 0.3 to 0.6 yuan (US$0.04 to $0.08) per kilowatt-hour where wind farms generate electricity at a cost of 0.7 to 0.95 yuan ($0.09 to $0.13) per kilowatt-hour.
Europe has a solid advantage in the wind power sector. Seven of the top 10 wind power countries are EU member states. Currently, the most common mechanisms to promote renewable energy in the EU are feed-in tariff systems (a fixed price per unit of electricity generated from renewables that a utility or supplier has to pay for); quota systems (where a fixed proportion of total electricity has to be generated from renewable sources); and tax incentives (such as tax relief). For the most part, feed-in tariff systems have functioned better in practice than quota systems or tax incentives.
China does not yet have a fully developed financial incentive system for renewable energy, but the government has been providing support for the sector since the 1950s. The major financial incentive applied in China today is a concession programme through tendering and tax-related incentives. For example, wind farms can enjoy about a 50% reduction in VAT and income tax. Although China has a feed-in tariff system regulated similarly to the EU, it is badly enforced. Therefore, if China’s main objective been the fast development of the sector, a more stringent tariff system should be imposed, with the possible introduction of a renewable energy purchase certificate system.
Expanding the investment from the EU
Despite the government’s positive commitment to develop renewable energy, Chinese enterprises have limited incentives to develop renewable energy. But the Clean Development Mechanism (CDM) is bringing considerable financial incentives that drive renewable energy development in China. On one hand, CDM enables EU member states and private companies to meet their Kyoto and EU Emissions Trading Scheme targets at a lower cost. On the other hand, investment from the EU has a dual effect in reducing unit renewable production cost and allowing renewables to compete with the conventional coal-fired electricity sector while avoiding greenhouse-gas emissions. For example, Huitengxile Wind Farm CDM project started bidding at the end of 2001, and become in 2005 the first registered CDM project in China, and the first CDM-registered project for wind energy in the world.
The wind farm, with capacity of 25.8MW, contracted to sell 514,296 Certified Emissions Reductions (CERs) to the Dutch government CERUPT programme at 5.4 Euros per tonne of carbon dioxide equivalent. The money raised from the sale of CERs will total 2.78 million Euros, accounting for 13% of the project’s total investment. This revenue will bring down the cost of power generation by 0.05 yuan per kilowatt hour. CDM investment from the EU provides great assistance to financially unattractive projects in terms of reducing the unit production cost.
China’s total EU-contracted CDM projects as of July 18, 2007, will have a capacity of 3,251 MW by 2020. EU CDM investments therefore have a significant impact helping China reach its renewable energy targets.
To prepare for its ambitious renewable target, China’s government will implement fiscal and tax policies to stimulate the development of renewable energy, including building special funds, feed-in tariffs and quota systems for renewable energy. China will require 2 trillion yuan (around 186 billion Euros or US$267 billion) of investment by 2020 to achieve its renewable targets, according to the NDRC’s deputy director. China’s wind energy development therefore represents a significant new business opportunities for the EU. These areas include: the transfer of wind turbine technology; training in management and related services; and direct equity investment in China’s wind power projects.
Xiao Shu holds an MSc in Environmental Technology and a BSc (Hon) in Environmental Management from Imperial College London. His particular area of interest is climate change, particularly with reference to the use of market-based mechanisms such as CDM. He also has a broad knowledge of CDM in China and has worked on the UNIDO-led renewable energy promotion program.
Homepage photo by alau2