CHINA WIND POWER SECTOR POLICY & REGULATORY LANDSCAPE 2010

By TechSci Research September, 2010

(TechSci)

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China Wind Power Sector Regulatory & Policy Landscape (TechSci)

Executive Summary
The Chinese government regulatory and policy framework has led to the exponential growth of wind power sector in recent years. The wind power installation in China has witnessed average growth of 100% since the implementation of renewable energy law in 2006. The law provides a feed-in tariff for some technologies and establishes grid feed-in requirements and standard procedures. During 2009, the Chinese government introduced a feed-in tariff structure for wind power sector which will apply for the entire operational period of a wind farm. The feed-in tariff structure has defined four different categories of tariff depending on a particular regions wind resources, ranging from Yuan 0.51/kWh to Yuan 0.61/kWh. China is expected to lead the global wind power market in the coming 5 years, driven by government appetite for renewable energy. Chinese government commitment to derive 20% of energy from renewable sources by 2020 will result in the required thrust towards the future growth of wind power market. The research report China Wind Power Sector Regulatory & Policy Landscape discusses and gives detail overview on the regulatory framework related to wind power sector in China. this study begins with a brief outlook of regulatory landscape in china followed by detailed overview on Renewable energy Law 2005 and amendments in 2009, Mid to Long Term Development Plan for Renewable Energy, Strategy and Goals of Energy Department, wind farm tariff structure, wind power equipment policy, offshore wind power policy and a brief overview on the wind power market.

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Table of Contents 1. China Regulatory Landscape Outlook 2. Renewable Energy Law, 2005 2.1 General 2.2 Resource Survey and Development Plan 2.3 Industry Guidance and Technology Support 2.4 Promotion and Application 2.5 Compensation Price Management and Fee Sharing 2.6 Economic Incentives and Supervisory Measures 2.7 Legal Responsibilities 2.8 Supplementary Provisions 2.9 Update of 2005 Renewable Energy Law 3. Medium and Long-Term Development Plan for Renewable Energy 3.1 Guiding Principles 3.2 National Policies and Measures 3.3 Objectives and Targets 3.4 Priority Sectors 3.4.1 Hydropower 3.4.2 Biomass Energy 3.4.3 Wind Power 4. National Energy Administration 5. Strategy and Goals of Energy Department 6. Funding and Development Bodies 7. Wind Farm Concession 8. Wind Power Tariff Structure 9. Wind Power Equipment Market Policy Framework 10. Offshore Wind Power Policy 11. China Wind Power Market Outlook

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1. China Regulatory Landscape Outlook

Chinas policies on renewable energy development fall into three categories. Similar to the way renewable policies are set in the United States, Chinas central government establishes the first two levels of policy. Local governments, including provincial, municipal, and county governments, establish the third level of policy with overall direction from the central government. First-level policies: Provide general direction and guidance, and include speeches of state leaders about development of renewable energy and the Chinese governments standpoint on the global environment. Second-level policies: Specify goals/objectives and development plans, and focuses on rural electrification, renewable energy-based generation technologies and fuel wood. These policies attempt to standardize the directions, focal points, and objectives of renewable energy development from different viewpoints. Some departments propose concrete policies and regulations. Second-level policies have played a very important role in promoting renewable technologies in China. Third-level policies: Consist of practical and specific incentives and managerial guidelines. These outline specific supporting measures for developing and using renewable energy. These third-level government policies provide crucial support to help develop renewable energy in its early growth stages. Since the mid-1990s, many provinces and autonomous regions of China have adopted policies for developing renewable energy, including subsidies and tax reduction. The central government also issued several effective regulations. The National Development and Reform Commission (NDRC) issued the first policy statement on climate change in June 2007.5 This policy statement was made with reference to the United Nations Framework Convention on Climate Change,6 providing general guidelines and principles to tackle climate change in China. It first set a target of

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raising the proportion of renewable energy to 10 percent of the primary energy supply by 2010. In another policy document titled Medium and Long-Term Development Plan for Renewable Energy in China released by the NDRC on Aug. 31, 2007 (NDRC Energy [2007] No. 2174), NDRC reiterates the same target for 2010 and establishes a longer term goal, that the national target of 15 percent of Chinas total energy generation to be originated from renewable energy generation by 2020. The policy document also specifies targets for various renewable energy sources. These targets are based upon the installed generating capacity rather than the actual amount of electricity connected to the power grid. In January 2006, the Renewable Energy Law of the PRC (Renewable Energy Law) came into effect. The Renewable Energy Law serves as the legal framework for the development of renewable energy in China. Besides providing for the compulsory interconnection of renewable energy to the grid, the Renewable Energy Law also provides guidelines on the structuring of power tariffs and cost-sharing arrangements, and the establishment of a renewable energy development fund to further the development of the renewable energy sector. The Renewable Energy Law is umbrella legislation where the details on the implementation are supported by various ministerial regulations and measures. The Regulation on Administration of Power Generation from Renewable Energy (NDRC Energy [2006] No. 13) and the Measures on Supervision and Administration of Grid Enterprises in the Purchase of Renewable Energy Power (SERC [2007] No. 25) obligate power grid companies to purchase the full amount of electricity generated from renewable energy projects that are within the geographical coverage of their grids. To remove the cost barriers to the purchase of renewable power by grid companies and utilities, the Renewable Energy Law also provides for cost-sharing arrangements with the introduction of a feed-in tariff. The concept of a feed-in tariff was further elaborated in the Provisional Administrative Measures on Pricing and Cost Sharing for Renewable Energy Power Generation (NDRC Price [2006] No. 7). The measures essentially require the end users of electricity to pay a surcharge to cover the difference between the price of renewable energy power and the average price of conventional power.

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Separately, the grid connection expenses incurred by power grid companies to purchase renewable power and other reasonable expenses may also be included in the power transmission cost. In relation to wind power, the NDRC issued the Circular on Refining the Policy for On-Grid Pricing of Wind Power (NDRC Price [2009] No. 1906) on July 20, 2009, which provides that feed-in tariffs for onshore wind power projects approved from Aug. 1, 2009 onwards are fixed using a centrally controlled price determination mechanism. Under the circular, China is divided into four different types of wind power resource areas and different prices are set for each of these areas. For solar power, tidal power and geothermal power, the pricing department of the State Council will set an appropriate feed-in tariff based upon the principle of reasonable production cost plus reasonable profit.

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2.1 General
Article 1 In order to promote the development and utilization of renewable energy, improve the energy structure, diversify energy supplies, safeguard energy security, protect the environment, and realize the sustainable development of the economy and society, this Law is hereby prepared. Article 2 Renewable energy in this law refers to non-fossil energy of wind energy, solar energy, water energy, biomass energy, geothermal energy, and ocean energy, etc. Application of this Law in hydropower shall be regulated by energy authorities of the State Council and approved by the State Council. This Law does not apply to the direct burning of straw, firewood and dejecta, etc. on low-efficiency stove. Article 5 Energy authorities of the State Council implement management for the development and utilization of renewable energy at the national level. Relevant departments of the State Council are responsible for the management of relevant development and utilization of renewable energy within their authorities. Energy authorities of local peoples governments above the county level are responsible for the management of the development and utilization of renewable energy within their own jurisdiction. Relevant departments of local peoples governments above the county level are responsible for the management of relevant development and utilization of renewable energy within their authorities.

2.2 Resource Survey and Development Plan

Article 6 Energy authorities of the State Council are responsible for organizing and coordinating national surveys and management of renewable energy resources, and work with related departments to establish technical regulations for resource surveys.

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Relevant departments of the State Council, within their respective authorities, are responsible for related renewable energy resource surveys. The survey results will be summarized by the energy authorities in the State Council. The result of the survey of renewable energy shall be released to the public, with the exception of confidential contents as stipulated by the Government. Article 9 In preparing the plan for the development and utilization of renewable energy, opinions of relevant units, experts and the public shall be solicited and the scientific reasoning shall be done.

2.9 Update of 2005 Renewable Energy Law

An update to the original 2005 renewable energy law was adopted by the National Peoples Congress in December 2009 and took effect 1 April, 2010. This update contained three main provisions: 1) More detailed planning and co-ordination is to be required, including co-ordination of renewables with overall electric power sector development and transmission planning, and co-ordination of local- (provincial-) level development with national development plans. In addition, the roles and responsibilities of electric power companies are to be further elaborated in relation to grid-interconnection of renewable energy generators and definition of different classes of renewable generators (including small-scale generators with positive net power production). The law revisions also address areas such as energy storage and smart grids. One reason for these grid-related provisions was that the renewables sector has been growing so fast, especially wind power, that the process of transmission planning and interconnection was falling behind wind turbine installations. Although not widespread, some completed wind capacity lacked transmission access, mostly in the cases of rogue or unapproved projects not coordinated with national planning. Transmission bottlenecks to seven designated geographic bases for wind power may become a significant issue in the future. The bases are Gansu/Yumen, East Inner-Mongolia, China Wind Power Sector Regulatory & Policy Landscape (TechSci) Page | 9

West Inner-Mongolia, Xinjiang/Hami, North Hebei, West Jilin, and Jiangsu Coastline. In addition, many sources are now reporting time lags in the operational status of completed turbines due to the time required for interconnection, testing, certification, and final approvals. These time lags are mostly related to personnel and administration bottlenecks rather than infrastructure issues, and do not appear to be serious obstacles. 2) Provisions were strengthened to guarantee that electric utilities purchase all renewable power generated. Previously, utilities were only obligated if there was sufficient power demand on the grid. Now, utilities must buy the power in all circumstances, but can then transfer the power to the national grid company for use elsewhere. The revisions to the law also add deadlines and economic penalties for utilities failing to comply with this guaranteed-purchase requirement. 3) A renewable energy fund under the Ministry of Finance as part of the 2005 law was strengthened and consolidated. Previously, the fund was collecting a 0.4 fen/kWh (0.06 US cents/kWh) surcharge on electric power sales nation-wide (with some customer classes exempt). The Ministry applies those funds to the costs of government-supported renewable energy projects and the costs of feed-in tariffs. However, the surcharge has not kept pace with expenditures, so the new revisions allow the Ministry to supplement the renewable energy fund from general revenues.

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5. Wind Farm Concession

Wind farms are being developed under NDRC concession programs. Modeled on resource concessions granted to developers for the extraction of oil, gas and other resources, the NDRC hopes that wind farm concessions will reduce the cost of energy from wind power, which is currently higher than that of energy from coal. Under the concession programme, provincial governments select and open sites for public bidding. The developer offering the lowest feed-in tariff from the project wins the contract and a long-term power purchase agreement. Bid prices (i.e. the feed-in tariff) are driven downwards as a result of the competitive bidding process and the fact that the long-term power purchase agreement (25 year contract with a 1015 year fixed purchase price guarantee) reduces risk and offers better financing terms for the developer. Requirements for wind power concession projects: The wind farms must be large scale to bring economies of scale in construction and power generation. Each project should be 100200 MW in capacity, and wind turbine size cannot be smaller than 600 kW. The county government is responsible for the access road to the wind farm. The power grid company is responsible for the transmission line to the substation of the wind farm. The period of the wind concession is 25 years. All electricity generated by the wind project must be purchased by the provincial power grid company, according to the terms of the power purchase agreement. The incremental cost of wind power will be shared within the provincial power grid. Each concession is operated on a provincial level, so the cost of wind power over conventional generation (subsidy) is borne by the province. For the first 30,000 full load hours (for a 100 MW wind farm, this is equivalent to 3 billion kWh), the wind farm will receive the bid price as the feed-in tariff. Depending on the wind resources on the site, this period could equate to 1015 years. After 30,000 full load hours, the wind farm will receive the average local feed-in tariff on the power market at the time.

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8. Wind Power Tariff Structure

During 2009, the Chinese government introduced a feed-in tariff structure for wind power sector which will apply for the entire operational period of a wind farm (20 years). The feed-in tariff structure has defined four different categories of tariff depending on a particular regions wind resources, ranging from Yuan 0.51/kWh to Yuan 0.61/kWh. The feed in tariff structure for wind power sector in China is higher than the tariff paid for coal-fired electricity. Before the introduction of current feed in tariff structure for wind power, there exist dual structures with a concession tendering process on the one hand, the project-by-project government approval process on the other. The new feed-in tariff now replaces both these processes. The level of the new feed-in tariff is comparable to that of the government approved tariffs over the past several years in most regions and is substantially higher than the concession tariff.
Table Error! No text of specified style in document.-1: Wind Power Tariffs Rate Structure by Province

Wind Resource Region Class I Wind Resource Region Class II Wind Resource Region Class III Wind Resource Region

Class IV Wind Resource Region

Feed-in Region Price(Yuan/kW H) 0.51 Inner Mongolia (excluding Chifeng,Tongliao,Xing'an Meng, Hulunbeir), Xinijiang's Urumqi,Yilli,Changji,Kiamayi, Shihezi 0.54 Heibei's Zhangjiakou and Chengde, Inner Mongolia (Chifeng,Tongliao,Xing'an Meng, Hulunbeir), Gansu's Zhangye, Jiayuguan and Jiuquan 0.58 Jinlin's Baicheng and Songyuna, Heilongjiang province's Jixi,Shuang ,Qitaihe,shuihua,Yichun and Daxinganling area, Gansu Province ( excluding Zhangye, Jiayuguan and Jiuguan), Xinjiang Province ( excluding Urumqui, Yilli, Chnagji, Kiamayi), Shihezi and Ningxia Hui Autonomus Region 0.61 Those areas excluded in Class I,II and III regions.

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The wind feed-in tariffs are less than those in Germany and France and less than those proposed in Ontario. Though the Chinese feed-in tariffs are thought to be based on the differences in the wind resource across the vast country, it is impossible to estimate the effectiveness of the feed-in tariffs without knowing the specific wind resources of the four wind energy zones. Nevertheless, the Chinese programme may represent an innovative hybrid between the graduated wind energy tariffs in Germany and France and those single-value tariffs in Ontario, Vermont, and California.

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8. Offshore Wind Power Policy

On 22 January 2010, the State Energy Administration (the "SEA") and the State Oceanic Administration (the "SOA") jointly issued the Interim Measures on the Administration of Development and Construction of Offshore Wind Energy (the "Measures"). The Measures came into effect on the date of issuance. Comprising 10 chapters and 38 articles, the Measures set out the procedures for offshore wind energy planning, the procedures and requirements for the grant of development rights, the application and approvals process for project construction and the use of sea space, oceanic environmental protection obligations, construction completion inspection procedures and ongoing reporting obligations of project developers to the relevant supervising authorities. The 38-article document regulates every aspect of offshore wind farm development across the country. It stipulates that offshore wind farms must be developed through public tender, whereby prices for sending power to grids, project plans, technical abilities and performance results will all be considered. Using public tender for concession projects, China will obtain reasonable prices and choose the most competitive enterprises to take on offshore wind farm construction. This should also support localized production of equipment for offshore wind farms and avoid redundant development. The Interim Measure states that the developers of offshore wind farms must be Chinesefunded enterprises or Sino-foreign joint ventures with majority Chinese ownership. It also requires businesses to start construction within two years of winning the tender. Otherwise the NEB will revoke development rights. Interim Measures on the Administration of Development and Construction of Offshore Wind Energy.

The most notable points of the Measures include the following: The provincial level Energy Administration Department is responsible for drawing up plans for local offshore wind energy development, whilst the provincial level

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Oceanic Administration Department is to provide preliminary opinions on the use of sea space and on a project's impact on oceanic environments. The SEA is responsible for national wind energy planning and management and the examination of planning for each province which possesses offshore wind resources. All offshore wind projects will be subject to the approval of the SEA. Project developers will be selected from a concession scheme. Bidding feed-in tariff, construction design, technological capability and performance record will be the elements affecting the Energy Administration Department's decision. Unlike onshore wind energy projects, the Measures rule out the possibility of wholly-foreign-owned enterprises developing offshore wind energy projects. The Measures provide that "developing and investing companies should be Chinese funded companies or Chinese-controlled joint venture companies (in which the Chinese party holds at least a 50% stake)". Financial compensation from the winner of the concession will be awarded to those who fail in the concession process but who have conducted work on offshore wind energy projects previously. Such compensation is to be based on the fee standards verified by the Energy Administration Department at the provincial level. The right of development will be cancelled if no construction of a project has been started within two years after the granting of approval. The right of use of sea space will be withdrawn by the SOA. Project developers are asked to report relevant data, such as operational and meteorological data, to the State Wind Energy Information Centre and the local Energy Administration Departments.

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