China's subsidy-free wind: bold step or flawed experiment?

IN DEPTH | A first 700MW of wind capacity to sell power at parity with coal will speed up Beijing's push to end subsidies, but the pilot scheme's wider value is open to question, writes Yuki Yu

China’s National Energy Administration (NEA) is stepping up efforts to wean the country’s vast wind fleet off subsidies, with more than 700MW of new projects already picked to lead the way under an initiative that sceptics claim is destined to fizzle out in the face of endemic national curtailment.

“Wind projects will be independent of subsidy around 2020 to 2022,” said Liang Zhipeng the vice-director of NEA’s New Energy and Renewable Division, setting out its stall in his keynote speech to the 2017 China Windpower conference in Beijing last month.

According to the NEA official, the administration has established various timelines for wind projects “of different features, conditions, and regions to gradually reach grid parity”.

In regions with better wind conditions, especially, subsidy for projects should end “as soon as possible”, with the onus on the industry to compensate by cutting costs and boosting efficiencies.

In China, renewables have thrived on the feed-in premium tariffs set by the government, with the differential between renewable tariffs and the benchmarked coal power prices essentially forming subsidy levels for wind, solar and the rest.

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In the past decade, the regulator has gradually cut wind power subsidy by trimming the feed-in tariffs, slowly preparing the industry to face the inevitable day with subsidy no more.

Under the most recent price adjustment, introduced at the end of 2016, onshore wind power feed-in tariffs in China have been lowered to 0.4-0.57 yuan per kilowatt hour ($0.06-0.086/kWh), compared to a price range of coal power at 0.27-0.47 yuan per kilowatt hour.

The NEA now appears to be resorting to new measures in an effort to speed things up. In May it launched its ‘Demonstration for Wind Grid Parity’ plan, soliciting new wind projects willing to operate without subsidy.

Just three months later, thirteen projects totaling 707MW were chosen as demonstrators.

Once they start operation, expected around 2018 and 2019, these demonstration projects will sell power at coal-benchmarked prices, instead of at premium wind rates. They will also receive no green certificates, cutting off any extra revenues from trading those in the Chinese market.

In return, the plan says grid operators will commit to fully purchase all power produced by the projects. In order words, the demonstration units will be provided with a guarantee of “no curtailments”.

Although NEA originally planned to “select one to two wind projects from each province” for the demonstrator, the shortlisted projects cover only five northern provinces — Gansu, Xinjiang, Ningxia, Heilongjiang, and Hebei.

With their highly favourable wind condition, four of these provinces are the key ‘red alert’ areas in China where existing wind projects struggle with high curtailment rates and further development is subject to restrictions.

Gansu and Xinjiang — the two provinces hosting five no-subsidy demonstrators — face the most severe wind power curtailment in the country, with 43% and 38% curtailment rates respectively in 2016.

In those provinces the developers taking part are betting that it is more profitable to sell at a lower rate and avoid curtailment, than selling less at a premium price — which can in any case fail to materialise at all. Since early 2015, subsidies have not been properly paid out to wind developers, due to a growing deficit in China’s renewable subsidy account.

But how representative of the vast Chinese wind sector those projects are is highly debatable.

"In the red alert regions, nobody can really guarantee no curtailment at all"

A renewable investment manager for China Guodian group told Recharge that in reality, only a handful of wind projects are in a position to survive without subsidy.

Typically, those projects need less than 80m yuan ($12m) investment and are situated in strategic locations with top-rank wind conditions, such as Dabancheng in Xinjiang and Chifeng in Inner Mongolia.

In most other parts of the country, however, wind projects generally produce for fewer hours and are exposed to less curtailment, making the trade-off under the demonstration scheme less attractive. Naturally, few projects volunteered for the pilot scheme.

The anomalies of the scheme are reflected in Zhangbei, in Hebei province, home to five subsidy-free demonstration projects, a higher than expected concentration for such a small town.

Since most wind projects in Zhangbei face little curtailment risk thanks to their vicinity to Beijing, the five demonstration projects are expected to be inherently less competitive compared to subsidised projects in the region, making their involvement look more one of political prestige than an economic decision.

Despite its limitations, the results of the pilot scheme may become a key reference for Beijing to establish further rules for renewable subsidy.

Qin Haiyan, director general of China Wind Energy Association stated in an article that the purpose of the demonstration is “to discover the prerequisite conditions for launching grid parity in China, and to explore how to innovate technology and management, accordingly”.

More importantly, Qin notes, the demonstration needs “to examine the many constraints holding back the wind industry — especially the curtailment or arbitrary charges posed upon wind developers by regional governments”.

However, many experts remained cautious over the further potential of the demonstration. Nor do they believe the timeline of reaching grid parity at 2020 is possible.

Once again, the key obstacle is the prevalent curtailment issue.

“In the red alert regions where most of the demonstration projects are located, nobody can really guarantee no curtailment at all,” a well-placed source in the Energy Research Institute of power giant State Grid told Recharge.

The source said in practice, grid operators are empowered by law to make decisions to dispatch or to curtail, in order to ensure system security, meaning any guarantees of unfettered grid access could be hollow.

To fix that, “these projects are paired with large local industries and they will directly transmit power to a few consumers closer by. As a result, they will be able to avoid curtailment,” Zhang Liutong senior manager of utility consulting firm Lantau Group told Recharge.

Whatever results come out from the experiment, Zhang points out they could hardly be copied to the Chinese power market on a large scale. This is because, essentially, “curtailment is a fundamental problem in the market” and any experiment that eliminates it has little wider relevance.

Most market analysts are highly sceptical over government pledges to address curtailment issues in the short-term, as power capacity and demand have grown vastly out of sync in the country.

It is especially alarming to the industry that, while curtailment rates dropped in the northern region this year, in the southern regions – where wind capacity has been ramping up – the trend is the other way.

Without fixing the curtailment clots, premium wind prices currently only keep the wind projects afloat. “It is certainly hard to imagine any wind grid parity could be achieved in the coming three years,” said Zhang.