Gap in renewable energy subsidies to reach RMB70bn by 2020…
Renewable energy provides an ideal alternative to improve China’s energy mix. However it also puts a heavy burden on the Chinese government. News sources have shown that delays in subsidies have become an important issue for the renewable energy industry. NDRC has even forecasted the gap in renewable energy subsidies to reach RMB70bn by 2020.
In recent years China has allowed the market more freedom in different aspects, market mechanisms such as water permit trading, carbon emission right trading, and pollutant discharge permit trading has been piloted. The newly initiated Green Power Certificate (GPC) system is another such mechanism aimed at marketising the renewable energy subsidies.
Existing subsidy scheme – Necessary but heavily burdened
Renewable energy in China relies strongly on subsidies in its early stages due to its high cost of development. The infographic below illustrates the existing subsidy scheme. Additional charges collected from electricity consumers (except domestic and agricultural use) along with the special fund from state finance together constitute the Renewable Energy Development Fund (REDF).
On the one hand, the REDF supports construction and development of renewable energy; on the other, it is also the source of renewable energy subsidies. These subsidies are paid to grid enterprises, so that they can purchase electricity from renewable energy enterprises at the renewable energy on-grid price, which adds a premium to regular energy.
Additional charges for renewable energy started to be collected in 2006 – RMB0.001/kWh. Since then the charge kept increasing until it reached RMB0.019/kWh in 2015 when NDRC released the latest notice.
Delays in subsidies can bring financial pressure to renewable energy enterprises
Despite the 19x increase in last decade and the fact that cost of renewable energy has decreased significantly due to fast improvements in technology, there is still a financial gap in subsidies resulting from rapid expansion of renewable energy and difficulties in collecting the additional charges. In particular, delays in subsidies can bring financial pressure to renewable energy enterprises. This pressure can even spread to upstream equipment manufacturers therefore seriously impacting the whole renewable energy industry.
Green Power Certificates – a new market-based trading system
GPC was then introduced in China providing a new approach to subsidise renewable energy enterprises. On 18 January 2017, the NDRC, MoF, and NEA jointly published the ‘Notice on the Pilot Issuance and Voluntary Purchasing/Trading Scheme of Sustainable Energy Green Power Certificate’. The Green Power Certificate (GPC) is a digital certificate for every MWh of on-grid non-hydro renewable energy.
At present, GPC mechanisms operate in more than 20 countries worldwide, including USA, Japan, Germany, UK, France, Denmark, etc. and have proven to be an efficient economic measure to support renewable energy enterprises. This marketised subsidy eases the burden on the government, and can also help improve future renewable energy deployment and development.
Renewable energy enterprises can sell their GPCs for liquidity, but the price is capped
China initiated GPC trading on 1 July 2017. Renewable energy enterprises can sell their GPCs to any individual or company in the National Issuing and Purchasing Platform. The GPC price is capped at the subsidies for corresponding renewable energy, which acts as a determent of speculation. For those who need renewable energy can bid up for GPCs. Renewable energy enterprises which need liquidity can price their GPCs reasonably. Once their GPCs are sold, no subsidies will be provided for corresponding renewable energy.
The GPC mechanism can even determine the amount of green energy investment needed in a certain region. If the price of sold GPCs is low, it may indicate a saturated demand and redundant renewable energy projects may be avoided in future.
Currently, GPCs are only available for onshore wind power & solar photovoltaics
Currently, GPCs are only available for onshore wind power and solar photovoltaics (PV) (excluding distributed solar energy). According to the deputy dean of the China Renewable Energy Engineering Institute, Yuechun Yi, this is because onshore wind energy and PV account for a high proportion of China’s non-hydro renewable energy, where a large amount of subsidies are needed. Other projects such as offshore wind power (which involves high initial investment and risk) and distributed solar power (hard to supervise and measure) may be taken into account as those industries mature with more advanced technology.
Brand & government support = GPCs set to boom
At the moment, GPCs are purchased voluntarily. International experience shows that brands such as Apple and Intel are favouring green energy consumption. Apple has set up a goal of “100% green power consumption” and as of the end of 2015, 93% of Apple’s energy consumption came from renewable energy. Moreover, Chinese international giants are catching up. According to an officer from Information Centre of Renewable Energy, Tencent, Alibaba and other IT companies have shown strong intents to purchase GPCs.
The mandatory purchase of GPCs may be initiated in the future
Apart from voluntary trade, the mandatory purchase of GPCs and a renewable energy consumption quota may be initiated from 2018, depending on the GPC market. In fact, a consultation paper about renewable quotas for coal-fired power units was issued to corresponding enterprises on 22 April 2016. It states that by 2020, renewable power generation of coal-fired power enterprises should account for at least 15% of coal-fired power. Coal-fired power enterprises can conduct their own renewable energy projects, or purchase GPCs to accomplish this quota. There can be tough punishments for those who fail to comply, such as the revoking of power generating licences.
Although this consultation paper hasn’t been released to the public yet, it still shows the will and resolution of the government to promote renewable energy and the GPC mechanism. Hopefully, this will alleviate financing from the government.
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