Winds of change: New era towards grid parity in China

Parque eólico de Gamesa en China /Gamesa's wind farm in China

2018 is deemed the year of change for renewables development in China. The National Energy Administration (NEA) has released a series of regulations with an impact on wind and solar, which are likely to change the industry in the coming years. A set of new rules entitled 2018 Wind Farm Construction and Management Rules were released by the government in late May introducing auctioning system in China, which means an end to the era of feed-in tariffs for future wind projects. From 2019, all large-scale on- and offshore wind farms will be subjected to a process of competitive tenders, with bids based on construction costs as well as power prices. The tariff for each project must not exceed the level set by the government.

Under the 13th Five Year Plan, all Chinese provinces are obliged to provide the government with a Provincial Wind Development Plan every year. Projects that were included in the 2017-2018 provincial wind development plans won’t be affected by the new auctioning rule. Also, decentralized projects, most of which are consumed locally and are transmitting on the distributing grid not on the transmission grid, won’t be affected and will continue to benefit from the FIT.

The NEA has communicated on various occasions that wind projects should reach grid parity by 2020. The FIT was adjusted three times during 2014-2016, resulting in a surge of installations of more than 30 GW in 2016. This is the major reason behind the push for the auctioning process. The FIT has been collected via a surcharge charged on each TWh of electricity produced and pulled into a renewables fund. This fund had a deficit of 100 billion RMB at the end of 2017.

The change from feed-in tariffs to auctions will bring both challenges and opportunities. Challenges because competition will be fierce and tariff price will be driven down. This cost squeeze will be passed on to the whole supply chain.

However, this means that the developers will be more focused on the long term levelized cost of energy (LCOE), rather than on IRR (internal rate of return) which was the case previously when the tariff was fixed. So attention is likely to switch from looking for turbine manufacturers with cheaper turbines to those who can provide a full set of service for the whole lifecycle of a project and those who have the lowest LCOE. This is a change that will benefit the industry in the long run, this change is long overdue.

At the same time the auctioning will help creating a fair allocation of the “developing rights” to developers with the most competitive technical solution, where previously in some provinces the rule for the allocation of developing rights was not clear; companies with close government connection got developing rights which they then sold to developers. This increased the cost of project development; or in some cases, turbine manufacturers were requested to build local manufacturing facilities to be able to access the market, which led to overcapacity and unfair competition. The new auction rule will to a large extent let the market determine how the resources will be allocated, which is a huge improvement to the current situation and can greatly cut many “gray area” costs incurred in project development in the past.

Liming Qiao
China Director, GWEC

Source: GWEC