This article is written by Gallien Lefevre and Pei Wang.
The National Energy Administration of the People’s Republic of China (the “NEA”) issued on 26 February 2021 a notification regarding changes to the mechanisms in place for the guaranteed offtake of wind and solar projects (the “Notification”).
The guaranteed grid connection and offtake is, alongside subsidy programs, one of the key mechanisms used by the Government to promote the rapid development of non-hydro renewable energy. The Notification introduces fundamental changes and has received significant coverage in the Chinese press.
The Notification is addressed to provincial authorities and grid companies for their comments. Given the NEA’s past practice for similar circulars in the past two years, it is expected that a formal circular will be issued soon.
Confirmation of general policy targets and renewables quotas
The Notification confirms China’s overall energy policy to reach peak coal by 2030, phase out coal by 2060, increase non-fossil energy consumption to 25% of overall energy consumption by 2030 and ensure wind and solar energy represent 11% of overall energy consumption in 2021.
The Notification provides that its goal is to implement the provisions of the 14th Five-Year Plan (which covers years 2021 to 2025 and is expected to be released shortly following the “two sessions” meeting in Beijing) on provincial quotas for renewable energy consumption.
In this respect, the Notification follows a prior NEA circular dated 5 February 2021 proposing renewable energy consumption quotas for each province in 2021 and annual targets for such quotas respectively during the period of 2022 to 2030. The mechanism of provincial quotas for renewable energy consumption was itself established by the NEA circular No. 807 in 2019.
Implementation of the guaranteed grid connection mechanism
The Notification provides that:
- the State shall implement a diversified guaranteed grid connection mechanism for all newly built non-hydro renewable energy generation equipment within the quotas. This also applies to market-oriented projects, such as joint construction and sharing projects, and various forms of storage and peak-power generation projects; and
- Projects covered by the connection guarantee shall be competitively allocated at provincial level based on tariff and total amount of subsidies received by the same project owner. When allocating projects, priority should be given to projects requesting lower amounts of subsidies.
This means that in order to be awarded new grid connection guaranteed projects, sponsors and project owners will have to either:
- bid for feed-in tariffs which are lower than competing proposals; or
- accept a “haircut” on subsidies owed to them in relation to awarded projects, which could adversely impact the returns of operating projects and create uncertainties for development or construction-stage projects.
This new allocation mechanism may be conducive to tilt the allocation of the guaranteed grid-connected solar and wind capacity to sponsors and owners with a large portfolio of assets and a high generation capacity.
The Notification does not provide for further details on the competitive bidding mechanisms to be used or the operation of the “haircut” mechanism and we expect that these will be further detailed by provincial authorities when formulating their updated renewable energy project allocation policies, or possibly by the NEA itself if a national policy is adopted or clarifications are required.
It is however clear from the provisions of the Notification and the language used that the NEA expects provincial governments to procure new solar and wind projects on a more competitive basis and to achieve a decrease in tariffs for new projects.
Sweep of delayed onshore wind and solar projects
The Notification further provides for a “sweep” of onshore wind projects approved before the end of 2018 but not connected to the grid before the end of 2020 and solar projects approved in 2020 but not connected to the grid in the first half of 2021 – these projects will loose the benefit of the guaranteed grid connection mechanism if they are not connected to the grid by the end of 2021. This may stimulate a tide of “rush to complete” before the end of 2021.
New incentives and sector development measures
It should be noted that the Notification also orders positive measures to further develop the renewables sector in China. The Notification orders authorities to:
- establish inter-provincial grid mechanisms and develop inter-provincial electricity purchase. In particular, the Notification orders authorities to encourage the development of renewable energy infrastructure projects in several areas with renewable energy generation capacity (Shanxi Jinbei, Xinjiang Zhundong, Qinghai Hainan Prefecture, and Dongbei-Zarut). Some of these areas are rural areas which are being connected to urban centers through Ultra-High-Voltage “supergrid” transmission lines which allow electricity to be transported over very large distances, and the Notification evidences the Government’s commitment to finding appropriate offtake solutions for renewable energy projects in these areas;
- to encourage the development of offshore wind by providing investment incentives, dispatch incentives and other similar policies and support the development of the industry. This is especially interesting given the high potential for development of offshore wind in China and reports that it is to be one of the world’s largest markets for offshore wind in the coming years;
- to repower older renewable energy assets, especially wind turbines with a capacity of less than 1.5MW; and
- to promote technological innovations and new uses for renewable energy sources, such as solar power and solar heating or renewable energy and energy storage combinations.
Outcomes and practical impacts
Given the Notification’s requirement that provincial governments must prepare plans for guaranteed grid connection in 2021 and 2022 on the basis of their respective quotas and prepare plans to allocate guaranteed grid capacity on a competitive basis, we expect that provincial authorities will issue such plans in a near future.
The Notification also orders provincial governments to organise merchant projects functioning on a market basis and it will be very interesting to observe what rules are adopted to implement this order and whether some provinces are able to transition part of their renewable energy generation capacity to a merchant model.