57906 China's Envisaged Renewable Energy Target The Green Leap Forward China's Envisaged Renewable Energy Target The Green Leap Forward China's Envisaged Renewable Energy Target: The Green Leap Forward Energy Sector Management Assistance Program (ESMAP) reports are published to communicate the results of ESMAP's work to the development community with the least possible delay. Some sources cited in this paper may be informal documents that are not readily available. The findings, interpretations, and conclusions expressed in this report are entirely those of the author(s) and should not be attributed in any manner to the World Bank, or its affiliated organizations, or to members of its board of executive directors or the countries they represent, or to ESMAP. The World Bank and ESMAP do not guarantee the accuracy of the data included in this publication and accept no responsibility whatsoever for any consequence of their use. The boundaries, colors, denominations, or other information shown on any map in this volume do not imply on the part of the World Bank Group any judgment on the legal status of any territory or the endorsement or acceptance of such boundaries. Cover photo credits (clockwise from top left): Stephen Strathdee, iStockphoto; Photovideostock, iStockphoto; Drohm Design & Marketing; Xidong Luo, iStockphoto. China's Envisaged Renewable Energy Target The Green Leap Forward KEy MEssagEs 1 TThedominanceofcoalshadowedChina'sachievementsindevelopingrenewableenergy(RE)during the last three decades. Small hydropower and later photovoltaic (PV) solar power were promoted bythegovernmentforelectrificationofruralcountiesandareasremotefromthegrid.Afterstalling duringthe9thFive-YearPlan(FYP),1996­2000,andtheearlyyearsofthe10thFYP,2001­05,windand, to a lesser extent, biomass boomed after the effectiveness of the Renewable Energy Law in 2006. In2009,installedREcapacityreached55gigawatts(GW)ofsmallhydropower(thelargestintheworld), 22.68 GW of wind power (and rising), 4 GW for biomass, and 300 megawatts-peak (MWp) for PV. These achievements are remarkable by any standard. 2 TheREMedium-andLong-TermDevelopmentPlan,publishedin2007,specifiedthecountry'scommit- menttoincreasingtheshareofREto15percentofthe2020primaryenergysupply.Thegovernmentis envisagingincreasingthetargetsofrenewableelectricityfrom360GWgenerating1,490terawatt-hours (TWh)to500GWgenerating1,820TWh(includinglargehydropower). 3 Theenvisagedgovernmenttarget(EGT),ifconfirmed,wouldconstitutemajorprogressinaddressing localandglobalenvironmentalissues.Itwouldputtheenergysectorontracktoachievethegoalof meeting15percentofthecountry'sprimaryenergyneedsthroughRE.The implicit local and/or glo- bal environmental externalities underlying the envisaged target indicate a tremendously increased focus on reducing local pollution and addressing climate change, as well as strong support to build a world-class RE industry. 4TheimpactoftheREprogramsonthecostofelectricitygenerationcouldbesignificantincaseofmajor scale-up,butitremainsmanageable. 5 Thetargetcouldbeachievedinamost-effectivemannerinthefollowingways: · Developing hydropower faster: Hydropowerrehabilitationandmorerapidandenvironmentallyand sociallysounddevelopmentcouldachievethetargetatalowercostbecausehydropowerisalready competitivewithcoal.DevelopinghydropowermorequicklywouldallowforincreasingtheREtarget abovetheEGTwithoutincreasingtheincrementalcostoftheprogram. · Improving the performance of wind power rapidly: China'sexperiencehasbeenlessthanoptimal inplanningwindfarms,operationalintegrationandcoordinationbetweendevelopersandgridope- rators.Thisconsiderablyreducedtheperformanceofthewindprogram.Ifnotaddressedadequately, thehighlevelofinefficienciescouldincreasethecosttothenationoftheenvisagedwindprogram, whichcouldbecomeprohibitive. · Promoting trade: Withtrade,provincescouldachievetheirmandatedtargets.REtransactionswould amounttoabout360TWh,42percentofthetotaloftheEGT.Andmoreimportant,tradewould reducethediscountedcostoftheenvisagedREtargetbyabout56­72percent. · Developing green electricity scheme(s): GreenelectricityhasbeenwellstudiedinChinaandpiloted inShanghaimunicipality.Deployinggreenelectricityschemesatthenationaland/orregionallevels shouldbeconsideredamongtheoptionstopayfortheincrementalcostresultingfromthedevelop- mentofRE. Contents Acronyms and Abbreviations............................................................................................................................................................. vii Acknowledgments .............................................................................................................................................................................. viii Introduction ............................................................................................................................................................................................... 1 In the Shadow of King Coal ...................................................................................................................................................................2 Momentous RE Growth... ...................................................................................................................................................................................................2 ...Despite Persisting Problems ...........................................................................................................................................................................................3 Optimizing RE Targets .............................................................................................................................................................................5 China's Envisaged RE Target: Aiming High........................................................................................................................................10 Two Birds with One Stone: Environmental Protection and Industrial Development ........................................................ 13 Increased Willingness to Pay for Environmental Protection ............................................................................................................................. 13 Strengthening Local Manufacturing: An Overriding Priority of Government Targets ........................................................................... 14 The Policy Fundamentals on the Right Track .................................................................................................................................16 Feed-in Prices: Adequate Levels but Unequal Distribution ............................................................................................................................... 16 Trade Would Benefit All .................................................................................................................................................................................................... 17 Someone Has to Pay! ............................................................................................................................................................................18 Toward a Greener Future ..................................................................................................................................................................... 20 Developing Hydropower More Rapidly .....................................................................................................................................................................20 Improving the Performance of Wind Capacity ......................................................................................................................................................20 Promoting Trade ................................................................................................................................................................................................................... 21 Developing Green Electricity Schemes at the Provincial or National Level ............................................................................................... 21 Annex: Basic Assumptions of the Study......................................................................................................................................... 22 Glossary .................................................................................................................................................................................................... 24 Boxes 1 Optimizing RE Electricity Generation: An Abbreviated Description of the Methodology................................................................... 6 Figures 1 Installed Capacity of RE in China, 1990­2008 ............................................................................................................................................................3 2 Comparison of Government RE Targets and Optimal Solutions..................................................................................................................... 15 3 Someone Has to Pay the Incremental Cost.............................................................................................................................................................. 19 A.1 Optimizing RE Electricity Generation......................................................................................................................................................................... 25 v Contents Tables 1 RE Capacity Potential....................................................................................................................................................................................................................5 2 Optimal Solutions .........................................................................................................................................................................................................................7 3 Share of RE in Total Energy Supply, 2020 ............................................................................................................................................................................ 8 4 Avoided Emissions, 2020 ........................................................................................................................................................................................................... 9 5 Avoided Emissions, 2009­20 and Lifetime of Optimal Solutions ........................................................................................................................... 9 6 Government Targets for 2020 ................................................................................................................................................................................................10 7 Share of RE in Primary Energy Supply, 2020 ...................................................................................................................................................................... 11 8 Avoided Emissions, 2020 ........................................................................................................................................................................................................... 11 9 Avoided Emissions 2009­20 and over Lifetime of Program ..................................................................................................................................... 12 10 Impact of RE Development on Electricity Generation Cost (change in fen/kWh) .......................................................................................18 A.1 Environmental Externality Cost in China--National Average .............................................................................................................................. 23 A.2 Summary of the RE Database ........................................................................................................................................................................................... 23 Acronyms and Abbreviations BG Bright Green Case Currency Equivalents BGOS Bright Green Optimal Solution (exchange rate effective April 1, 2010) CO2 Carbon dioxide Currency unit = yuan = 100 fen CGT Current government target Y 1.00 = US$0.147 DG Dark Green Case US$1.00 = Y 6.82 DGOS Dark Green Optimal Solution Fiscal Year: July 1­June 30 of next year EGT Envisaged government target EU European Union Units of Measure FYP Five-Year Plan gce Gram of coal equivalent GDP Gross domestic product GW Gigawatt NOx Nitrous oxide GWh Gigawatt-hour O&M Operating and maintenance kWh Kilowatt-hour PV Photovoltaic mtce Million tons of coal equivalent RE Renewable energy MWp Megawatts-peak SEPA State Environmental Protection tce Ton of coal equivalent Administration tCO2e Tons of carbon dioxide equivalent SO2 Sulfur dioxide TWh Terawatt-hour TSP Total suspended particulates VAT Value added tax vi Foreword In 2004, China surprised the world during the Bonn This note is published by ESMAP to disseminate the rich Renewable Energy Conference by announcing its experience of China's very successful journey in devel- commitment to meet 10 percent of its primary energy oping its renewable energy. Beginning with the enact- needs with renewable energy resources by 2010. The ment of the Renewable Energy Law in 2005, China has announcement included a target of installing 20 GW relied on a wide and diverse mix of policy instruments of wind capacity by 2020. Skepticism abounded with to achieve renewable energy growth. It has pragmati- good reason: the total installed wind power capac- cally combined (a) wind concessions; (b) feed-in prices ity in 2004 was only about 0.8 GW, and the coun- for biomass and lately for wind; and (c) RE obliga- try struggled during the ninth (1996­2000) and tions imposed on power generators, provinces, and in tenth (2001­05) Five Year Plans to develop a total of the future, grid companies. Despite the problems and 1.2 GW. setbacks encountered along the way, China's achieve- ments lead to the obvious conclusion that the country is The doubts quickly dissipated and China installed gradually and pragmatically doing something right. 22.68 GW of wind, 4 GW of biomass, 55 GW of small hydropower and 0.3 GW of photovoltaic capacity Ede Ijjasz by the end of 2009. China is leading the world in its Sector Manager hydropower development, and ranks as number two China and Mongolia Sustainable Development Unit in its wind power capacity. East Asia and Pacific Region vii Acknowledgments This Policy Note is a summary of the findings of a The World Bank team that prepared the report consists joint study of the Energy Research Institute of the of Ximing Peng, Task Team Leader and Noureddine National Development and Reform Commission, and Berrah, Energy and Policy Advisor. The team would the World Bank. The study is one of three activities like to give special recognition to peer reviewers Susan supported by the Energy Sector Management Assis- Bogach, Senior Energy Economist, and Xiaodong Wang, tance Program (ESMAP) and Asia Sustainable and Senior Energy Specialist, from the World Bank; and Dr. Alternative Energy Program (ASTAE)--China Energy Fei Feng from the Development Research Center of the Intensity Strategy Study. Its objective was to reevalu- State Council. The team would also like to thank Defne ate the renewable energy development targets consid- Gencer, Energy Analyst at the World Bank, editor ering the latest changes in the energy sector and to Rebecca Kary, editor Sherrie Brown, graphic designer provide policy recommendations on how to maximize Gemma Drohm, and designer Laura Johnson for their the economic and environmental benefits of renew- efforts for producing the final publication. able energy development. The World Bank team is also grateful to Ede Ijjasz, Sec- A team from the Energy Research Institute (ERI) led tor Manager at the World Bank's China and Mongo- by Hu Gao with the participation of Jingchun Fan, lia Sustainable Development Unit; Amarquaye Armar, was the major contributor of the data and conducted Manager, ESMAP; and Carter Brandon, Task Team the analysis for this publication. Ming Hu from Leader of the China Energy Intensity Strategy Study, Alberta Electric System Operator (AESO) compiled who provided guidance and support during the study and improved the economic evaluation model. In period and made this publication possible. addition, the activity benefited greatly from the feed- back provided and discussions that took place during Finally, the World Bank team would like to call atten- the consultation workshop on "Evaluation of China's tion to the leadership and guidance of Shi Lishan, Renewable Energy Development Targets" held in Bei- Deputy Director General of New and Renewable jing in December 2009. Energy Department of the NEA. His inspired vision and encouragement helped steer this effort to its ulti- mately successful outcome. The financial and technical support by the Energy Sector Management Assistance Program (ESMAP) is gratefully acknowledged. ESMAP--a global knowledge and technical assistance partnership administered by the World Bank and sponsored by official bilateral donors--assists low- and middle-income countries, its "clients," to provide modern energy services for poverty reduction and environmentally sustainable economic development. ESMAP is governed and funded by a Consultative Group (CG) comprising official bilateral donors and multi- lateral institutions, representing Australia, Austria, Canada, Denmark, Finland, France, Germany, Iceland, the Netherlands, Norway, Sweden, the United Kingdom, and the World Bank Group. viii Introduction The Chinese government embarked on the prepara- last three decades, which were characterized by the tion of the 12th Five-Year Plan (FYP, 2011­15) and dominance of coal. "Optimizing RE Targets" is dedi- is envisaging increasing existing renewable energy cated to the calculation of the optimal RE solutions (RE) targets substantially. Ongoing discussions focus (share of primary energy consumption and technology mainly on the RE share in primary energy, technol- mix). "China's Envisaged RE Target: Aiming High" ogy choices, and the impact on electricity prices. This focuses on the evaluation of the existing and envisaged Policy Note first evaluates the existing and envisaged government RE targets based on the same economic, RE government targets against two optimal solutions technical, and externality assumptions used for the opti- determined based on the same economic and technical mization. "Two Birds with One Stone: Environmental assumptions, but two contrasting values for environ- Protection and Industrial Development" is dedicated to mental externalities. The environmental externality the comparison of the government targets and optimal assumptions cover the wide range of estimates in recent solutions and the analysis of incremental costs associ- studies. Second, the Policy Note assesses the existing ated with them. "The Policy Fundamentals on the Right policies and their adequacy to achieve RE scale-up and Track" focuses on the impact of the development of RE the government targets. Finally, the Policy Note pro- programs on the costs of electricity generation and how vides high-level policy recommendations that could be to pay for it. "Someone Has to Pay!" provides high- considered during the revision of the targets. level policy recommendations that could speed up the scale-up of RE and reduce incremental costs to society. The Policy Note is organized as follows: The next sec- The final section, "Toward a Greener Future," provides tion, "In the Shadow of King Coal," provides a brief recommendations based on the results of the study to history of the development of RE in China during the achieve scale-up of RE at minimal cost. 1 In the Shadow of King Coal The dominance of coal in China's booming energy By contrast, wind power stagnated during this period. sector overshadowed the progress achieved in devel- Installed capacity reached 344 MW by the end of oping RE during the last three decades. RE progress 2000, less than 35 percent of the country's 9th FYP made China the leader in small hydropower develop- target of 1,000 MW. ment and second only to the United States in installed wind power capacity. The 2000s: The East Wind In 2004, China surprised the world during the Bonn Renewable Energy Conference by announcing its Momentous RE Growth... commitment to developing RE to meet 10 percent of The 1980s and 1990s: The reign of small hydropower its primary energy needs by 2010. More surprisingly, and emergence of photovoltaics it announced a target of 20 GW of wind capacity by In the 1980s, the Ministry of Water Resources 2020, although the country's total installed capacity launched several rural electrification programs (such was only about 800 MW, still 20 percent lower than as the 100-county and 200-county programs) that led the target in the 9th FYP. The 2020 wind power capac- to the important development of small decentralized ity target was increased to 30 GW during the Beijing power grids that rely mainly on small hydropower.1 Renewable Energy Conference in 2005. By the end of 1980s, about 1,500 decentralized pre- fecture and county grids relied on small hydropower The Renewable Energy Law, enacted in February for more than 50 percent of their electricity needs. 2005, and effective in January 2006, set the stage for In 1990, the country's installed capacity of small RE scale-up to meet China's surging electricity demand hydropower reached 13.2 GW generating 39.3 TWh. and to achieve its objectives of energy security, pollu- Installed capacity continued to grow during the 1990s tion reduction, and poverty alleviation. The Renewable at an annual average rate of 6.6 (respectively, 7.4) per- Energy Medium- and Long-Term Development Plan cent bringing it to 24.9 GW (respectively, 80 TWh) in (Renewable Energy Plan), published in 2007, specified 2000, making China the second largest user of small the country's commitment to increasing the share of RE hydropower after the United States. to 15 percent of the 2020 primary energy supply.2 In the mid-1990s, the government initiated several Established at the national level, the RE target eventu- bilateral programs to provide electricity to isolated ally worked its way down to the provinces, through and arid areas using photovoltaic (PV) systems. The the 10th (2001­05) and 11th (2006­10) FYPs, and to installed capacity of PV systems increased more than individual energy-production entities, mainly through 10-fold--from 1.8 MWp in 1990 to 19.0 MWp in mandated RE shares.3 2000. The government's national programs, mainly the Brightness Program initiated in 1997, accelerated 2. Many high-level Chinese officials have lately begun stating the development of China's PV industry. that the 15 percent includes non fossil fuel. If this new definition is officially adopted in upcoming plans, this would mean that the share of RE in 2020 would amount to 13.1 percent only if the nuclear capacity would be 70 GW by 2020. This note is still 1. Small hydropower in China includes plants with capacity based on the target of the 2007 Renewable Energy Plan. less than 50 MW. However, all decentralized grids relied mainly 3. The Renewable Energy Plan mandated large power enter- on small hydropower plants ranging from 1 to 10 MW. prises (with a total capacity 5 GW) to increase "non hydro" 2 In the Shadow of King Coal The national target was ambitious for all technologies Figure 1 Installed Capacity of RE in China, 1990­2008 with special focus on wind and biomass: 100,000 PV · Wind: 5 GW installed and 12,300 GWh generated biomass 10,000 wind in 2010, and 30 GW installed and 73,800 GWh small hydro generated in 2020.4 1,000 MW · Biomass: 5.5 GW installed and 27,280 GWh gener- ated in 2010, and 30 GW installed and 148,800 100 GWh generated in 2020. 10 · Small hydropower: 50 GW installed and 205,000 GWh generated in 2010, and 75 GW installed and 1 307,500 GWh generated in 2020. 1990 1995 2000 2008 · Solar PV: 0.3 GW installed and 474 GWh generated in 2010, and 1.8 GW installed and 2,844 GWh Source: Authors. generated in 2020. reached 3.1 GW at the end of 2008, including 0.6 The policy's pragmatic approach mixes market instru- GW of direct-burning straw-fired power plants. It ments (for example, bidding on concessions and man- is unlikely that the 2010 target will be reached. dated market share) and government intervention · The total installed capacity of small hydropower (such as price controls and imposed technology tar- reached 55 GW in 2009, exceeding the 2010 gets). The accomplishments were beyond expectations planned target. China became the world's leading for wind but mixed for biomass because of technical country in hydropower development. and fuel-supply problems. Photovoltaics progressed · With the development of the PV manufacturing significantly, but remained marginal because of its industry and the initiation in 2002 of the gov- high cost. Figure 1 illustrates the progress achieved, ernment's Township Electrification Program, the especially since 2000. installed capacity of PV surged from 19 MWp in 2000 to 300 MWp in 2009. Development of · Wind power capacity doubled in both 2006 and large-scale grid-connected PV stations began in the 2007, prompting the government to increase the northwestern region in 2009. Renewable Energy Plan wind capacity target for 2010 to 10 GW from 5 GW. The momentous wind ...Despite Persisting Problems development continued in 2008 and 2009; its installed capacity reached 22.68 GW at the end of Although these achievements have been impressive and 2009, 122 percent higher than the revised target unprecedented, especially for wind during the last four for 2010. years, the journey has not been without difficulty. · Construction of biomass-fired units boomed with the implementation of the subsidized tariff All technologies still face technical problems in 2006.5 Total installed biomass-fired capacity Small hydropower suffered at its early development stage from standardized design, low local technical expertise, substandard equipment, and rudimentary RE capacity in their generation mix to at least 3 percent by control systems. This led to less than optimal use of 2010 and 8 percent in 2020 (2007 Renewable Energy Plan, site potential. Most of the capacity installed before and Section 8, p. 30). 4. The generation of each RE technology was calculated based during the 1980s, and even in the 1990s, would ben- on the estimated capacity factors provided in the annex. efit greatly from rehabilitation and modernization. 5. A premium of Y 0.25/kWh over the 2005 coal-based re- gional generation costs was applied for biomass-fired projects. Currently, small hydropower development in many The government increased the premium by 10 fen/kWh for the biomass-fired projects commissioned in 2007 and 2008. provinces with great potential is constrained by 3 China's Envisaged Renewable Energy Target: The Green Leap Forward institutional barriers and, more than likely, psycho- Prices are not yet quite right logical ones. Large developers and operators do not China has made substantial progress in gradually free- develop small hydropower projects because only ing energy prices and relaxing controls. However, the "non-hydro RE" can be included in their mandated approach to pricing reform has been piecemeal in that shares (see footnote 3). Furthermore, most develop- it addresses issues as they arise and not according to ers would rather invest in more hyped technologies, the comprehensive reform program clearly set out in such as wind. Although economically justified, small State Council Document No. 5 (2002). Prices still do hydropower also suffers from very low locally regu- not reflect the adverse environmental effects of pro- lated prices and a lack of policy incentives in provinces duction, transformation, and use of energy. In addi- with great potential, except Zhejiang where authori- tion, fuel taxation in China is low both in absolute ties established a feed-in price that triggered high lev- terms and relative to other countries (especially energy els of public and private investment in the sector. importers), despite several years of discussion and consideration of an energy tax. However, it is recog- Several studies and a quick review of the generation nized that "policy making has to serve and reconcile subsidy­based payments to generators during 2007 multiple objectives, not only health and environmen- and 2008 indicate that generation performance of the tal protection."7 nascent Chinese wind power sector is lower than that of countries with similar wind resources. The studies Fiscal disincentives to trade point to the following reasons: The fiscal system in China focuses on revenue collec- tion at the generation level. Provinces, municipalities, · A sizable share of the built capacity is not con- and even government entities at a lower administra- nected to the grid in a timely manner following tive level favor construction of generation units within commissioning because of the lack of coordination their administrative boundaries to maximize their fis- between developers and grid operators.6 cal revenues and short-term benefits, to the detriment · The capacity factors of Chinese wind farms are of national interests and optimal use of resources. lower than comparable wind farms in developed This distorted behavior hampers interprovincial trade, countries because of the use of unproven turbines unless mandated by the central government as in the and the development of sites without confirmation case of the Three Gorges. Although the issue is not of resources and proper micrositing studies, or devel- limited to RE, this fiscal approach often leads to the opment of sites with mediocre wind resources in development of high-cost resources and increases the some provinces to meet their mandated capacities. burden on ratepayers and taxpayers. Biomass development also encountered technical and Given the envisaged rapid growth of the RE sector fuel-supply problems during the early years. Defects (especially wind and biomass), these technical prob- in local feed-in and generation equipment slowed lems and policy issues need to be addressed to ensure the development of the technology. These problems cost-effective use of resources. Otherwise, inefficien- stemmed from hurried deployment of local equipment cies could lead to prohibitive costs and unacceptable before adequately addressing start-up and learning- impacts on ratepayers. curve problems. 7. "Energy Policy and Externalities: The Life-Cycle Analysis 6. "Survey of Wind Power Development in China," State Elec- Approach," OECD Nuclear Energy Agency, Paris, 2001, tricity Regulatory Commission (July 2009). pp. 195­234. 4 Optimizing RE Targets The World Bank teamed with China's Energy Research and with consideration of local and global environ- Institute of the National Development and Reform mental costs. Commission to carry out quantity analyses and pol- icy analyses. The goal of the quantity analyses was An abbreviated description of the methodology is pro- to update the optimal RE capacity and generation for vided in box 1. 2020, taking into account technical, economic (for example, costs and discount rate), and local and global The optimization was carried out for two base cases externality costs only. These optimal solutions were assuming the same technical, economic, and cost thereafter used as benchmarks for evaluating govern- assumptions (summarized in the annex), and RE gen- ment RE targets. The goal of the policy analyses was eration potential presented in table 1. The cases are to assess the adequacy of the policy instruments and differentiated by two contrasting assumptions related their consistency with government targets. The analy- to local and global externality costs. They cover the ses were carried out using a model developed during wide range of estimates and uncertainty related to the the preparation of the China Renewable Energy Scale- economic impacts in recently published studies: Up Program. · In the first case, labeled the Dark Green Case (DG), The approach to determining optimal RE shares in local environmental costs are derived from a joint total electricity generation is based on the following: study by the State Environmental Protection Admin- istration (SEPA) and the World Bank, as well as a · Developing provincial supply curves for electricity global environmental cost of US$15/tCO2e, based on generation from RE and aggregating them into a the latest Clean Development Mechanism transac- national supply curve. tions in China. These externality costs are conser- · Comparing levelized costs of electricity generation vative and reflect low estimates of local pollution from RE sources and levelized costs of coal without impacts on the economy. Other studies indicate that Table 1 RE Capacity Potential RE resources Installed MW (2009) Potential MW Total MW Wind 22,680 161,193 173,393 Smallhydropower 55,000 76,775 128,045 Hydropowerrehabilitation -- 5,243 5,243 Biomass 4,000 24,722 25,364 PV 300 22,670 22,670 Total 81,980 290,653 354,715 Source: Authors. Note: --=Notavailable.TheREpotentialinthetableisbasedonidentifiedorextrapolatedgrid-connectedelectricityprojectsanddoes notreflectthefullREpotentialinChina.Furthermore,itdoesnotincludethepotentialofdirectuseofbiomassandprojectsthatarenot connectedtothegrid. 5 China's Envisaged Renewable Energy Target: The Green Leap Forward Box 1 Optimizing RE Electricity Generation: An Abbreviated Description of the Methodology ThemethodologyusedtodeterminetheoptimumshareofREintotalelectricitygenerationwasdevelopedduringtheprepa- rationoftheChinaRenewableEnergyScale-UpProgram.Theanalyticalframeworkconsistsoftwoparts. Thefirstpart,referredtoasquantityanalysis,estimatestheoptimumlevelofelectricityfromREsourcesbasedonasetof assumptionsrelatingtothecostsofthedominantnon-REproductionoptions(coal-basedgenerationinChina);capitaland operatingandmaintenancecostsforREtechnologiesconsideredforelectricitygeneration;andexternalitycostsoflocalpol- lutantsandgreenhousegases. Thesecondpart,referredtoaspolicyanalysis,assessestheadequacyofpolicyinstrumentstoreachtheeconomicoptimum quantity(orgovernment-approvedtarget)ofpowerfromREsourcesandthefinancialimpactsonthevariousstakeholders. AsimulationmodelisusedinboththequantityandpolicyanalysestogeneratesupplycurvesforpotentialREprojects,deter- mineanoptimumtargetquantity,andevaluatetheeconomicandfinancialimpactsofpolicyinstrumentsdesignedtomeet thetarget. Thequantityanalysisbeginsattheprovinciallevelbyfirstcomputingtheproductioncostofcoal-basedpowergeneration andsecondbydevelopingadatabaseofallexistingREpowergenerationprojectsatfeasibilityandprefeasibilitystages,and possibleprojectsderivedbyextrapolatingprojectcosttrends,takingintoaccountgeneralresourceassessments.Themodel thenconstructsaprovincialsupplycurve(leftfigurebelow)byplottingthelevelizedcostsofkilowatt-hoursgeneratedbythe databaseprojects(includingacapacitypenaltyforintermittentREgenerationsources).Finally,themodelsubtractsthecost ofcoalgenerationandaggregatestheincrementalcostsintoanationalsupplycurve(rightfigurebelow).Theselectionofthe optimalREgenerationsharesaregraphicallyshownintheillustrativefiguresbelow:(a)Qeconistheoptimumsharewithout considerationofenvironmentalexternalities,(b)QLENVistheoptimumshareconsideringlocalenvironmentalexternalities only,and(c)QGLENVistheoptimumshareconsideringlocalandglobalexternalities. Thepolicyanalysisfocusesondeterminingthemostefficientpolicyinstrumentsorassessingtheadequacyofexistingcountry policiestoachievetheoptimumtargetstomeet,consideringthedistributionofbenefitstovariousstakeholders. 1.2 0.4 1.0 0.3 levelized generation cost (Y/kWh) levelized incremental cost (Y/kWh) 0.2 0.8 RE supply curve average global environmental 0.1 externalities 0.6 global environmental average local environmental externalities externalities 0.0 local environmental 0.4 externalities -0.1 0.2 -0.2 Qecon QLENV QGLENV coal-fired thermal -0.3 0.0 Qecon QLENV QGLENV RE generation (TWh) -0.4 RE generation (TWh) 6 Optimizing RE Targets Table 2 Optimal solutions Dark Green Bright Green (SEPA externality + US$15/tCO2e) (EU externality + US$30/tCO2e) Renewable electricity generation GWh % GWh % Wind 60,729 9.5 386,386 35.8 Smallhydropower 501,327 78.8 513,577 47.6 Smallhydropowerrehabilitation 21,837 3.4 21,837 2.0 Biomass 52,956 8.3 156,421 14.5 PV -- -- 830 0.1 RE generation 636,849 100 1,079,050 100 % of 2020 generation 10.3 17.4 Installed RE capacity MW % MW % Wind 22,269 13.9 154,618 49.3 Smallhydropower 123,838 77.4 128,045 40.8 Smallhydropowerrehabilitation 5,243 3.3 5,243 1.7 Biomass 8,587 5.4 25,364 8.0 PV -- -- 520 0.2 Installed RE capacity 159,936 100 313,790 100 % of 2020 installed capacity 11.4 22.4 Source: Authors. Note: --=Notavailable. the economic and financial impacts on the Chinese electricity generation and capacity installed are pre- economy from pollution are higher than the exter- sented in table 2. They are respectively referred to in nality costs adopted in this case. the remainder of the Policy Note as the Dark Green · In the second case, labeled the Bright Green Case Optimal Solution (DGOS) and the Bright Green Opti- (BG), local environmental costs are quite high mal Solution (BGOS). because they are derived from the European Union ExternE (External Costs of Energy) Study,8 which As expected, the results show that the optimal solu- is considered one of the most exhaustive local envi- tions are highly dependent on externality costs: ronmental studies published to date. The BG case uses a global environmental cost of US$30/tCO2e, · RE-based electricity generation is 70 percent higher twice the price of the latest Clean Development in the BGOS than the DGOS. DGOS (respectively, Mechanism transactions in China. BGOS) generation would amount to about 10 per- cent (respectively, 17 percent) of the total forecast The optimal (economically and environmentally jus- electricity generation in 2020.9 tified considering the above assumptions) RE-based 9. Forecasts considered for 2020: 6,200 TWh and 1,400 GW 8. "External Costs: Research Results on Socio-Environmental for electricity, and 4,772 million tce for total energy demand Damages Due to Electricity and Transport," EUR 20198, Di- ("China's Low Carbon Development Pathways by 2050," pre- rectorate General for Research, European Commission, 2003. pared by Energy Research Institute, 2009). 7 China's Envisaged Renewable Energy Target: The Green Leap Forward Table 3 share of RE in Total Energy supply, 2020 Sources Unit of measure DGOS BGOS REgeneration GWh 636,849 1,079,050 Largehydrogeneration GWh 922,500 922,500 OtherREgeneration GWh 37,358 37,358 TotalREsupplyofelectricity Milliontce 510.9 652.5 OtherREsupply Milliontce 137.7 137.7 TotalREsupply Milliontce 648.7 790.2 REshareintotalenergysupply % 13.6 16.6 Source: Authors. Note: tce=tonofcoalequivalent. · Installed RE capacity is 96 percent higher in the Table 3 shows that if other RE resources,10 especially BGOS than the DGOS. DGOS (respectively, BGOS) large hydropower and decentralized (direct use and capacity would amount to 11 percent (respectively, not connected to the grid) RE, are developed accord- 22 percent) of the total forecast installed capacity ing to the Renewable Energy Plan issued in 2007, the (respectively, generated electricity) in 2020. 2020 RE share in the 2020 total primary energy sup- ply could reach 13.6 percent in the DGOS and 16.6 Small hydropower (new and rehabilitated) dominates percent in the BGOS. the RE mix in the DGOS with about 81 percent of the total installed capacity and 82 percent of the elec- Table 4 provides the avoided emissions of local pollut- tricity generated in 2020. All the small hydropower ants and greenhouse gases forecast for 2020. rehabilitation potential and about 97 percent of the new potential are developed. Wind and biomass are Table 5 provides (a) the cumulative avoided emissions moderately developed with, respectively, about 9 and during the study period (2009­20) and over the life- 8 percent (respectively, 14 and 5 percent) of the RE- time11 of the projects implemented under the DGOS based electricity generation (respectively, capacity and BGOS programs; and (b) associated environmen- installed) in 2020. Photovoltaics is not included in the tal benefits for the two optimal solutions assuming RE mix. that the new capacity is installed linearly during the study period (2009­20). In the BGOS, the potential of both new and reha- bilitation small hydropower is fully developed. Wind, therefore, becomes the most attractive RE source and is developed to reach about 50 percent (respectively, 10. Other RE resources include large and medium hydropower, 36 percent) of the installed RE capacity (respectively, solid biomass fuel, biogas, fuel ethanol, biodiesel, solar heat- ing, and geothermal heating. The 2020 planned large and me- generated electricity). Biomass accounts for about 8 dium hydropower capacity is 225 GW; the planned biomass percent (respectively, 15 percent) of the installed RE generation capacity includes 6 GW from bagasse, biogas, and capacity (respectively, generated electricity). PV is solid waste; and other planned RE supply includes solar heat- included in the RE mix, but remains marginal with ing, biogas utilization, fuel ethanol, and biodiesel. 11. The economic life for wind, biomass, hydropower, and PV 520 MW installed and 830 GWh generated. is assumed to be 15, 20, 30, and 15 years, respectively. 8 Optimizing RE Targets Table 4 avoided Emissions, 2020 Pollutant Unit of measure DGOS BGOS TSP Thousandtons 187 377 SO2 Thousandtons 393 787 NOx Thousandtons 248 558 Carbon Milliontons 109 242 CO2e Milliontons 400 887 Source: Authors. Note: TSP=Totalsuspendedparticulates;SO2=Sulfurdioxide;NOx=Nitrousoxide;CO2e=equivalentCO2credit. Table 5 avoided Emissions, 2009­20 and Lifetime of Optimal solutions Avoided emissions Avoided emissions (2009­20) (lifetime of program) Unit of Pollutants measure DGOS BGOS DGOS BGOS TSP 10 tons 6 1.05 1.88 5.18 8.73 SO2 10 tons 6 2.20 3.92 10.90 18.24 NOx 10 tons 6 1.39 2.78 6.88 12.93 Carbon 10 tons 9 0.61 1.21 3.03 5.61 CO2 10 tons 9 2.24 4.42 11.10 50.56 Environmentalbenefits(SEPA+US$15/tCO2e) BillionY 276 537 1,367 2,494 Environmentalbenefits(EU+US$30/tCO2e) BillionY 2,346 4,519 11,613 21,000 Source: Authors. 9 China's Envisaged RE Target: Aiming High The government of China is envisaging a major revi- · Biomass might slightly retreat to give the technol- sion to its RE target, based on lessons learned during ogy and local manufacturing time to address the the last two FYPs, to further scale up RE development technical and fuel-supply issues they encounter. and address rising concerns about climate change. · Small hydropower development would follow a Available information about the envisaged target indi- business-as-usual trend. cates the following: Table 6 presents the current and envisaged govern- · Wind will gain momentum because of the success ment targets (CGT and EGT). achieved during the last few years. · PV will rise to address overcapacity in its manufac- If confirmed, the new target would aim very high. It turing and will speed up cost reductions. would increase the 2020 installed RE capacity and Table 6 government Targets for 2020 Government targets for renewable energy CGT EGT Renewable electricity generation GWh % GWh % Wind 73,800 13.8 369,000 43.0 Smallhydropower 307,500 57.8 307,500 35.9 Smallhydropowerrehabilitation Biomass 148,800 27.9 148,800 17.4 PV 2,844 0.5 31,600 3.7 REgeneration 532,914 100 856,900 100 %of2020generation 8.6 13.8 Installed RE capacity MW % MW % Wind 30,000 22.9 150,000 55.8 Smallhydropower 75,000 57.3 75,000 27.9 Smallhydropowerrehabilitation Biomass* 24,000 18.4 24,000 8.9 PV 1,800 1.4 20,000 7.4 Installed RE capacity 130,800 100 269,000 100 % of 2020 installed capacity 9.3 19.2 Source: Authors. Note: Largeandmediumhydropowerarenotincludedinthistable. *Onlydirect-burningbiomass-firedthermalcapacitywasincluded.Seefootnote10. 10 China's Envisaged RE Target: Aiming High Table 7 share of RE in Primary Energy supply, 2020 Targets Sources Unit of measure CGT EGT REgenerationwithoutlargehydro GWh 532,914 856,900 Largehydro GWh 922,500 922,500 OtherREgeneration* GWh 37,358 37,358 TotalREsupplyofelectricity Milliontce 477.7 581.4 OtherREsupply Milliontce 137.7 137.7 TotalREsupply Milliontce 615.4 719.1 REshareintotalenergysupply % 12.9 15.1 Source: Authors. Note: *Seedefinitioninfootnote10. generated electricity targets by more than 100 percent Table 8 shows that the EGT would reduce emissions and 61 percent, respectively. The share of installed of local and global pollutants substantially in compar- renewable capacity in the 2020 forecast of capacity ison with the CGT: 115 percent for TSP, 116 percent would increase to 19 percent from about 9 percent, for SO2, 140 percent for NOx, and 139 percent for and the share of RE-based generation in the 2020 Carbon and for CO2 emissions. forecast would increase to 14 percent from about 9 percent. Assuming that the new capacity is installed linearly during the study period (2009­20), Table 9 provides If other RE resources are developed according to the (a) the cumulative avoided emissions during the study 2007 Renewable Energy Plan, RE would reach 12.9 period (2009­20) and over the lifetime of the projects percent (CGT) and 15.1 percent (EGT) of the 2020 implemented under the CGT and the EGT programs; primary energy supply. The EGT would therefore meet and (b) associated environmental benefits if emissions the 15 percent target announced in the 2007 Renew- are valued at the externality costs assumed in the opti- able Energy Plan. Details are shown in Table 7. mization study. Table 8 avoided Emissions, 2020 Targets Pollutant Unit of measure CGT EGT % increase TSP Thousandtons 133 286 115 SO2 Thousandtons 256 554 116 NOx Thousandtons 177 424 140 Carbon Milliontons 76 182 139 CO2e Milliontons 279 667 139 Source: Authors. 11 China's Envisaged Renewable Energy Target: The Green Leap Forward Table 9 avoided Emissions 2009­20 and over Lifetime of Program Unit of Avoided emissions (2009­20) Avoided emissions (lifetime of program) Pollutants measure CGT EGT CGT EGT TSP 106tons 0.77 1.46 3.33 6.07 SO2 10 tons 6 1.49 2.84 6.42 11.78 NOx 10 tons 6 1.03 2.17 4.43 9.02 Carbon 10 tons 9 0.44 0.93 1.90 3.87 CO2 10 tons 9 1.62 3.42 6.98 14.20 Environmentalbenefits BillionY 199 415 862 1,720 (SEPA+US$15/tCO2e) Environmentalbenefits BillionY 1,690 3,483 7,304 14,452 (EU+US$30/tCO2e) Source: Authors. 12 Two Birds with One Stone: Environmental Protection and Industrial Development As indicated earlier, decision makers have to serve The current government 2020 RE generation (respec- and reconcile multiple objectives, not only health and tively, installed capacity) target is lower than the DGOS environmental protection. The RE government targets RE generation (respectively, installed capacity) by 16 are therefore justified on environmental and industrial percent (respectively, 18 percent), indicating that the grounds. implicit local and/or global externality costs are lower than those assumed in the DGOS. It must, however, be noted that the target was announced in 2005 when the Increased Willingness to Pay for price of coal was only about Y 435/tce (Qinhuangdao Environmental Protection free on board price and VAT not included). The gov- Figure 2 assesses the government targets (CGT and ernment target was at that time just 3 percent lower EGT) in light of the optimal solutions (DGOS and than the optimal RE generation based on the 2005 BGOS). coal price with other assumptions unchanged. The important increase in the price of coal during the last Figure 2.a depicts the ranking of the RE quantities years warrants a higher target to at least the DGOS of the optimal solutions and government targets and level of 637 TWh, even without increased externality their positions on the national supply curve. values. Figure 2.b shows that the structures of the CGT and The EGT, if confirmed, would constitute major prog- the DGOS capacity mixes are quite different. Wind ress in addressing local and global environmental and biomass are higher in the government target by issues. The 2020 RE generation (respectively, installed about 36 percent and 280 percent, respectively, while capacity) in the EGT would be higher than DGOS hydropower capacity is 40 percent lower in the gov- RE generation (respectively, installed capacity) by 35 ernment target than in the DGOS. The figure also (respectively, 68) percent, but lower than the BGOS shows that the structures of the EGT and the BGOS RE generation (respectively, installed capacity) by 21 are quite similar, except for solar PV, which is 20 times percent (respectively, 14 percent) because the external- higher in the government target. ity associated with the BGOS is clearly too high for China's current development conditions. The increase Figure 2.c depicts the implicit environmental costs of RE penetration from 15.1 to 16.6 percent almost that justify the government targets and the environ- doubles the incremental cost. The willingness to pay mental costs assumed in the optimization analyses. for environmental benefits accounts for about two- The implicit externality cost of the EGT is 4.6 (respec- thirds of the total incremental cost associated with the tively, 2.1) times higher than the CGT (respectively, envisaged target (see figure 2.c). DGOS), but 62 percent lower than the assumed exter- nality cost of the BGOS. The figure also shows that the It must be noted that the considered RE technologies, incremental costs are higher than the incremental costs except for small hydropower, are still quite far from of the equivalent optimal solutions (same installed being competitive with coal for electricity generation capacity and generated electricity, but with optimal in China with consideration of environmental exter- mix). These costs reflect other government priorities nality costs reflected in China's current environmental or benefits not considered in the optimization. standards only. Sensitivity analyses were carried out 13 China's Envisaged Renewable Energy Target: The Green Leap Forward to determine the cost reductions that would warrant for both technologies. In hindsight, the emergence the government's CGT and EGT for each technology of vibrant and competitive wind and PV industries without consideration of environmental externalities. and the expectation that the benefits to the country The results indicate that the cost per kilowatt installed would outweigh the incremental costs incurred will for the considered RE technologies should be reduced likely justify these strategic choices.12 However, the by the following amounts: difficulties and constraints facing the development of biomass do not indicate yet that the benefits · 35 percent (respectively, 46 percent) to justify the would outweigh the incremental costs incurred. wind target in the CGT (respectively, EGT). · The PV target is not justified unless the externality · 40 percent to justify the biomass target in the CGT costs are significantly higher than the ones assumed and the EGT. in the study. It is, however, recognized that the PV · 83 percent (respectively, 87 percent) to justify the target is aimed at reducing the cost of the technol- PV target in the CGT (respectively, EGT). ogy and helping the strong local industry survive the current slump in global demand. Given the past accomplishments of the Chinese PV industry, Strengthening Local Manufacturing: An this stretched target may bring PV generation costs Overriding Priority of Government Targets down, even if the bid prices of the first large PV Comparison of the government targets with the opti- concession are considered too low to ensure profit- mal solutions led to the following observations: ability of PV projects in the medium term. · If only technical costs and environmental exter- nalities are considered, small hydropower should 12. Numerous studies showed the benefits of developing the be developed almost to its full potential before RE industry. For example, on November 2, 2009, the Herald Tribune reported that a 2004 study of the Renewable Energy wind and biomass are developed on a major scale, Policy project by a research institute based in Washington es- and solar PV should remain marginal under the timated that about 4,300 jobs are created per 1,000 MW of assumptions considered in the study. installed wind capacity with about three-quarters generated at the manufacturing level and one-quarter generated at the op- · Wind and biomass targets in the CGT indicate that erational level. A study on the economic impacts of the wind the government gave high priority to the develop- industry (and eventually biomass industry) in China is required ment of world-class local manufacturing industries to reach a significant conclusion on the subject. 14 Two Birds with One Stone: Environmental Protection and Industrial Development Figure 2 Comparison of government RE Targets and Optimal solutions a. Cost supply curve of RE in China 4.5 RE cost supply curve levelized incremental cost (Y/kWhh) current GT (optimal solution) 3.5 dark green envisaged GT (optimal solution) 2.5 bright green 533 637 857 1,079 1.5 0.5 0 200 400 600 800 1,000 1,200 1,400 1,600 -0.5 RE generation (TWh) -1.5 b. Capacity structure wind small hydropower RE installed capacity (GW) small hydropower rehab. 1,200 biomass RE generation (TWh) solar PV 1 1,000 350 156 1 25 22 800 32 5 300 149 514 128 0 0 600 250 53 22 20 308 3 24 400 200 149 0 501 0 0 9 75 5 150 2 308 369 386 200 24 124 0 150 155 100 75 74 0 61 50 30 22 0 current GT dark green envisaged GT bright green c. Implicit or assumed environmental cost 1.4 cost reduction with unit generation cost (Y/kWh) 1.2 optimal mix 1.0 0.8 0.132 0.873 0.6 2 0.332 incremental generation 0.084 24 0.156 cost vs. coal 0.4 0.072 0.354 0.354 0.354 0.2 0.354 coal-fired thermal 0 current GT dark green envisaged GT bright green 15 The Policy Fundamentals on the Right Track China relied on a wide and diverse mix of policy instru- a 25 fen/kWh premium. In 2007, the biomass pre- ments, pragmatically combining (a) wind concessions, mium was increased to 35 fen/kWh. with a strict though unofficial price ceiling (however, · The wind feed-in price was introduced in 2009. developers benefited from compensatory subsidies per It is differentiated according to wind resources in kilowatt-hour generated when bid prices failed to pro- four regions: vide them with adequate returns); (b) feed-in prices for biomass and lately for wind; and (c) RE obliga- Region Annual utiliza- Feed-in price (fen/kWh) tions on generators, provinces, and grid companies. tion (hours) With VAT Without VAT This hybrid recipe, relying on both market and com- I >2,500 0.510 0.470 mand-and-control policies, worked quite well during II 2,301­2,500 0.540 0.498 the years following the enactment of the Renewable Energy Law and led to a dramatic surge in wind and III 2,101­2,300 0.580 0.535 noticeable biomass development. However, with the IV 2,100 0.610 0.562 multiplication of the projects at the national level and the different project approval standards applied at the · A PV feed-in price policy is still under consideration. local level, the hybrid and diversified approach became difficult to manage. The model was used to assess the consistency of the latest feed-in prices with the physical targets set by the Lately, the government began to rely mostly on feed- government. The simulations showed the following to in tariffs. Feed-in prices were defined at the national be true, without major changes under the prevailing level with regional differentiation and an RE obliga- cost and externality conditions: tion on provinces (usually with reference to specific technologies) and on large energy operators. This · The original feed-in biomass price (with a premium and fiscal disincentives made trading difficult, if not of 25 fen/kWh) was too low to provide enough impossible, and led to inconsistencies and nonoptimal incentive to developers to meet the CGT biomass use of resources. target. The price would have theoretically led to biomass-based generation of 47 TWh, compared with 149 TWh under the CGT, and installed capac- Feed-in Prices: Adequate Levels but ity of less than 8 GW, compared with 24 GW under Unequal Distribution the CGT. The increase of the premium to 35 fen/ The RE pricing situation is evolving rapidly and, as of kWh from 25 fen/kWh brought the feed-in price early November 2009, was as follows: in line with the CGT biomass target and could, without a major drop in the price of coal, lead to · The biomass feed-in price was instituted in January biomass-based generation of about 156 TWh and 2006. It was set at the regional grid prices of coal- installed capacity of about 25 GW, both slightly based electricity generation in 2005, augmented by higher than the CGT. Given that biomass-based 16 The Policy Fundamentals on the Right Track generation and installed capacity are not expected The analysis shows the following to be true without to change significantly in the EGT, the latest feed-in major changes in the prevailing cost and externality price would remain consistent with the government conditions: biomass objectives, if all other prevailing condi- tions remain the same. However, it must be noted · With trade, provinces could achieve their mandated that the current biomass feed-in price favors the targets with RE transactions amounting to about regions where electricity prices are higher, mostly 360 TWh, 42 percent of the EGT. The five top the more-developed ones, to the detriment of poor exporters would be Sichuan (74 TWh), Inner Mon- inland provinces. golia (69 TWh), Yunnan (65 TWh), Xinjiang (40 · The regional wind feed-in prices would lead to TWh), and Tibet (24 TWh). The five top importers wind electricity generation of about 143 TWh and would be Jiangsu (64 TWh), Shandong (53 TWh), installed capacity of about 53 GW. The former is 94 Guangdong (53 TWh), Shanxi (40 TWh), and Zhe- percent higher than the CGT, but about 61 percent jiang (37 TWh). The discounted cost of achieving lower than the EGT. The latter is 77 percent higher the EGT with trade over the life of the developed than the CGT, but 65 percent lower than the EGT. projects would amount to Y 1,193 billion. The wind feed-in prices would need to be increased · Without trade, 13 provinces would not be able to if compensatory subsidies are removed, to meet the achieve the new mandated targets to meet the EGT EGT for wind, unless the cost per installed kilo- with their resources identified to date. The short- watt is reduced (or the performance of wind farms fall would amount to 295 TWh, 34 percent of the increased) by 17 percent in the near future. EGT. The unmet quantities range from a low of · There is still no feed-in price for solar PV. How- 4,959 GWh for Beijing to a high of 50,780 GWh ever, to achieve the EGT without reduction in the for Shandong province. To achieve mandated tar- cost of solar PV, the feed-in price should be set at gets, equivalent to the EGT, these 13 provinces Y 3/kWh. The feed-in price would be reduced to would have to develop more local, more-expensive Y 2/kWh if the PV installation cost is reduced by resources, such as PV. Assuming that the cost of 30 percent in the near future, and only Y 1/kWh if additional RE capacities would be 10 percent, 20 the PV installation cost is reduced by 80 percent. percent, and 30 percent (respectively, 20 percent, An 80 percent reduction is unrealistic in the near 40 percent, and 60 percent) higher than the mar- future. ginal RE projects of the first, second, and third tier of the provincial potential, the discounted cost of achieving the EGT without trade over the life of the Trade Would Benefit All developed projects would amount to Y 2,696 bil- The analysis to assess the benefits of trade assumes that lion (respectively, Y 2,978 billion). The cost of the the national target is passed on equally to all provinces without-trade option would be about 126­150 per- and that, contrary to the optimal cases considered in this cent higher than the with-trade option. If all unmet note, each province would meet its share with its local RE quantities were met by PV, the discounted cost resources. Therefore, in the nontrade option, provinces of achieving the EGT without trade would increase are allowed to buy neither physical RE quantities nor to Y 4,190 billion, about 250 percent higher than tradable green certificates from provinces with lower- the with-trade case. cost resources to meet their targets. 17 Someone Has to Pay! The impact of the development of RE on the cost of · Wind and biomass contribute significantly to the electricity generation in 2020 in real terms was esti- increase of the total generation cost. mated for the optimal solutions (DGOS and BGOS), · The increase of the generation cost from PV is negli- the current and envisaged government targets (CGT gible in most cases because of low penetration, but it and EGT), and the government targets with an opti- would amount to about 1 fen/kWh (second-highest mal mix (CGT optimal and EGT optimal), implicitly contribution after wind) in the case of the EGT. assuming that the national target would be achieved · The increase in electricity generation costs in 2020 with trade among provinces. Table 10 provides the as a result of the implementation of the consid- results of the analysis for each of the technologies ered RE programs would vary from a low of 0.02 considered and for the whole RE program with and fen/kWh in the case of the CGT to about 2.5 without small hydropower. fen/kWh in the case of the EGT. For reference, average electricity tariffs in the regional grids vary The results show the following: from 20.1 fen/kWh to 42.4 fen/kWh (2009, VAT excluded). · Development of small hydropower reduces the cost of generation by about 0.8 fen/kWh in all consid- If the national target is to be achieved without trade, ered cases because it is cheaper than coal.13 the impact on generation costs would be significantly higher and differentiated among provinces, for exam- 13. Although not considered in the current study, levelized cost ple, as follows: calculations carried out for the envisaged hydropower plant show that medium and large hydropower is competitive with · In Shaanxi, where RE resources fall short of its coal despite its remoteness. Accelerating the development of mandated share by about 9 percent, the impact of medium and large hydropower on sound environmental and social grounds could also contribute to achieving the target at RE development without trade would increase gen- a lower cost. eration costs in the province by about 2.0 fen/kWh. Table 10 Impact of RE Development on Electricity generation Cost (change in fen/kWh) RE source DGOS BGOS CGT CGT optimal EGT EGT optimal Wind 0.181 1.789 0.192 0.130 1.594 0.605 Smallhydro -0.819 -0.771 -0.818 -0.823 -0.756 -0.814 Biomass 0.227 0.653 0.575 0.021 0.605 0.604 SolarPV -- 0.031 0.069 -- 1.006 -- Total -0.411 1.703 0.019 -0.673 2.449 0.395 Total(excludingsmallhydro) 0.409 2.473 0.836 0.150 3.205 1.209 Source: Authors. Note: --=Notavailable. 18 Someone Has to Pay · In Beijing, Shanghai, and Tianjin, where RE could contribute to reducing the cost of incremental resources fall short of the mandated shares by more generation. However, it is expected that additional- than 95 percent, the impact of RE development ity and other issues related to the Clean Development without trade would increase generation costs in Mechanism will limit the contribution of this option. the municipalities between 4.9 fen/kWh and 23.1 fen/kWh. The recently revised Renewable Energy Law instituted a national RE Fund replenished by a fee on electric- Whatever the increase, someone has to pay the incre- ity consumption of 0.4 fen/kWh. The estimates of mental generation cost. Figure 3 shows some of the increases in electricity generation show that in 2020, options to pay for the incremental cost using either the fee (or end-user tariff) on consumers should be mandatory or voluntary pass-throughs to ratepayers increased to about 2.5 fen/kWh to compensate devel- to finance an RE Fund to compensate off-takers and/or opers and/or off-takers for the incremental generation developers. Selling certified emission reductions result- cost, in the absence of an RE cost reduction and/or ing from the development of the renewable program coal cost increase. Figure 3 someone Has to Pay the Incremental Cost Incremental generation cost Could reduce incremental costs Selling CERs Taxpayers RE fund Ratepayers Voluntary Mandatory Compensation Subsidies of "green electricity" pass-through of off-takers off-takers scheme tariff Source: Authors. 19 Toward a Greener Future China achieved recognized and rapid progress in scal- improvements in other types of turbines, computer- ing up RE-based electricity using diverse technologies. aided software to optimize design and take full advan- It is envisaging a new target that would put it on the tage of the potential at each site, and technology path of achieving its goal to meet 15 percent of the improvements in control systems. 2020 primary energy supply through RE. The follow- ing recommendations are provided for consideration The success of Zhejiang province in developing its during the revision of the target to further increase RE small hydropower resources shows how institutional penetration at a minimum cost: barriers can be overcome and local private and pub- lic developers can be involved. Setting adequate and · Develop small hydropower more rapidly. attractive feed-in prices, developing local engineer- · Improve the performance of wind capacity. ing and construction services, and providing access · Promote trade. to financing could lead to more rapid development of · Develop green electricity schemes at the provincial this cheap and abundant resource. or national level. Although medium and large hydropower are not included in the study, complementary analyses carried Developing Hydropower More Rapidly out separately show that medium and large hydro- Small hydro rehabilitation and more rapid develop- power are competitive with coal-fired plant even with- ment of hydropower could achieve the target at a out considering environmental benefits and taking lower cost because hydropower is already competi- into account the transfer of power from generation tive with coal. Based on the China Renewable Energy plants to load centers. Therefore, accelerating hydro- Scale-up Program experience in Zhejiang province, power rehabilitation and development will contribute the rehabilitation of existing small hydropower could to achieving the RE target at a lower cost. bring about increases of 38 percent in existing capac- ity and 50 percent in generated energy, on average, at However, both small and large hydropower develop- an investment cost of only Y 2,870/kW. New capac- ment should be carried out on sound environmental ity can be developed at a lower cost than coal in and social grounds and should involve concerned com- most cases and should be speeded up even without munities to ensure that they benefit from the develop- consideration of environmental costs. Developing ment of indigenous resources. hydropower at a faster pace would allow increasing the RE target above the EGT and, at the same time, Improving the Performance of Wind Capacity decreasing the incremental cost of the program (see table 10). During recent years, the government has committed immense resources to the development of onshore Development of small hydropower could also trigger wind. Teething problems, common to nascent indus- a technology revival in the manufacturing and service tries, led to lower-than-expected performance. If these sectors and provide a strong stimulus to those sec- problems are not addressed rapidly and efficiently, the tors, such as through the development or improve- cost to the nation of the large envisaged wind program ment of bulb turbines for low head sites, efficiency could become prohibitive.14 20 Toward a Greener Futrure The government commitment to scaling up wind level of RE resources in province i, the target of power development should be twinned with a clear province i (TPi) could be objective to deliver electricity at minimum cost. Effi- ciency is contingent on ensuring that wind farms are TPi = TN (RPi/RN), built in places where critical requirements for suc- cess are present: the best resources, adequate project design, use of proven turbines, regulatory clarity, ade- where TN is the national target. quate incentives, and last but not least, appropriate operation and maintenance practices carried out by Another method, such as targets proportional to skilled staff.14 the share of the provinces in the total gross domes- tic product (GDP), could also be considered. Grid is the key! China's experience has been less than optimal in planning and coordinating the operational Or better: integration of wind farms between developers and grid operators. This considerably reduced the performance · Allow provinces with limited resources or higher- of the wind program. If not addressed adequately development-cost resources to buy from provinces and rapidly, grid connection and stability issues could rich in cheap-to-develop resources. The trade could jeopardize the future of the program. A high level of involve physical transactions or tradable green cer- inefficiencies, especially in the gigawatt-level scale tificates, or both. This would allow for better use with no precedent anywhere in the world, could derail of resources and development of RE in the low- the wind program. Comprehensive connection studies income western provinces. with special attention to the optimal connection size and connection circuit layout should be undertaken Developing Green Electricity Schemes with the involvement of all stakeholders. Short-term at the Provincial or National Level operational forecasting studies and development of short-term wind forecasting methodologies are also Green electricity schemes have been widely studied necessary. in China. They offer nonpolluting renewable electric- ity at a premium price. Participation is voluntary and can cover total electricity consumption or a part of it. Promoting Trade Participating consumers are guaranteed that for each Provinces with limited RE resources should not be kilowatt-hour of green electricity purchased, a cor- mandated to achieve targets that require the develop- responding amount of renewable electricity has been ment of very high cost resources. The cost to consum- produced. These schemes have been widely used to ers and taxpayers could be very high and could reduce pay for the incremental cost of renewable electricity citizens' support of RE. The government should do production. Shanghai Municipality has been operat- one of the following: ing a green electricity scheme successfully since 2005. In 2008 and 2009, consumers participating in green · Mandate provinces to achieve RE targets adjusted electricity schemes worldwide were partly shielded to the provinces' levels of proven RE resources. If from the significant electricity price increases because RN is the national level of RE resources and RPi the green electricity schemes acted as hedges against the volatility of hydrocarbon prices. 14. Some of the conclusions of this paragraph are based on key messages in the recent report titled "Strategic Guidance Chinese authorities should consider national or on Meeting the Challenges of Offshore and Large-Scale Wind regional green electricity schemes to pass through part Power Scale-Up in China," prepared as part of a joint effort of the incremental generation cost to environmentally of the National Energy Administration/NDRC, the Australian Agency for International Development, the Asia Sustainable aware and willing-to-pay consumers. and Alternative Energy Program and the World Bank. 21 Annex: Basic Assumptions of the Study The technical, economic, and cost assumptions of this (in Beijing) to 411 gce/kWh (in Xinjiang) with an aver- study are summarized in this annex. The assumptions age of 332 gce/kWh in 2007. relate to (a) the social discount rate; (b) the techni- cal and economic characteristics of coal-fired thermal Coal price plants, including capital and operating and mainte- The market coal price in past years was reviewed. In nance (O&M) costs, efficiency, and price of coal; (c) 2009, the price of coal was stable at about Y 640/tce environmental externality costs; and (d) RE resources. (without VAT, Qinhuangdao free on board price). This price was adopted as the reference coal price in the study. The coal price in each province was calculated Social Discount Rate to reflect transportation costs, ranging from Y 255/tce A social discount rate of 8 percent was adopted in this (in Xinjiang) to Y 830/tce (in Jiangsu). study. This rate is recommended by both the National Development and Reform Commission and the Min- Environmental Externality Costs istry of Construction in Economic Evaluation Meth- ods and Parameters for the Investment Projects (Third Environmental externality costs were derived from two Edition). separate studies to reflect the minimum and maximum valuation of local pollution impacts on the economy and the population. The costs considered in the study Technical and Economic Characteristics of are provided in table A.1. The economic development Coal-Fired Thermal Plants level and population density of each province were Investment cost taken into account to convert the national averages to Actual investment costs for the same type of coal-fired provincial externality costs. thermal power plants vary slightly by province. The investment cost adopted in the study is Y 3,643/kW. It RE Resources Database is recommended by the China Power Engineering Con- sulting Corporation in its reference handbook15 and is The RE database was established from data collected based on a 2 x 600 MW supercritical power plant. by the Energy Research Institute on existing, under- construction, and planned RE projects from the cen- Generation efficiency tral and provincial governments. Some extrapolation The average generation efficiency of existing capacity in was made to define possible RE projects that would each province was adopted as the reference. The gross be needed to develop the full potential of identified coal consumption rates ranged from 293 gce/kWh resources. The investment cost and capacity factor of each RE project are based on the Energy Research 15. Quota of the Capital Cost for the Design of Thermal Power Institute's estimates. Table A.2 summarizes the RE Projects, CPECC, 2007. database used in this study. 22 Annex: Basic Assumptions of the Study Table a.1 Environmental Externality Cost in China--National average Pollutants Unit of measure SEPA study EU study TSP US$/ton 5,801 62,214 SO2 US$/ton 379 11,373 NOx US$/ton 269 7,660 Source: Authors. Table a.2 summary of the RE Database RE technology RE resources (MW) Investment (Y/kW) Fuel cost (Y/ton) Capacity factor (%) Wind 173,393 8,700­10,800 -- 21­37 Smallhydropower 128,045 3,548­9,965 -- 13­50 Hydropowerrehabilitation 5,243 Avg.2,870 -- 13­50 Biomass 25,364 9,500 260­350 80 PV 22,670 24,000 -- 10­25 Total 354,715 -- -- -- Source: Authors. Note: --=Notavailable. 23 Glossary The glossary provides the definitions of the terms and ­ 46.6% = 53.4%. The formula to calculate the capac- indicators used in this Policy Note. ity penalty of RE project j is as follows: Levelized cost (LC). Because the economic life of differ- CPj* = CCj (1- a) ent generation technologies (including both RE tech- nology and coal-fired thermal) varies, the levelized Where CPj* = capacity penalty applicable to the jth cost per kilowatt-hour is adopted to compare them. RE project, An equivalent annual cost is calculated by dividing the net present value of a project's costs, including CCj = capacity cost of coal generation in the jth proj- the investment cost, fuel cost, and O&M cost, by the ect location, and present value of an annuity factor. LC is then calcu- lated by dividing the equivalent annual cost by annual a = capacity adjustment factor (such as for wind and electricity sales, which is annual electricity generation run-of-river hydropower, the ratio of annual capacity less auxiliary consumption. factors). Incremental cost (IC). The incremental cost is defined Environmental externality cost. The term environmen- as the cost difference between RE technology and a tal externality cost refers to the negative environmen- coal-fired plant. In this study, the LC of RE technolo- tal impacts of coal-fired thermal generation resulting gies was adjusted by applying a capacity penalty when from its emission of pollutants. These negative impacts justified. (See Capacity penalty.) are not reflected in market transactions. Internation- ally, many researchers have obtained different quanti- Capacity penalty (CP). The capacity of some RE tech- ties for the environmental externality cost of coal-fired nologies, such as run-of-river hydropower, wind, and thermal. This Policy Note uses the results of two stud- PV, is nondispatchable because of their intermittent ies to cover the full range of externality costs: one is generation, which decreases their capacity value to a joint study by the SEPA and the World Bank, which meet the system peak load. The capacity penalty (cost) was completed in 2008; the other is the European is applied to these types of RE to make up for this dif- Union ExternE (External Costs of Energy) Study, ference in capacity value. Normally, a system analysis which has much higher figures. could be done to calculate the avoided or replaced firm capacity by the RE addition, and the capacity penalty Implicit environmental cost. The implicit environmen- could be calculated as "1 ­ replaced firm capacity / RE tal cost is defined as the equivalent incremental cost capacity." In this study, the capacity credit is roughly of the marginal RE project to meet a specific govern- proportional to the respective annual load factors. For ment's RE target. As shown in figure A.1, when the example, the capacity credit for a wind project with a government establishes an RE target Q, all RE proj- 35 percent annual capacity factor that displaces a coal ects between 0 and Q should be developed to meet this plant with a 75 percent annual capacity factor may be target. The full cost of the marginal project j should taken as 46.7 percent (= 35%/75%). Therefore, the be covered. It implies the government values the incre- capacity penalty to be subtracted from the levelized mental cost of project j as the benefit that was brought capacity cost of this particular RE project is 100% about by RE development. 24 Glossary Figure a.1 Optimizing RE Electricity generation 1.2 1.0 levelized generation cost (Y/kWh) 0.8 government RE supply curve RE target j 0.6 implicit environmental cost 0.4 0.2 cost of coal-fired thermal 0 Q RE generation (TWh) Source: Authors. 25 The Energy Sector Management Assistance Program (ESMAP) is a global knowledge and technical assis- tance trust fund program administered by the World Bank and assists low- and middle-income countries to increase know-how and institutional capability to achieve environmentally sustainable energy solutions for poverty reduction and economic growth.