Reviewing China’s latest policy announcement on renewable energy

Max Dupuy and Wang Xuan write on the Energy Collective website about Document 625, the Chinese government’s latest policy announcement on renewable energy developments. This is intended to require grid companies to purchase from renewable energy operators. This is a detailed assessment that you should appreciate.

 

China’s String of New Policies Addressing Renewable Energy Curtailment: An Update

In late March, the Chinese government issued a major policy announcement (Chinese, known as “Document 625”) on renewable energy, aimed at reducing the perennially high level of curtailment of energy from wind, solar, hydro, and other renewable resources. The central feature of Document 625 is a mandated “guarantee” that grid companies purchase output from renewable generators, at least up to an allocated number of hours.

This is not the first time that grid companies have been required to purchase renewable energy output. The original Renewable Energy Law, enacted in 2005, requires that “grid companies shall…buy all the grid-connected power produced with renewable energy…” More recently, reducing curtailment has been a key objective of the major power sector reform effort (“Document 9”) launched by the State Council and Central Committee of the Communist Party in March 2015. Since the release of Document 9, several supporting policy statements and policies have reaffirmed this principle. This includes guidance (“Document 518”) from the National Development and Reform Commission (NDRC), also released in March 2015, which calls on provincial authorities to “ensure purchase of all renewable generation.”

Document 625 introduces significant new elements. The most striking of these is a call to directly compensate renewable energy generators for curtailment. Up until now, renewable energy generators have not received payment for the hours that they are curtailed. According to Document 625, curtailment costs will be paid by conventional generators—except in certain cases, such as unplanned maintenance of transmission lines, when grid companies will be responsible. (RAP has discussed recommendations for curtailment compensation in this 2013 report and more recent reports for the Paulson Institute and the World Bank) However, given the difficulties that policymakers have apparently encountered thus far in ensuring priority for renewable energy generation, enforcement of these new payments may be a significant challenge.

“Guaranteed Purchase”

Document 625 states that NDRC and the National Energy Administration (NEA) will be responsible for planning annual allocations of operational hours for each type of renewable generation in regions of the country that have been experiencing curtailment. The document stresses that purchase of the energy from these allocations will be guaranteed. The decision to give these central government agencies responsibility for this planning—formerly held at the provincial government level—may help strengthen the guarantee.

Compensation is split into two types (Article 9). If curtailment is due to non-renewable generators “infringing on absorption space and transmission capacity,” then the non-renewable generators are responsible for paying compensation. Alternatively, if the curtailment is due to grid line failure or unplanned maintenance, then the grid company must take responsibility for compensation.

In addition, Document 625 stipulates that:

  • Beyond the allocated hours which are “guaranteed purchase,” renewable generators are allowed to negotiate contracts with end-users (“market traded generation”). These contracts will be given priority dispatch rights (Article 5).
  • Renewable energy generators are encouraged to participate in mid- to long-term trading and spot market competition. The traded generation will receive the market (negotiated) price, plus the difference between the renewable feed-in-tariff and the coal benchmark price (Article 11).
  • Grid companies should conduct dispatch according to “energy saving low-emissions” principles and should not ask renewable energy generators to pay any fee (to other types of generators) in order to enjoy their priority dispatch status (Article 15).
  • Grid companies should “gradually move away from provincial balancing dispatch methods and expand the dispatch balancing scope” (Article 15).

Preceding Power Sector Reform and Renewable Energy Announcements

In addition to the policy announcements mentioned above, several additional recent items all stress the need to give priority to energy produced from renewable energy resources:

The revised Air Law (August 2015) requires “clean energy be given priority in electricity dispatch” (Article 42).

The US-China Joint Presidential Statement on Climate Change (September 2015, reaffirmed in March 2016) includes a commitment by the Chinese for “giving priority…to renewable power generation…”

New provincial-level renewable energy pilots (NDRC Document 2554, October 2015) center on measures for “boldly exploring” new approaches to reducing curtailment in Inner Mongolia and Gansu, which together represent a major part of the “Three Norths.” The Three Norths have received the lion’s share of wind investment and have seen average curtailment rates above 30 percent.

A February 2016 “Notice” from the National Energy Administration (Chinese) briefly lists nine approaches for dealing with renewable energy challenges in the Three Norths. These include restatement of several important areas of ongoing discussion, including using renewable energy for district heating, improving flexibility in non-renewable combined-heat and power units (which have been a significant source of system rigidity), improving mechanisms for compensation of ancillary services, implementing regional coordination mechanisms for spinning reserves, and improving system dispatch.

In short, the new Document 625 can be seen as another indication of concern by high-level policymakers about curtailment and renewable energy integration. However, policies to date stop short of comprehensively addressing the root causes of curtailment, instead repeating calls on power sector players to “just do it”. (One article in the U.S. media referred to Document 625 as an attempt at “forced” integration of renewables.) An area in particular need of attention is fashioning a new model for pricing for the output of thermal generators. This has been a significant obstacle to reform, but has not been comprehensively addressed in recent policy statements. A forthcoming discussion paper from RAP takes up current developments with dispatch and compensation issues in more detail. Another important issue will continue to be rationalizing feed-in-tariff mechanisms and securing sustainable funding for renewable energy.

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