Throughout the ongoing financial crisis, and in spite of the glum news all around, I continued to receive fresh inquiries from prospective investors interested in the wind power industry in China. Small wonder, as this industry has doubled in size every year since 2006.
Last year, my observation on investment in the wind power industry was that the timing might be right, but investors should be patient and be prepared for challenges.
In fact, some international wind farm developers have pulled out under the pressure of continuing low returns on investment.
Some of the major causes of low returns are as follows:
(a) difficult grid connection – the grid enterprises managing the state monopoly business have no financial incentives to provide timely grid connection to renewable energy power plants, and there is no effective mechanism to compel them to connect new producers, nor any unified technical standards for connection.
(b) unfavorable pricing – the local stated-owned power plants have no pressure to make profits, and they won many wind projects by tendering below-cost output prices; also the formulas and processes for tariff setting are still being worked out, and remain unpredictable (especially for independent producers).
(c) inexperience – foreign investors may lack the local connections and know how of both incumbent power companies and new independent local competitors, and as a result face higher costs and more obstacles across the board.
The central government has been aware of these problems and in response recently promulgated amendments to the 2006 Renewable Energy Law taking effect on April 1, 2010 (the “2010 Amendments”). The 2010 Amendments aim to clarify some statutory ambiguities and solve some policy problems, but still provide only fairly general guidance. More detailed implementing regulations are expected to be issued in the coming months.
Perhaps the single most important innovation in the 2010 Amendments is a new focus on renewables outtake. In particular, there is now a further requirement that the state energy authority and power administration take responsibility to supervise the implementation of the requirement, provided for in the 2006 Renewable Energy Law, that all power generated by renewable energy shall be purchased by the grid operators so long as the renewable power generation facilities and connection to the grid satisfy relevant technical criteria. To help ensure this outcome, the state energy authority and power administration, together with the state financial department, are mandated to jointly determine a minimum ratio of renewable energy to total power to be purchased by grid enterprises, based on the total generated power volume.
Although technical criteria for network connection have not yet been published, drafting and internal discussions are underway at the power administrations. Balance will be important, since there will be serious downsides to technical requirements that are either too low (hazardous for the network as a whole) or too high (unnecessarily raising costs for renewable power producers).
It is also worth mentioning the 2010 Amendments’ mandate for the state treasury to establish a renewable energy development fund. This fund will be sourced from ad hoc funds in the annual budget and from renewable energy surcharges, and might be used to compensate grid enterprises for their increased costs of purchasing renewable power.
Certainly, the 2010 Amendments reiterate the central government’s commitment to facilitating investments in wind and other renewable power projects. However, in the absence of rational and transparent sales, tariff and technical interconnect regimes, the investment environment will continue to be challenging and risky, and the current distortions in the market will persist.