1. INSIDE STORIES
on climate
compatible
development
November 2011
Key messages How China built the world’s largest
● A clear expression of political will,
backed by a set of effective policy
measures, has been key to China’s
wind power market
success in building the world’s
largest wind power market. The story of the Chinese wind power industry is remarkable. From a
● The establishment of a stable and small number of demonstration projects at the beginning of the century,
favourable pricing mechanism is the Chinese wind power market has grown to become the world’s largest.
crucial for the development of wind At the end of 2010, it overtook the United States to become the leader in
power, because it increases the terms of cumulative installed capacity. Even though China used to import
chances for profitability and growth. 80% of its wind energy equipment, domestic manufacturing has exploded
● A strong domestic market since 2006 and now supplies more than 70% of the domestic market. In
contributes to the growth of 2010, China’s wind power market attracted investments of RMB 89 billion
local wind power equipment (US$14 billion) and employed over 150,000 people1.
manufacturing.
Overview of China’s wind viable technologies, making it today’s
market market leader. The figure below shows
the growth of China’s wind market over
Just as China’s economy has grown at the last decade. Since 2006, the year that
a breathtaking pace over the past two China’s Renewable Energy Law came
decades, so too has its energy demand. into effect, the wind market in China has
Such development puts enormous almost doubled its capacity each year3.
pressure on the security of the country’s
electricity supply in China, 70% of which In 2005, the Chinese government
is based on coal. The price of coal has announced a target of 30 GW installed
been rising steadily, gradually making capacity of wind power by 2020. As
wind power a competitive alternative. shown in the figure above, this target
Moreover, coal’s environmental impacts was surpassed a full 10 years ahead of
– such as air pollution, solid waste schedule. Today, according to the China
generation and climate change – have Wind Power Outlook 2010 report, the
also become major concerns to both the industry believes that it can achieve as
government and the public2. much as 200 GW by 2020. Under this
scenario, assuming that 200 GW of wind
As a result, the Chinese government power capacity could generate 440,000
is increasingly looking at renewable GWh of electricity, wind development will
energy sources to help provide electricity help reduce greenhouse gas emissions
in an environmentally and socially by 440 million tons by 2020. It will
acceptable way – and at a competitive also limit air pollution by reducing coal
Author: price. Among various renewable energy consumption, generate over RMB 400
Ailun Yang sources, wind power is one of the most billion (US$63 billion) in industrial added
World Resources Institute technologically proven and financially value, and create half a million jobs.4
CDKN helps developing countries to design and deliver climate compatible development. When decision makers in government, business
and civil society speak to us about their aims and needs, they often ask about ‘best practice’ in other countries or, indeed, mistakes to
avoid. What are the leading innovations in integrating climate change planning with economic growth strategies and poverty reduction?
What are the biggest challenges faced along the way: institutional, financial, political, technical? This paper is one of a series of policy
briefs that explore the ‘Inside stories on climate compatible development’: briefing papers that aim to answer these questions.
2. Growth of China’s wind power market In reality, the implementation of these
policies has encountered problems. For
50000
example, delays in grid construction
45000 by the grid companies have hindered
the ability of existing wind farms to sell
40000
power. As state monopolies, the grid
companies often escape accountability.
Installed capacity (MW)
35000
The Renewable Energy Fund remains
30000
embryonic: the amount of money in the
25000 Fund has yet to be defined and detailed
provisions regarding its use have yet to
20000
be announced. And, although the ‘30 GW
15000 by 2020’ development target clearly
underestimated market growth and has
10000
already been met, the government has
5000 not provided a new target to further
inspire market development.
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
However, the existing framework has
Newly
Installed 77 57 66 98 197 507 1288 3311 6154 13803 18928 sent a strong signal regarding the
Capacity
government’s intended policy direction,
Total
Installed 342 399 465 563 760 1267 2555 5866 12020 25805 44733 and has successfully provided the
Capacity
incentives needed for the development
Source of data: China Wind Energy Association of the wind market in China.
Pricing mechanisms:
Package of supportive companies are legally obliged to feed-in-tariff versus
policies for wind power purchase 100% of the wind power concession bidding
generated, thus ensuring full grid
The key to China’s wind power success access for wind power. Wind power is a proven technology.
is a clear expression of political will, ● Stable and favourable pricing The main barrier to the largescale
combined with a set of effective support mechanism: This provides more development of wind power is that it
measures. China’s policies promoting predictability and profitability for wind is often not yet competitive compared
the development of wind power are power investors and developers. with traditional fossil fuels. Therefore,
enshrined in the Renewable Energy Law, ● Cost sharing for wind power a favourable pricing mechanism is the
which has been in effect since January development: The added costs main factor affecting the level of active
2006, and its related implementation of developing wind power as investment by developers and market
rules and regulations. Collectively, these compared to those of traditional growth.
measures send a clear message to fossil fuel generation (determined
businesses and government officials at by local prices of desulphurised According to the ‘True cost of coal’
all levels that China has great ambitions coal generation) are shared across study5 released in 2008, it is estimated
for wind power. They also form a legal the country so that places rich in that each ton of coal burned in China
framework that can be summarised by wind resources have incentives generates an environmental cost of
the following key elements: to develop their full potential. This RMB 150 (US$24). Many countries
● Clear development targets: The helps create a level playing field with renewable energy policies use the
’30 GW by 2020’ goal was the for the wind power market across external costs (environmental, social,
country’s first target for wind power. different regions. health, etc.) of fossil fuel to justify
Representing 23 times the installed ● Creation of the Renewable En- supportive pricing mechanisms for wind
capacity when it was announced in ergy Fund: This fund aims to power, which are normally considered
2005, the goal sent a strong signal support technology research market phasein subsidies.
that wind power development was a and development, wind resource
government priority. assessment, development of tech However, countries have used different
● Compulsory purchase of re- nology standards, and demonstra tools to design these subsidies, including
newable energy power: Grid tion projects. the most common forms:
2
3. ● A feed-in-tariff system offers a 0.61 RMB/kWh (US$ 9.6 cents)7. While rule out that the localisation requirement
guaranteed rate for all generated the bidding system could still be used – played some role in accelerating local
wind power fed into the national for example, for offshore wind projects manufacturing, the Chinese government
grid, in order to provide wind power – the feedin tariff allowed wind farm and most industry players argue that it
developers with more certainty as to developers to plan their projects based was mainly the strong domestic market
the profitability levels. Feedin tariffs on a guaranteed price. The industry and that fuelled the transition8. By 2010,
have contributed to the success most experts warmly welcomed this 7 of the 15 largest global wind power
of the wind power industries in move, as it eliminated one of the biggest equipment producers (in terms of
a number of countries, including uncertainties standing in the way of wind annual installed capacity) were Chinese
Germany and Spain. power development in China. companies9.
● In a concession bidding system,
developers bid to provide wind The growth of local China’s advances in the production of
power at the cheapest prices. This manufacturing wind power equipment have reduced the
competition mechanism aims to cost of wind power significantly. Since
lower the cost quickly. However, At the same time as the government 2005, the price of wind turbines has
bidding systems in countries such as created a huge domestic market, dropped by one third in China, benefitting
the United Kingdom have so far had the Chinese government was also not just China but the global wind power
little success in promoting market determined to have it supplied by its own market due to China’s growing export
growth, mostly because developers wind equipment manufacturers. In July ambition10.
bid so low that they later decide not 2005, the National Development and
to implement their projects. Reform Commission of China released Falling prices seem to have led to some
a directive stating that wind farms had sacrifice of quality control, as with a
Starting in 2003, China used a to buy equipment in which at least number of incidents where some locally
concession bidding system to determine 70 percent of the value was domestic manufactured wind turbines had to be
the tariffs for wind power. China’s ally manufactured. This was a formidable disconnected from the grid due to quality
Renewable Energy Law promised that challenge, since in 2005 only one failures. In early 2011, the Chinese
the government would determine feed Chinese wind equipment manufacturer government issued a series of technical
intariffs for renewable energy projects, (Goldwind) was able to produce on a standards in response to this problem.
based on the characteristics of different commercial scale. These new policy initiatives from China
types of renewable energy and the contribute to the general trend among
situations in different regions. However, Foreign players in the global wind global wind manufacturers to change
even after the Renewable Energy Law market heavily criticised this local the focus from quantity to quality in
was adopted, the government continued sourcing requirement. Many claimed order to achieve sustainable market
to organise concession bidding as the that it violated World Trade Organization development.
tool for price discovery. By 2007, there (WTO) rules. In late 2009, the Chinese
were five rounds of bidding, with a total government revoked the requirement. Lessons and implications
installed capacity of 3.35 GW6. However,
because the bidding prices were too low, However, by then, the objectives of the Examining the rapid growth of China’s
some of these concession projects have localisation requirement had already wind power market leads to the following
suffered losses while others did not even been achieved – over 70% of wind reflections:
go forward. equipment bought by wind developers ● China’s experience with pricing
was produced in China. Normally, policies for wind power shows
In order to ease the growing tensions producers of wind equipment choose that at the early stages of market
between the enthusiasm of the wind to locate their factories as close to the development, it is very important
market and the ineffective pricing system, point of delivery as possible, because to prioritise support for wind power
the Chinese government announced the the components of turbines are large developers over efforts to lower
Notice on Pricing Policy Improvement and expensive to ship. By 2006, the the price of wind power. The use
for Wind Power in 2009, which set up major international manufacturers had of policy instruments such as feed
a systematic feedin tariff model for already started to move their production in tariffs provides a stable market
wind power with variations according to China. Inspired by the huge market environment with greater certainty
to the quality of the wind resources potential, many of the biggest Chinese of profitability. In contrast, the use of
in different regions. There are four heavy industry manufacturers had also a concessionbidding model for the
different categories for the tariff ranging established new production lines for wind purpose of price discovery could risk
from 0.51 RMB/kWh (US$ 8.0 cents) to power equipment. While it is difficult to discouraging potential investors,
3