In review: renewable energy policy and regulation in China

An extract from The Renewable Energy Law Review, 5th Edition

The policy and regulatory framework

i The policy background

China’s present policy clearly indicates the government’s support and promotion of dramatic growth in the renewable energy sector, with a view to ensuring its achievement of China’s NDC. Although China has kept silent internationally about its peak emissions aim and has not committed on any clear timeline to phase out domestic coal consumption in China, its authorities may have a planned phase-out in mind. For example, the APPE specified certain targets, including:

1. by 2025, non-fossil energy consumption will account for approximately 20 per cent of total energy consumption and energy consumption per unit of gross domestic product (GDP) will drop by 13.5 per cent compared to 2020 figures; and
2. by 2030, non-fossil energy consumption will account for approximately 25 per cent of total energy consumption and energy consumption per unit of GDP will drop by over 65 per cent compared to 2005 figures.

The APPE also provided that the renewable energy substitution rate in urban construction will achieve 8 per cent. Urban construction will make efforts to achieve 50 per cent photovoltaic (PV) coverage of the rooftops of new public and factory buildings by 2025.

National policy plays a leading role in China’s major decisions on its economic goals and actions, and any substantial redirection of the economy – for example, the development of China’s wind farms. As China is rich in coal resources, coal has been the main source of fuel in China since time immemorial. In the mid-1980s, China saw a rapid increase in economic scale, which caused a rapid increase in serious air, soil and water pollution, and also saw a potential challenge from the perspective of national security regarding the lack of sufficient natural oil and gas resources in China. China began to explore ways of tacking these issues by considering renewable energy. The first experimental project decided by national policy was the development of wind farms. The equipment was imported from Denmark for the first wind farm in Shandong, which was successfully completed and on-grid in 1986. Through the implementation of the policy in three further steps (industrialisation exploration, development and scale-up), China began the construction of wind farms and experimental projects of PV power generation. Now, although coal consumption still accounted for 57 per cent of its total energy consumption in 2020,⁵ China has become the world’s leading country in electricity production from renewable energy sources. Its wind power capacity reached 28,153kW in 2020.⁶

In addition to hydro, wind and solar power, China has explored other forms of renewable energy generally referred to as ‘new energy’ (biomass, geothermal and green hydrogen energy). Green hydrogen is a new energy source that has attracted the attention of several large energy companies. China currently has dozens of projects in progress to turn wind and PV power to green hydrogen, most of which were invested in by large Chinese state-owned companies. Foreign investors are also seen playing a role in this sector.

Shell’s joint venture with a local partner has started production at a wind-powered 20MW electrolyser in Zhangjiakou, which provided green hydrogen for half of the fuel cell vehicles at the game zone in Hebei during the 2022 Winter Olympic Games. The project, stated by Shell as being its first and the largest commercialised electrolyser in the world, has an ambitious long-term plan for the second phase of the project.

Building a new renewable energy project is time-consuming and requires substantial investment. As a result, most of the major players in China’s renewable energy sector are large state-owned companies. Compared to small- to medium-scaled privately owned enterprises, state-owned companies are more welcome by banks. Although several government circulars and provisions repeatedly state their support of the participation of privately owned enterprises, the sector is still dominated by state-owned companies.

That said, the Chinese government has made efforts to provide financial support to all participants in low-carbon projects, including players not owned by the state. Starting from 2015, the People’s Bank of China (PBOC), based on the joint-published policy by the Central Committee of the Communist Party of China and the State Council, issued a series of circulars setting up certain schemes to promote commercial banks and the stock market for their strong financial support of low-carbon projects. Such schemes intend to attract more non-government funding (i.e., setting up private green funds; allowing green enterprises’ green bonds on the bond stock market, banks’ revolving credit and bank guarantees; and creating green products trading). Since then, many green industry funds have been seen in China, among which are private equity or venture capital investment funds; public–private partnership project funds; joint venture funds comprising investors from various enterprises, individuals and government agencies; and some with international investors. To date, the total capital possessed by green industry funds may have exceeded several hundred billion yuan, most of which is still from government agencies and enterprises. The PBOC’s aim to secure non-government resources still seems far from reality.

The NDRC issued a catalogue in 2019 to define which industries are green and should be qualified for finance or investment by green industry funds. The catalogue sets out six categories as green industries, including environmental protection, clean production and clean energy.

Until 1 August 2021, there were schemes for feed-in tariffs (FiTs) for renewable energy, although different schemes applied to different renewable energy resources. China applies a FiT to PV power. The FiT consists of the benchmark tariff and renewable energy subsidies. The subsidies are, in principle, paid by the national government to the power plant. In practice, the subsidies are paid by the government directly to the grid⁷ and the grid pays the subsidies to the power plant at the end of the financial year after the final settlement of all accounts with the power plant. The benchmark on-grid tariff is decided by the NDRC, is subject to adjustment by the NDRC and varies from location to location.

There used to be a FiT for wind power, which was revised in 2019 by NDRC Notice No. 882 on amending the wind power FiT policy. Since July 2019, the original benchmark on-grid tariff no longer applies to all onshore wind farms. A price indication will be determined by the NDRC, which will vary from location to location. Such indication should be benchmarked with but shall not be higher than the local coal-powered on-grid tariff. All new onshore wind farms must bid for connection to the grid and no winner shall receive a tariff higher than the NDRC’s price indication. In practice, power plants tend to accommodate the required grid parity through certain contractual terms in favour of the power plants – such as long-term electricity supply-and-purchase contracts – and the grid undertakes to not reject the supplied electricity.

Although the FiT has been maintained to the extent stipulated in NDRC Notice No. 882, the NDRC has further attempted to push for grid parity for more wind- and solar-powered electricity projects. On 30 September 2020, the NEA circulated a notice⁸ that listed certain newly approved solar-powered projects that have undertaken to achieve grid parity, based on NDRC Notice Fa Gai Ban Neng Yuan No. 588 of 2020. The NDRC issued a further notice on the new energy FiT policy in 2021, which further required that, as of 1 January 2021, all new onshore wind farms shall achieve grid parity. A similar pricing mechanism will also be applicable to offshore wind farms, but at a later date.

The FiT was further revised on 7 June 2021 by NDRC Circular No. 833 on the Issues with regard to the Policy for New Energy’s On-grid Tariff (effective as of 1 August 2021) (Circular No. 833), which stated the abolishment of the FiT. Circular No. 833 applies to all PV power projects, regardless of their being centralised or distributed for commercial or industrial use. All onshore wind power projects that were newly filed with or approved by the authorities as at 1 August 2021 (the New Projects) shall no longer enjoy any subsidies from the central treasury. The New Projects shall go on-grid with grid parity and the benchmark shall be the coal power’s on-grid price in the same region. The New Projects may trade their electricity directly on the market and the price resulting from free market trading shall be the on-grid tariff for such New Projects. In addition, as of 1 August 2021, the pricing authorities at provincial level shall decide the on-grid tariff within their territories for all newly approved or filed offshore wind farms and solar thermal power projects, and the provincial authorities may determine the local on-grid tariff through a bidding process. However, if the on-grid tariff determined through the bidding process is higher than the local benchmark price based on coal power, the grid will only pay the local benchmark price. Finally, Circular No. 833 stated that the local governments are encouraged to establish local policies to support the development of the new energy sector.

Circular No. 833 largely sets forth two messages to the players in the sector:

1. the central treasury will stop financing wind and solar power projects by calling off the FiT completely and requesting grid parity for all New Projects; and
2. in the meantime, local provincial governments are encouraged to establish their own policies to continuously promote the new energy sector in their areas, including by paying a FiT subsidy as described above.

On the other hand, Circular No. 833 is silent on whether FiTs will remain for the wind and solar power projects already in operation or in construction, or to any new projects filed prior to 1 August 2021. Logically, this silence should mean the continuation of the FiTs for the existing projects, at least until the end of their power purchase agreements with the grids.

From 2011, China has seen an insufficient use of renewable energy power or an abandonment of wind and solar power by the grid. For example, an NEA report stated that wind-powered electricity abnormally rejected for purchase by the grid in total amounted to 497kWh in 2016.⁹ In certain provinces, the abnormally ended electricity amounted to 43 per cent of their total generated electricity.¹⁰ The reason for this disappointing situation may be attributed to several factors, including that most wind and PV farms are built in the north-west, north-east and Huabei regions, where coal historically has been the dominant fuel. The electricity produced from wind and solar was in surplus for local consumption in such regions. In addition, the grid complained about the volatility of the electricity supply from wind and solar sources, and claimed that such a ratio of peak-valley difference and the peak load technically could not be handled by the grid. However, the grid, though commonly criticised as being too dominant, is not completely unreasonable nor should be considered responsible for solving technical difficulties connected to the supply of wind- and solar-powered electricity.

Solving these technical difficulties would require facilities that are capable of storing and releasing electricity to act as the mediatory service between power plants and the grid. Such electricity storage technology and facilities may be insufficient in China. The NDRC may have noted the issue, as evidenced by its issuance of the Implementation Plan on Development of Neo Type Energy Storage for the Fourteenth Five-year Period in January 2022. China’s NDC will require it to go through a substantial restructuring of its entire traditional energy sector to build a non-fossil-based industrial system. Technology in all aspects will be a key factor for China’s success in this regard.

There used to be a value added tax rebate enjoyable by PV power plants for a limited period,¹¹ which has now expired. Instead of tax benefits, there are now certain other measures adopted by the authorities that aim to reduce the financial burdens of investing in the renewable energy sector, such as a reduction in costs for construction of renewable energy power plants.

ii The regulatory and consenting frameworkREL

The REL sets up the framework and certain key principles to benefit renewable energy development. China began development in the renewable energy sector much earlier than the promulgation of the REL in 2005. Before the REL, China’s often-criticised piecemeal approach to legislation was typically seen in this sector. The legal provisions in relation to renewable energy were seen scattered among various regulations issued by different government authorities, and all such authorities played a role in certain aspects of the upstream and downstream chain of this sector.

The draft of the REL was inspired largely by the initiative of the Energy Foundation¹² and the promulgated REL takes a clear position in favour of renewable energy development. For example, it states that China encourages and supports the renewable generation of electricity and connection to the grid.¹³ Further, Article 14 requires that the state shall adopt a system to ensure the purchase of all of the electricity generated through renewable energy sources. Attempting to provide systematic solutions in relation to the on-grid process, Article 14 requires advanced planning by the relevant authorities and specific regulations to ensure a priority position for renewable power plants in the on-grid process.

The desired measures under the REL to encourage and promote the development of renewable energy sources in China have not been fully implemented. For example, the purchase of electricity generated from renewable energy power plants by the grid has stalled. The difficulty of implementing the REL may partly be attributable to the fact that the various authorities involved in the administration of this sector do not necessarily have the same goals and views regarding the sector’s development.

The Legislation Law defines the legislative authorisation of the Chinese government authorities at different administrative levels. Laws, regulations, provisions and circulars issued by the National People’s Congress (NPC) or by various government agencies comprise the Chinese legal system. The REL is ‘top-tier’ law, as it was issued by the Chinese NPC. However, the REL was drafted far behind the growth of the renewable energy sector administered by various other authorities, which had already issued numerous provisions, circulars or notices to define all the pragmatic features of the industry. The REL, for the benefit of the stable operation of the sector, is not able to go into pragmatic details. It provides the framework and certain key principles to integrate various existing practices governed only by administrative regulations into the overall schema of environmental protection.

When a law like the REL is issued, various authorities with certain relevant administrative roles in the relevant sector will issue or alter a large number of regulations, provisions, decrees and guidelines to implement the law. Authorities at the national, provincial or even municipal levels will issue their own policies and regulations for implementation. The role of local governmental authorities may be of particular importance in the case of the implementation of the REL, as each province fundamentally faces different challenges, which will require different methodologies and strategies to overcome. This is especially true in relation to the achievement of China’s NDC. For example, Shanxi, as traditionally and even currently the largest coal producer, needs a highly specific strategy, methodology and feasible local road map to restructure its coal sector and to convert to other industries. In addition, thought must be given to what new contributions should be expected from provinces like Qinghai, which is comparatively in a more comfortable position as it holds the largest PV production site in China.

National authorities

The State Council does not engage itself in the day-to-day administration of various economic sectors. Its function is fulfilled through various governmental authorities. There are many authorities under the State Council that play a role in the administration of the renewable energy sector in China. To avoid an unnecessarily long list of such public bodies, we will focus on those of decisive power or with the most relevant functions governing renewable investments and operations, as set out below.

1. The NDRC is in charge of both the macro (i.e., working out the development or restructuring (or both) plan of the entire sector) and micro aspects of the sector. It will issue, from time to time, various catalogues that set out encouraged (or, under certain circumstances, prohibited) industries. For example, on 29 November 2005, the Renewable Energy Industry Development Guidance Catalogue was issued by the NDRC. In terms of micro-administration, the NDRC is in charge of the electricity pricing policy and also is the authority issuing approval (or rejection) for specific new renewable energy projects that require approval based on certain rules.
2. The NEA, under the direction of the NDRC:
   • prepares drafts of laws and regulations for further review by the superior authorities;
   • proposes and oversees the implementation of the renewable energy development strategy;
   • carries out supervision of the electric market to ensure its operation in order; and
   • may have certain power to approve or review investment project in fixed assets.
3. The Ministry of Natural Resources is involved in renewable energy development to determine the ownership title of natural resources involved in renewable energy projects. For example, if an offshore wind farm requires the use or reclamation of certain areas of the sea, the Ministry of Natural Resources’ approval is required to ensure that the farm’s title to use such area of the sea is valid.
4. The Ministry of Ecology and Environment (MEE) is the authority tasked with assessing the ecological and environmental impacts of each project waiting for approval. The MEE’s report that confirms the project being free of any negative impact is vital for the applicant to receive final NDRC approval.
5. The PBOC and the Ministry of Finance, although not directly involved in the administration of renewable energy projects, play a decisive role for the implementation of the financing policy applicable to the renewable energy sector.

A renewable energy project will involve the administration of multiple authorities, such as the NDRC, the MEE, the local electricity administration and the local land use administration, among other things.

To date, there is no differentiation between the approval process for fossil-fired power plants and that of green power plants under the law or regulations governing the approval for specific projects. China’s approval and the applicable procedures are complex. Simply put, a renewable energy project may require a number of approvals at different phases of its progress. The major approvals are set out below.

1. NDRC approval or examination and filing. The State Council issues, and updates from time to time, a catalogue¹⁴ to specify the types of projects that require prior approval or that require an examination and filing only. The NDRC is primarily in charge of the approval function. Through the policy of limiting and streamlining authorities’ approvals, the list of projects requiring approval by the NDRC has been substantially shortened. The NDRC’s approval comes in two steps. First, the project owner must obtain an NDRC filing confirmation, which is generally referred to as ‘project establishment’ (PE). Second, the NDRC’s final approval is subject to the project owner obtaining other approvals from other authorities. To obtain the PE and other approvals, the project owner would have to prepare and submit different project documentations to different authorities.
2. Urban or rural location planning. The project owner must obtain a pre-approval to use the intended land area from the local urban or rural planning authority.
3. Environmental impact assessment and approval. Upon obtaining the PE, the project owner is required to go through a process regarding the project’s possible impact on the environment. Usually, the project owner must engage a licensed third-party environmental assessment institute to complete the assessment and to deliver the assessment report to the environmental authority. Subject to local regulations and based on all obtained pre-approval filings, the project owner must obtain a pre-approval filing from the local land authority and, if water will be used in the project, a pre-approval permission from the local natural resources authority must be obtained. Final approval will only be issued following the NDRC’s final approval.
4. Grid connection notification and application.

With all the aforementioned documents, provided that all such documents contain no negative comments, the project owner shall return to the NDRC for final project approval. After obtaining this, the project owner must return to the local authorities to complete the formalities for the final approval documentation one by one (e.g., the land use certificate, whether through purchase or through lease for the right to use such land). The entire process for obtaining these essential approvals may take a year or even longer, subject to whether any complications may occur during the process.

Since 2014, a year in which China was facing the pressure of an economic downturn, the policy of government streamlining was initiated by the State Council. This included the revocation of certain approvals, and the decentralisation of certain powers and procedures to approve projects.¹⁵ The NDRC, following the State Council’s decision, decentralised its approval power by delegating such power to its local bureaus. According to the NDRC’s official news briefing, by 2018, 67 per cent of its project approval items were delegated to its local arms (i.e., provincial or municipal NDRC bureaus).¹⁶ This made the approval authorities and procedures more accessible to investors.

Following the APPE and the NDRC’s implementation plan, the NDRC – together with the other 11 relevant authorities – issued a circular on 18 February 2022¹⁷ that, in addition to adopting a more favourable taxation and surcharge payment scheme for renewable energy enterprises, indicated that the various local authorities involved in the aforementioned approval process shall adopt more collaborative and flexible approaches and attitudes in their approval processes. Environmental impact assessments are key steps in these processes. If the result of the assessment is negative, obtaining NDRC approval is impossible.

The MEE has issued technical guiding principles¹⁸ as a basis for the professional environmental institutes to carry out their assessments. The guiding principles appear to focus on possible air, water, soil and noise pollution. Protection of wild animals and cultural resources are not in the authorised scope of power of the MEE. Protection of wild animals is delegated to the Ministry of Agriculture under the Wild Animal Protection Law. The protection of cultural resources is under the power of the Ministry of Culture and Tourism. This may be seen as a typical example of the piecemeal methodology of China’s legislative system.