The Future of Wind Energy Development in China
Pei-yang Guo1, Dan-yang Zhu1, Jacqueline Lam1,2, Victor O.K. Li1,2, 1The University of Hong Kong, Hong Kong, China, 2The University of Cambridge, Cambridge, United Kingdom Email: 2[email protected]
Abstract
In face of the recent economic slowdown and increasing pressure to substantially reduce carbon emissions, China has placed wind energy on top of its energy policy agenda. Chinese government has adopted various pro-wind energy policies, including fixed feed-in-tariff and priority dispatch. Remarkable progress in wind energy development has been achieved over the last two decades, especially in terms of installed energy capacity. Currently, China tops the world in wind energy capacity. However, wind energy output is less well performed. Barriers to full deployment of wind energy in China remain, ranging from overcapacity in electricity generation, wind curtailment, poor grid connectivity, lack of an ancillary service market, absence of demand response (DR) and energy storage, differential priorities between the central and the local governments, to vested interests among coal-fired power plants and the local governments. Several initiatives have been undertaken by the Chinese government to address and eliminate these barriers, including: energy coordination, coal-fired power plant retrofit, smart DR, development of a well-functioned ancillary service market, setting of a legal binding carbon reduction target, and a mature carbon-trading market. To ensure sustainable development of wind energy industry and the smooth integration of wind to the grid, China needs to substantially transform its current electricity system, including the development of distributed generation, proactive transmission planning, smart grid development, merit-based dispatch, and continual electricity market reform via pricing improvement. A low-carbon and clean energy pathway can be foreseeable in China, through continuous investments in wind and other forms of renewable energy and addressing the above technological and market challenges.
Keywords
Wind energy development; China; barriers; drivers; government; stakeholders
5.1 Introduction
Globally, energy is generated mainly from the nonrenewable sources. This has resulted in serious environmental pollution and health degradation. By contrast, renewable energies (RE) are clean, sustainable, and emit fewer pollutants and greenhouse gases (GHG) [1]. REs include wind, solar, biomass, geothermal and hydrothermal, all of which occur naturally on our planet. Like all renewable forms of energy, wind generates green electricity and provides a solution to reducing GHGs. It is expected that wind will provide more than 20% of global electricity demand by 2050 [2]. The growth of installed global wind capacity from 17.4 GW in 2000 to 432.4 GW in 2015 is a strong indication that this target will be met [3].
As the biggest GHG emitter in the world, China is facing increasing pressure to cut carbon emissions. The recent slowdown in economic development has prompted China to look for alternative economic solutions and develop new energy industries which include wind. In less than two decades of development, China’s installed wind energy capacity has reached the stage of being greater than that of any other country in the world. In this chapter, we will first review the status of China’s wind energy development, with a brief introduction of the electricity and wind energy market in China. Secondly, we identify the barriers and drivers to the country’s wind energy development. Lastly, we outline the possible future pathways for achieving a sustainable wind energy industry in China.
5.2 Wind Energy Development in China
5.2.1 Overview
Since 1979, the Chinese economy has increased at an average annual rate of 10%, doubling every 7 years. To maintain this high rate of economic growth, China needs to continue expanding its electricity supply. However, viable options of electricity generation are few. China is rich in coal reserves, but limited in gas and oil supply. Electricity generation based on coal is highly polluting and carbon-intensive, thus creating significant political and international pressure [4]. There is an urgent need for China to change from high-carbon to low-carbon electricity generation.
China has so far achieved remarkable progress in wind energy development. Wind power now represents 3.3% of the overall power generation [3]. This is largely due to the country’s vast wind resources [5], relative technological maturity, and relatively low cost, compared to other renewable resources. From 2001 to 2015, China’s accumulated wind power generation capacity increased from 404 MW to 148 GW (Fig. 5.1). The new installed wind energy capacity increased to 32 970 MW in 2015, thus securing China’s global leading position in installed wind capacity [3]. Wind energy has constituted a key component of China’s RE strategy and is expected to play an increasingly significant role in China’s energy mix.
5.2.2 Electricity Market and Wind Energy Market in China
5.2.2.1 Electricity Market and Wind Energy Market
China’s electricity market is heavily regulated. On the supply side, the government has established an on-grid tariff for each province. Each power plant must sell its outputs to the two national grid companies via the on-grid tariff. The grid companies then transmit and distribute the electricity to local utilities, which are subsidiaries of the two grid companies. On the demand side, consumers purchase electricity from local utilities at fixed prices set by the local governments. Since 2015, China has started revamping the electricity market and has attempted to liberalize electricity supply [6]. However, such reforms have only just begun. The main electricity transactions conducted between power plants and two grid companies are still controlled by the central government.
According to the energy law in China, electricity produced by wind farms should all be taken up by the two national grid companies and purchased at a price stated by the feed-in-tariff (FIT). The FIT is set at a much higher price than the on-grid tariff applicable to thermal plants. All consumers must purchase electricity at a state-sanctioned fixed price, which includes surcharges for renewables, regardless of the proportion of renewables represented in the overall electricity package.
Two different pricing schemes have been introduced to the electricity market in China over the past decade to boost the integration of onshore wind to the grid: auctioning and FIT. The auctioning scheme was introduced in 2003, when the National Development and Reform Commission (NDRC) organized national concession tendering for selected projects and picked winners based on the lowest bidding price. However, it soon became evident that this process was dominated by the state-owned enterprises (SOEs), which submitted bids at very low prices to secure projects. SOEs were keen to win these projects because (1) they were required by the government to purchase wind capacity to meet their renewable installation target; (2) they were able to compensate for wind project loss with revenues from conventional generation; (3) some parties hoped to win the bid first and postponed the development until the cost of wind power technology becomes sufficiently low. Such practices conducted by SOEs carried unintended consequences: the tariffs were too low to cover the project cost; auction winners resorted to corner-cutting to reduce costs; and private investments were forced to exit the nascent wind power industry. After a few unsuccessful attempts to reform the auctioning process, the Chinese government eventually decided to abandon onshore wind auctioning.
Since 2009, FIT has been introduced to replace auctioning. China is divided into four regions based on wind resources and the existing grid infrastructure. Under each region, a benchmark price for wind power is issued by NDRC. Each tariff consists of two parts: a fixed on-grid tariff and a renewable subsidy. The fixed on-grid tariff is paid by the national grid companies. The renewable subsidy is covered by a national renewable fund, sustained by a surcharge levied on electricity consumers and fiscal transfer from the government. A high, fixed FIT has been considered by wind developers as one of the most important drivers of wind capacity installation [7].
Recently, a new renewable quota (the government has refrained from framing it as a “quota,” though it is a quota by nature) has been proposed, which will link closely with existing FIT [8]. The new regulation requires nonhydro renewables to generate 9% of consumed electricity by 2020. To achieve the renewable target, NDRC has stipulated the amount of renewables that each province should share; this ranges from 5% to 13%. The regulation also requires that all power companies should share a minimum of 9% electricity output from the renewables by 2020, complemented by policy issues such as tradable green certificates issued by the local governments, whenever relevant, in order to meet the renewable quota. Before the new regulatory package has been successfully implemented at the local level, its effectiveness in stimulating the increasing penetration of wind and other renewables into the national grid and local utilities remains to be proven.
5.2.2.2 Key Players in the Wind Energy Market in China
China’s wind industry is shaped by five key types of stakeholders, including the wind developers, the wind turbine manufacturers, the central government, the local governments, and the national and local grid companies. Because of the strong role the state plays in the electricity market in China, the central and the local governments are dominant players shaping the wind energy market. The national and local grid companies are under the direct control of the state and the local governments.
5.2.2.2.1 Wind Energy Developers
Wind energy developers in China consist primarily of the state-owned power generation companies. The unique feature of China’s electricity system dates back to 2002, when its electricity market was restructured to allow competition in electricity supply. Five state-owned companies were spun off from the State Grid Corporation (SGC), then, the only vertically integrated utility. Since then, China’s electricity generation has been dominated by five corporations plus a number of new entrants, most of which are SOEs such as Shenhua and CR power. After China increased the renewable penetration by taking up wind auctioning in 2003, these companies rapidly expanded their installed wind capacities via their deep pockets and their ability to subsidize the low strike price of wind renewables by the revenues obtained from nonrenewables. Only one new entrant has been able to obtain significant market share from any state-owned companies. This being Tianrun, a private power company specialized in wind power development and a subsidiary of Goldwind, the leading wind turbine manufacturer in China.
5.2.2.2.2 Wind Turbine Manufacturers
Chinese wind turbine manufacturers top the world’s wind energy market in terms of installed wind capacity. In 2015, among the top 10 companies achieving the highest installed wind capacity, five are Chinese [9]. Such outstanding performance can mostly be attributed to the rapid wind power expansion in China, which relies predominantly on domestically produced wind turbines.
Chinese wind manufacturers started developing wind turbines at a much later stage than their European counterparts. Local wind turbine manufacturing began production in the mid-1990s. In 1996, the Chinese government unveiled a set of policy initiatives to speed up wind technology capacity. Chinese manufacturers gradually acquire advanced technologies via joint ventures or technology licensing and secure competitive positions in global turbine manufacturing [10,11]. A major policy reform was introduced in 2005, which required that 70% of wind turbine components be manufactured in China [12]. Though this policy was eventually abolished 5 years after the introduction due to international pressure, it significantly boosted the market share of domestic manufacturers and encouraged technology transfer from frontrunner companies in China. China has gradually reduced its reliance on imported turbine technologies and has accumulated its own innovative capacity [11]. Chinese manufacturers are capable of producing large turbines of comparable size to their European counterparts.
5.2.2.2.3 The Central Government
The central government, including NDRC and the National Energy Agency, are the primary national policy-making bodies taking charge of wind power development and planning in China. Before 2010 when auctioning was applied on wind power pricing, NDRC was responsible for planning concession bidding, for any wind projects that exceed 50 MW. After China has adopted FIT, NDRC retains the authority to approve any wind projects that exceeded this threshold, while delegating the local government the authority to approve any projects that falls below the threshold. However, the overheated response of the local governments to approve wind projects that fall below the threshold, prompted NDRC, in 2011, to retake its authority to approve all types of wind projects. From 2013, NDRC decides to delegate the authority of wind projects approval back to the local governments, while retaining its overarching control over wind development planning. The central authority lays out plans for scheduled installation for individual provinces and coordinates transmission line construction [13].
5.2.2.2.4 The Local Governments
In parallel with the central government, the local governments have much control over local wind energy development. They are given the authority to propose annual plans for total local power generation, which will dictate the maximum wind capacity that each local province should take up. Before 2011, the local governments also gained considerable power on wind capacity installation as they enjoyed the authority to approve any wind projects falling below 50 MW. For the local authorities, wind energy development is not taken as a zero-sum game; there are potentials to boost local employment and economic growth, and increase the local authority’s tax revenue. However, some local governments also hold the belief that coal-fired electricity has a higher potential to boost local employment and economy [14]. Whenever there is an oversupply of electricity, local governments often attempt to save coal-fired power generation, at the expense of wind power development, via wind curtailment.
5.2.2.2.5 Grid Companies
Grid companies are tasked with ensuring grid access and priority dispatch of wind power. China’s transmission and distribution are dominated by two national grid companies, namely, the National Grid and the Southern Power Grid. These two grid companies are not competitors as they are serving different regions. Local utility companies are subsidiaries of these two national companies, and follow closely the policies laid down by their parent companies. Grid companies make a profit from procuring and selling electricity at state-sanctioned prices. They pay the on-grid tariff for wind electricity at the same rate as their coal counterpart, whereas the difference between the FIT price and on-grid tariff is covered by the renewable fund. The renewable fund is supported by government subsidies and surcharge levied on the consumers.
5.3 Wind Energy Development in China: Barriers and Drivers
The wind energy output in China is less than satisfactory in view of the massive wind capacity installed. This can be witnessed by comparing wind development in China with that of the United States. In 2015, the installed wind energy capacity in China was double that of the United States [3]. However, the wind energy output generated in China was slightly lower than that of the United States, and only 186 TW h of wind energy output was generated in 2015, as compared to 190 TW h generated in the United States. The mismatch in wind energy capacity and output is due partly to the fact that wind resources are intrinsically less abundant in China [15,16]. Other factors beyond scarcity of wind resource have also contributed to the less well-performed wind energy output, including poor grid connectivity and wind curtailment [14,15,17]. In Sections 5.3.1 and 5.3.2, we will highlight the barriers to and drivers of wind energy development in China, and provide an account of the relatively less well-performed wind energy output in China.
5.3.1 Barriers to Wind Energy Development in China
5.3.1.1 Overcapacity in Nonenewable Power Plants
Overcapacity in electricity generation from nonrenewables has become increasingly evident due to the slowdown in economy in China. The cooling effect on capacity investment is closely linked to its long history of capacity shortage. In the 1980s, after the introduction of the open door policy, electricity demand increased dramatically and most provinces began experiencing severe electricity shortage. Industrial users in China were only allowed to access electricity only on government-planned schedules, depending on how much capacity was generated in total. Such move went against the generally accepted international practice [18]. To spur capacity investment, the central government liberalized electricity supply, allowing provincial governments and private companies to build their own power plants. Preferential pricing was introduced to fix procurement price at a rate that guaranteed revenues. Such measures have produced huge financial incentives for grid companies to invest in generation capacity. Over the last few decades, the growth in electricity supply has gradually been catching up with the growth in electricity demand.
As a result of the recent economic slowdown in China, with growth rate dropping from double digits to single digits, ranging from 6% to 7% over the last few years, electricity demand followed the same pattern. However, capacity investment irrationally grew in spite of the economic trend. Growth in investment capacity outstripped electricity demand. In 2015, electricity demand increased marginally by 0.5% [19], while the total installed capacity increased by more than 10% [20].
Overcapacity implies that wind energy will play an increasingly weaker role in electricity generation. Gansu, a remote inland province in Northwest China, has an installed capacity of 27 GW of wind and solar energy, in addition to the 104 TW h thermal or hydro [21]. Given that its average annual electricity demand is 109 TW h, without cutting thermal power or hydro generation or transmitting the excessive capacity to other provinces, installed wind energy capacity could hardly be put into any meaningful use in Gansu. This is also true for other provinces that display similar electricity supply and demand characteristics.
5.3.1.2 Wind Curtailment
Wind curtailment is a particularly acute challenge to wind energy integration in China. Wind curtailment refers to the situation where the output of wind plants is reduced to a level below its maximum generation capacity. China has experienced curtailment since 2010 and curtailment reached its peak of 17% in 2012 (Fig. 5.2). After a brief remission in 2013 and 2014, the curtailment rate increased in 2015, and is expected to increase further in 2016. In some places, curtailment rate reached as much as 39% [3]. The severity of wind curtailment in China is staggering when compared to other RE development leaders such as Germany, which had a curtailment rate of below 1% in 2013 [22].
Wind curtailment should be considered within the context of China’s priority dispatch policy. Internationally, procurement of output from generation sources other than wind is not guaranteed. The various generation sources are dispatched based on the structure of competitive wholesale market, such as the United States and Germany; or local policies or regulations, such as China. Under the priority dispatch policy, however, system operators are obliged to dispatch wind output first before they dispatch other sources. In China, the Renewable Energy Law provides that RE such as wind be awarded a dispatch priority, which means that grid companies must procure all power from wind developers at the FIT price.
However, in reality, priority dispatch has not been strictly implemented. Local governments sometimes misinterpret or distort the policy in favor of thermal power generation, which has been taken as a more important means for enhancing economic growth and employment [14]. Local policies that attempt to restrict wind power development include setting the total generation hours for wind power, ordering the wind developers to purchase generation rights from thermal power plants, thereby forcing wind power to compete with thermal power in the newly established electricity market. This situation would not occur in other countries as hefty compensation has to be paid to wind farm owners for every kilowatt hour the operator fails to procure. In China, because no penalty or compensation is required legally in case of any wind procurement failure, the local governments are free to interpret the priority dispatch provision, resulting in a violation of priority dispatch.
5.3.1.3 Poor Grid Connectivity
Poor grid connectivity arises from geographic distribution of wind farms and the centralized development of generation capacity. A key feature of China’s wind power is centralized utility-scale generation. Large wind farms are mostly located in the vast inland regions, including North China, the Northeast, and the Northwest (“Three North” regions), where wind resources are abundant. Because of the sheer expansion and sparse distribution of population in these regions, wind energy needs to be transmitted across thousands of miles before consumption. Very often, wind generation within these inland provinces greatly outstrips demand, making it necessary to export excessive energy to coastal or southern provinces, and triggering the need for long-distance transmission.
Transmission planning often lags behind the speed of wind capacity installation. The time spent in obtaining official approval of new transmission lines greatly exceeds that of new wind power development. Construction of new transmission lines has to go through onerous planning, environmental impact, and feasibility assessments before it is assessed by various divisions of the central government [17]. Besides, huge delay may occur due to the lengthy process involved in land acquisition. Long-distance transmission also requires considerable coordination among the local governments, whenever transmission lines have to pass through their own jurisdictions [4]. In comparison, planning for wind projects is relatively easy. The local governments have much say on the installation of new wind capacity and the approval procedures are often simple and easy. The speed of installing wind turbines thus often outpaces that of constructing transmission lines.
5.3.1.4 Lack of a Well-Functioned Ancillary Service Market
Integrating renewables calls for flexible power sources to provide ancillary services. Wind energy outputs are inherently variable and uncertain. Therefore, the power system must be flexible enough to accommodate the rapid change. However, power supply flexibility is low in China. Coal-fired power plants dominate the power generation, accounting for 67% of total electricity supply [24]. Unlike gas power which could ramp up and down quickly, coal-fired power plants are usually designed to serve base load and run at a constant output. Large deviation from the designed output is often seen as ill-advised as it reduces efficiency, increases costs, and lowers equipment lifetime [25]. As such, no coal-fired power plants will be motivated to provide ancillary service for renewables without proper compensation.
China lacks a well-functioned ancillary service market to provide power plants with incentives to balance the grid. In other countries with a large share of coal power, such as Germany, any plant capable of providing ancillary service is eligible to enter the market. At a time when renewable output changes drastically, the price of ancillary service provision would surge to an extremely high level to compensate for the sudden change. This price signal would encourage investment in flexible power source such as natural gas, and provide the necessary financial incentives for coal-fired power plants to retrofit and increase flexibility. However, in China, such market design is still largely elusive. Very often, coal-fired power plants are required by the government to provide ancillary service free of charge. In some regions where remuneration schemes do exist for ancillary service, the payment is often low and fixed by the government. The incentive for investment in flexibility remains weak.
5.3.1.5 Lack of Demand Response and Energy Storage
Demand response (DR) offers a promising solution to increase power system flexibility from the demand side. DR refers to all intentional modifications on consumers’ electricity consumption patterns such as altering the duration of use, the level of instantaneous demand, and the total electricity consumption [26]. DR programs enable timely adjustment of consumer demand according to electricity supply conditions, which helps to accommodate intermittency of electricity output and levels out its variation. The DR programs that are most relevant to wind energy integration include direct load control (DLC), interruptible or curtailable load (IL), demand side bidding or buyback program, and emergency DR programs.
China’s DR development is in its infancy. China has installed DLC and IL in some coastal provinces only. Because of the lack of electricity wholesale market, DR programs are rolled out under the strong supervision of the government, which would set the amount and price for curtailment. The state-owned grid companies are responsible for implementing the DR programs. However, because the grid companies earn profits from the fixed price difference of electricity procurement and sales, they are reluctant to promote DR as curtailment from DR would reduce their revenues. DR is therefore undervalued as a tool to integrate wind energy to the grid in China.
China also lacks energy storage technologies, particularly thermal storage, that can level wind output variation through absorbing and releasing wind energy from the grid. Such technologies are particularly important given the prevalence of combined heat-and-power (CHP). CHP has been promoted by the government for decades due to its high efficiency in heat and electricity generation. However, most CHP plants are not designed for flexibility; the proportion of electricity output to heat output is fixed. As a result, CHPs could not be ramped down during peak wind output seasons because residents are relying on them for heating. In principle, thermal energy storage could effectively decouple electricity generation from heat production, allowing CHP power plants to vary electricity output without affecting heat supply, thus enabling CHP plants to respond flexibly to variation in wind output. However, such thermal energy storage system is not yet available in China.
5.3.1.6 Differential Priorities Between the Central Government and the Local Governments
The policy objectives of promoting wind energy differ between the central and the local governments. The central government values increasing wind energy share to reduce emissions and enlarge economic benefits. The local governments, however, prioritize on large-scale investment of wind power and wind turbines, partly for local economic development and for extending their personal ambitions. Given that the performance of local officials is tied to local economic growth, large-scale wind energy projects that involve huge financial investment are preferred by the local governments. Wind power investment becomes a desirable option for local governments to strengthen their own political portfolio. Sometimes, the local governments would push for wind investment even when such development has proven to be redundant from environmental or economic perspectives.
The tussle between the central government (mainly NDRC) and the local governments is most evident in the transfer of authority for wind project approval. Before 2011, all wind projects above 50 MW had to obtain the approval from the NDRC. To circumvent the approval procedure, the local governments came up with a strategy of dividing a large wind project to smaller ones for wind projects below 50 MW. A rush to wind power installation by the local governments soon resulted in severe wind curtailment. To control the rush for wind investment, NDRC began asserting its authority over all wind projects from 2011. In 2013, however, under the banner of “streamlining administration and delegating power” proposed by the new administration, project approval authority was re-delegated to local governments. Nevertheless, the NDRC still tries to control wind development pace by issuing an annual wind development plan [13].
The relationship among the local governments is characterized by increasing protectionism. Provinces experiencing electricity overcapacity are not able to export the excessive power to other provinces experiencing power shortages. This is because local governments believe that importing electricity will reduce the local need for new capacity investment, thus hurting local employment and economy [14]. An example is the construction of a long-distance transmission line, which connects the wind power plants in Gansu province to the southern provinces of Hunan, Hubei, and Jiangxi. Government officials from the receiving provinces displayed their reluctance in purchasing wind energy from Gansu. Instead, they continued to approve new generation plants in order to reduce the import of electricity.
5.3.1.7 Vested Interests Between Coal Companies and the Government
Local governments are influenced by their vested interest in coal companies. Local governments have to balance the interests of coal-fired plants, which dominate generation and contribute immensely to local economy and taxation. Wind energy will impact on coal-fired power plants and the local governments in the following ways:
1. An increase in wind dispatch would crowd out a share of output that would otherwise belong to coal. This is particularly evident in places where large centralized wind capacity is installed. For example, in Gansu province, if its total wind capacity of 12.5 GW operates at its legally guaranteed 1800 hours year−1 [27], the average utilization hours of coal-fired power plants would be reduced by 1406 hours year−1. This would slash the revenue of coal-fired plants by 30% and value-added tax by at least 30%. (The calculation is based on the assumption that the average utilization hour of coal-fired power plants is 5000 hours year−1. The calculation for valued-added tax is based on the formula provided by Ref. [13].)
2. Accommodating wind intermittency increases ancillary service costs borne by coal-fired power plants. Integrating wind energy to the grid requires the provision of ancillary services by coal-fired power plants, such that the thermal power outputs can vary based on variation in wind outputs. In China, many provinces still demand compulsory ancillary service from coal-fired power plants. In the few provinces that do offer compensation for ancillary services, coal-fired generators are required to share the compensation [14]. An increase in wind integration would adversely impact the total revenue of coal-fired power plants.
3. From the perspective of local governments, coal-fired power plants contribute more in terms of employment and economic growth [14].
As a result, in face of an oversupply of electricity, the local governments are either inclined to compromise on the priority dispatch rule or invite the wind power generators to share profits with the coal-fired power plants. These measures have exacerbated the wind curtailment and thwarted the integration of wind energy to the grid. In Section 5.3.2, we will outline the existing drivers of wind energy development in China.
5.3.2 Drivers of Wind Energy Development in China
5.3.2.1 Energy Coordination
Tackling wind curtailment requires coordination among capacity installation, transmission planning, and consumer demand. In particular, transmission must keep up with capacity installation. New wind energy projects should not be undertaken if the output could not be utilized or otherwise matched by demand.
Starting from 2015, China begins improving the coordination of energy sources. The central government tries to control the overheated capacity installation with an annual development plan [13]. It provides a guideline that decides on the total planned capacity for each province according to wind resource endowment and severity of curtailment. Provincial governments are held responsible for approving individual projects and arranging grid connections and transmission within the province. The NDRC plans the large interregional transmission lines. Plans are under way to shift wind development from the remote regions, the “Three North,” to the south, where wind output could be transmitted and utilized by load within a short distance. Ultrahigh voltage (UHV) transmission lines are scheduled to deliver wind energy from inland regions to the south.
5.3.2.2 Coal-Fired Power Plants’ Retrofit and Energy Storage
China still has to rely on coal power to reduce wind output variation, as coal power still dominates electricity generation and China has very limited flexible energy sources other than natural gas. At present, coal power in China is highly inflexible. Most coal-fired power plants could only ramp down to a minimum level of 60%–70% rated output, while in western countries such as Denmark such level could reach as low as 20% [25]. For the CHP power plants that are dominant in the north, they are often not allowed to ramp down the output, as they are badly needed for heating. Wind energy is therefore frequently curtailed because few coal-fired power plants in China can provide high flexibility in energy output.
Recently, 15 pilot programs addressing coal-fired power plant generation flexibility enhancement were set up in regions with severe wind curtailment [28]. It is expected that through retrofits, the coal-fired power plants could further ramp down by an additional 20% of rated output. Recent regulations also seek to enhance the flexibility of CHP plants with thermal storage. Traditional CHP plants will be complemented with hot water tanks, which serve to decouple electricity output and heat output [29]. Pilot programs on electrical storage have also been launched in the “Three North” region. These pilots will allow electrical storage to be compensated for their ancillary service [30]. Though these programs are still in their infancy and are small scale, they can potentially increase generation flexibility when massively deployed.
5.3.2.3 Smart Demand Response
Smart DR utilizes smart infrastructure and management system to increase demand flexibility. Currently, the Chinese government is aggressively pursuing smart infrastructure deployment. China is committed to roll out new advanced meters with smart functionalities to 90% of all users by 2020 [31]. In 2015 alone, more than 90 million units were installed [32].
Equipped with smart infrastructure, the electricity system presents abundant opportunities for smart DR. Four pilot cities have been chosen for DR programs; these are Beijing, Suzhou, Tangshan, and Foshan [33]. Jiangsu has already rolled out its first interruptible load program that could respond to contingency events within seconds [34]. China has established an annual demand side management target which requires utilities to achieve an annual saving of at least 0.3% in sales volume and 0.3% in demand [35]. Wind energy integration is set to benefit immensely from these measures.
5.3.2.4 Emerging Ancillary Service Market
China has made some progress in setting up ancillary service markets, though it is less than satisfactory. In 2006 a new regulation by NDRC was implemented to require generators to be compensated for the ancillary service they provide above the legally required level [36]. Before 2006, all ancillary services were provided free of charge. Up till now, nearly all regional grids have established rules on ancillary service compensation. Usually the rules will define an obligatory ancillary service level, above which payment would apply. Some provinces adopted a fixed formula. For example, the southern grid provides that thermal plants could receive RMB 3 (kW h)−1 for plants operating at 40%–50% of rated capacity, and RMB 6 (kW h)−1 for 30%–40% of rated capacity [37]. Some other provinces went further to allow market pricing. For example, the northeast grid has established that provincial and regional ancillary service markets should adopt the market pricing.
5.3.2.5 Carbon-Trading and Carbon Reduction Target
Carbon trading is an important instrument for internalizing the external costs of air pollution. Zero-emission wind power produces energy that contributes to the efforts to combat climate change. However, plants producing non-RE freely emit at zero cost as the cost associated with emissions is not reflected in its pricing. As a result, wind energy is at a price disadvantage. A fundamental approach to rectify such free-riding behavior is to let the thermal power plants pay for carbon emissions through carbon trading. By setting a legally binding carbon reduction target and assigning permits for each thermal power plant, plants with emissions exceeding their caps must purchase permits from others who meet or exceed the emission target. In this way, wind energy and thermal energy are put on a level playing field where they could compete fairly. Given that traditional regulatory, nonmarket-based command and control policies perform less well in reducing carbon, carbon trading has been increasingly hailed as a possible option on the national policy agenda [38]. Several pilot carbon-trading markets have been established at the subnational level, with different degrees of success. However, there is still no nationwide emission cap and furthermore, current programs merely serve to demonstrate the compatibility of carbon trading with China’s carbon control regime [39]. Much commitment by the government is still needed to push the way forward for carbon trading.
5.4 The Future of Wind Energy Development in China
Despite efforts introduced by the government to overcome barriers, several challenges have yet to be fully addressed. Present implemented measures are insufficient in addressing the poor compliance with the priority dispatch measures. In terms of grid connectivity, although the annual development plan delineates the responsibilities of local governments to promote transmission line construction and introduce UHV transmission, transmission approval and construction procedures are still cumbersome. In addition, reform that could address the political tussle between the central and local governments is particularly difficult to carry out. We recognize that such barriers will not be overcome in the short term. Rather, it requires stakeholder engagement and reform over a long period of time. However, we believe that the following technologies and mechanisms reform, if followed through, would greatly improve the integration of renewable to the electricity supply system in the future.
5.4.1 Distributed Generation Deployment and Proactive Transmission Planning
Grid-connection delay and geographic mismatch between generators and loads could be alleviated by distributed generation deployment and proactive transmission planning [15]. Proactive transmission planning has been widely implemented in the United States, and the option of exporting excess output in China could be supported by the UHV lines. Some scholars have shown that proactive construction of large-scale transmission line is more cost efficient than smaller transmission investments on individual projects [40]. Distributed generation can be found in the eastern regions of China, where low-speed wind resources abound and electricity demand is substantial. With the distributed energy system installed near a load center, it could achieve greater energy conservation, lower investment cost, and a flexible operation pattern [41]. The savings in the transmission cost and curtailment loss outweigh the higher energy generation cost under relatively low wind speed [15]. In the future, distributed wind generation is more likely to be integrated with solar generation, establishing the “wind and solar” complementary power generation system [42].
5.4.2 Offshore Wind Power Planning
While the remarkable achievement of the Chinese wind power industry is attributed to onshore wind power, the geographic mismatch of generation and demand places heavy burden on transmission and grid planning. Since there are abundant offshore wind resources along the southeast coastline where electricity demand is strong, the trend of promoting offshore wind power development is inevitable [43]. Scholars have suggested several approaches to offshore wind power development in China, including: (1) improving independent research and development in wind technologies (e.g., wind turbine manufacture, installation, and construction) through spiral interactive innovation; (2) modifying and upgrading the policy framework, especially the tariff policy and the financial subsidy policy; (3) encouraging the local governments to guide the development through a market-based mechanism; and (4) integrating wind energy to the grid [44]. While China is still at the infancy stage in offshore wind power development, it is predicted that offshore wind power will reach a mature stage before 2020 [45].
5.4.3 Smart Grid
Smart grid will contribute to advance the integration of the renewables through advanced information, communication, and management technologies [46,47]. A typical smart grid system consists of variable energy sources, energy storage, power electronic interface, power control, and power grid load [48]. Based on the metering records of consumers’ energy consumption, the trend in wind power penetration in the local grid distribution system could be predicted [49]. On the other hand, electricity generation is presently monitored and controlled remotely via Advanced Metering Infrastructure and Supervisory Control and Data Acquisition. Smart homes, intelligent buildings, and electrical vehicles can also serve as smart grid components. For instance, electric vehicles can be considered as a distributed energy storage unit [48]. The European Union is moving into the field of smart grid proactively, and China is making similar moves. The SGC of China has committed to invest RMB 101 billion in developing smart grid technology during the period 2009–20 [50].
5.4.4 Merit-Order-Based Dispatch
The merit-order-based dispatch tends to give priority to power plants to deliver and dispatch according to marginal generation costs. Because of the close-to-zero marginal cost of wind, a merit-order-based dispatch would favor the purchase of power from wind farms. The conventional energy sources would then compete for the remaining demand not covered by the renewables (hard coal and fuel oil, etc.) In China, the dispatch order was characterized by inefficient dispatch, implying that the grid company would try to distribute equal shares of operating hours to all thermal power plants [51]. Since 2009, an energy-saving and environmentally friendly generation dispatching (ESGD) model, which preestablishes the dispatch order based on pollutant emission, has been carried out in five provinces [52]. However, as an administrative measure, ESGD provides relatively small improvement. It does not change economic incentives and potentially exacerbates center-provincial tensions [51]. A full market-based ESGD model would require bidding for dispatch, based on the marginal cost which may only be realized in the long-term future.
5.4.5 Pricing Improvement
As the pricing method for onshore wind energy in China, fixed FIT has advantages and disadvantages. The primary benefit of a fixed FIT is that it ensures investment certainty for wind projects, which will yield a price attractive enough for wind energy investment. However, a fixed FIT suffers from several drawbacks: (1) the pricing for wind energy is set by the government, thus carrying the potential of deviation from the lowest cost; (2) improperly priced FIT, together with priority dispatch, would create overheated investment in wind energy, overload transmission capacity, and add enormous burden to consumers. Such issues have begun to emerge in China. Since the establishment of a fixed FIT, the renewable surcharge has been increased from RMB 0.001 (kW h)−1 to RMB 0.019 (kW h)−1 by 2016. Since surcharge alone would not cover all the costs of FIT subsidies, the central government has to contribute tens of billions of RMB to close the gap.
The current FIT pricing mechanisms should be adjusted according to the status of wind energy development. First, for countries with limited wind penetration, the priority is to attract sufficient level of investment. FIT pricing that ensures investment certainty is preferred. This is evident from the experience of the United Kingdom, which has moved from a quota to a de facto FIT system. Secondly, for countries that have large shares of renewables, cost reduction is a more important consideration than quick deployment. These countries should consider reducing the subsidy and improving wind energy competitiveness using other policy instruments. For example, Germany has taken up a market premium approach from 2012 and is moving toward auctioning to allow more market competition.
Taking into account overcapacity and overheated wind investment, China ought to reform the fixed FIT system. China has experimented with auctioning and abandoned it because the state-owned electricity companies rushed to underbid each other. However, China should at least consider adding a digression factor to the fixed FIT, which would gradually reduce the subsidy for FIT price according to a predetermined rate. This would encourage cost reduction for wind energy production without losing the benefits of investment certainty.
5.5 Conclusion
Over the last two decades, China has made remarkable progress in wind energy development. China leads the world in wind capacity installation and wind turbine manufacturing output. However, such a leading position has not resulted in a correspondingly superior wind energy output. China still suffers from transmission and grid connectivity challenges, alongside curtailment problems. The electricity system is not flexible enough to accommodate wind intermittency. The local and the central governments have different wind development priorities, resulting in irrational investment decisions and ineffective management.
At the moment, integration of wind energy to the grid is a key priority. China has already started to reform its transmission planning, increase system flexibility through retrofitting coal-fired power plants, introduce DR programs, and improve energy storage. To ensure the level playing field for wind and thermal power plants, a legally binding carbon reduction target and carbon-trading initiatives have been established. However, such initiatives have just begun and the road to full implementation is long. In the future, market reform in the electricity market should be continued, alongside merit-order-based dispatch and the development of a well-functioned ancillary market. Fixed FIT pricing system requires further optimization to prevent overheated wind development and to ease the burden on consumers. By addressing these key challenges, a clean, smart, and sustainable electricity system is foreseeable for China.
Acknowledgment
We gratefully acknowledge the editorial assistance of Miss Melody Ma, and the funding support of the Research Grants Council of HKSAR, under Grant No. 17403614.