5.1. The Logic of Wind Power Policies in China
The successes of wind power policy in China can be summarized as: (1) a strong political motive; (2) the implementation of the
Renewable Energy Law and clear development targets declared in various planning documents; (3) the competition in wind concession projects to reduce the price of wind power; (4) the FIT policy and a special fund to sustain it; (5) the localization of wind turbine manufacturing ([
10,
31]).
Ever since the promulgation of the
Renewable Energy Law in 2006, a series of comprehensive planning steps for renewable energy or specific planning for wind power have been formulated and put into implementation, which provide a clear signal to wind power investors in China. The most recent update in specific planning was issued by the Ministry of Science and Technology in April of 2012, proposing that the total installation of wind power should reach 100GW by 2015 [
32]. Soon after it, the State Council issued a comprehensive plan for the strategic emerging industries, stating that the newly-added wind power capacity should reach 70GW during 2011–2015. Furthermore, the plans by the National Energy Administration issued in 2012 also proposed concrete development targets, pathways and priorities for the coming five years [
33].
Regarding the tariff policy, China has stipulated different tariff mechanisms at different periods to promote the healthy development of wind power. In the beginning of the 1990s when wind power was at the initial stage in China, most of the investment on wind turbines was sourced from foreign aid, while tariffs for wind power was set at low levels comparable to local coal prices. Since 1998, the pricing policy for wind power was approved by the local governments and therefore the tariff levels have varied among different regions. Then from 2003, concession bidding price was introduced to promote the development of large-scale wind farms. Therefore, bidding prices and government mandate prices coexisted during 2003–2006, until in 2006 the government mandate pricing mechanism was abolished. Though bidding pricing effectively lowers the cost of wind power in China, the problem is that it requires extensive administrative input and results in utterly different tariff levels for wind farms developed at different regions and at different times. To simplify the tariff policy, in 2009 the National Development and Reform Commission issued the policy of regionalized benchmarking pricing for wind power [
16], which stipulates four different tariff levels according to the resource conditions. The benchmarking FIT policy provides strong economic incentives to wind power investors in China.
Tax policy also plays essential role in the domestic manufacture of wind turbines in China and contributes to the wind power cost reductions. During the initial stage of wind power development, an exemption from import duty was implemented to support the capacity installation. Then in 2008, the Ministry of Finance issued a tax policy, providing import duty exemption on the key components of wind turbines, instead of the entire wind turbines [
34]. For turbine manufacturers, public subsidies are also provided to promote the localized production of new turbine models. In the end of 2008, State Administration of taxation issued a policy to provide a preferential VAT tax policy for wind farms, as well as full exemption of corporate income tax during the first three years of operation and half exemption during the second three years [
35].
5.2. Implication of the Numerical Results
The numerical analysis on the LCOE can provide a different perspective on renewable energy policy in China. Although existing wind policies have been effective in promoting the scale-up of domestic production and capacity installation, the focus on installed capacity rather than generation, the focus on production scale of wind turbine rather than quality, and the focus on industry policy (to promote economic growth) rather than energy policy (to promote renewable penetration), have frequently been criticized in the literature ([
11,
14]). The LCOE results reveal somewhat opposite evidence.
Our study rightly indicates that because of the attractive FIT policy that stimulates wind power investment, the industrial policy that promotes the domestic manufacture of wind turbines and the positive interaction between cumulative production (installation) and technology learning, the LCOE of wind power is reduced rapidly and effectively making wind power commercially competitive with coal power in China. Though grid integration and effective utilization of the installed capacity are important in the sustainable development of wind power and other renewable energy as well, technology learning and cost reduction are certainly the top policy priorities in the beginning. Morthorst proposed a framework for evaluating the process of wind power development, including investment certainty, effectiveness, efficiency, market competition, and administrative demands [
36]. Hu
et al. [
17] narrowed down the framework to four indicators, including technology, wind resources, administration, and time/space frame. Using their framework as the evaluation metrics, the numerical LCOE results clearly indicate that wind power policy until recently was actually very successful in China, especially in the investment certainty, technology learning and cost reduction.
Furthermore, the analysis also indicates that radical reforms should be made in the future wind policy. Currently the subsidy for wind power and other renewable energy is sourced from two parts, the special fund of the central government, and the surcharge in the retail tariff of electricity [
37]. The first part is subject to annual budget restrictions, while the second part is collected from various electricity consumers around the country. Since the issue of the
Renewable Energy Law in 2006, China began to collect a surcharge on the electricity tariff with an initial standard of 0.1 cent per KWh. With the increase in the installed capacity and generation of renewable energy, the demand for subsidies is increasing quickly in China. As a response, the government has raised the surcharge level several times, firstly from 0.1 cent to 0.4 cent, then from 0.4 cent to 0.8 cent, and recently from 0.8 cent to 1.5 cent [
38]. However, the growth of the renewable energy fund is unable to keep pace with increasing subsidy demands. It is estimated that in 2009 the gap was 1.3 billion yuan, while in 2011 the gap soared to more than 10 billion yuan. According to the renewable energy development plan during the 12th FYP period, by the end of 2015 the subsidy requirement will amount to at least 100 billion yuan, while on the supply side the fund can support at most 50 billion yuan. Therefore the government is finding itself in a dilemma: increasing the surcharge level and assuming the side-effects of high tariffs, or keeping the surcharge level unchanged and taking the risk of slow-down in renewable deployment.
The rationale for providing subsidies to renewable energy with a FIT scheme is that in the early development stages renewable energy is much more expensive than traditional energy. Hopefully, the scale-up and learning-by-doing will cut the cost down and render it competitive with traditional energy. Hence the subsidy policy is designed to function only for a certain period. When renewable energy is becoming commercially viable, it is the time to stop the subsidy and have the market work by itself [
39]. If China continues to provide generous subsidies to onshore wind power, the risks are as follows. First of all, the consumers’ willingness to accept renewable energy will be reduced. If consuming renewable energy always means more expenditure, the consumers may be reluctant to using it. Secondly, for the national economy, the cost of electricity service will also be high and push up the production cost. Thirdly, the opportunity for other nearly-commercialized renewable energy sources such as offshore wind power and solar PV will be deprived of funds. Last but not the least important, unnecessary subsidies are not only inefficient in an economic sense, but also a waste of public good. As a result, the consumers, the renewable energy industry and the entire national economy will suffer. A wiser way is to reduce or gradually cancel the subsidy for newly commissioned onshore wind power projects by introducing a sunset mechanism. Then more resources can be provided to support offshore wind power and solar PV.
It should also be noticed that even though onshore wind power is competitive with coal power at the LCOE level, its system cost could still be higher than that of coal power. To overcome the deficits of an LCOE comparison Joskow [
40] emphasized that the economic evaluation of any power generating technology should consider both costs and value. Variable renewable energies are economically efficient if their LCOE (marginal costs) equal their marginal economic value. Moreover, they are competitive if LCOE are equal or below their market value. Ueckerdt
et al. [
41] developed the idea of Joskow [
40] by defining a concept of system LCOE, which can be interpreted as the marginal economic costs of renewable energy and the costs induced by their variability on a system level. Though all power generation technologies induce integration costs, because renewable energies interact differently with the power system, they are much more difficult to integrate especially at high shares. Integration costs are defined as “the additional cost of accommodating intermittent renewable energy like wind and solar” [
42]. Wind power would only be economically efficient and competitive without subsidies if its system LCOE is below the average costs of a purely conventional system. Three options are available for reducing the integration cost: firstly, adjusting the residual generation capacities to a mix with lower capital cost; secondly, increasing transmission capacity to neighboring power systems, in particular if those power systems have different renewable energy sources; and thirdly, any measures that increase the flexibility of the power system.
China has formulated a target of 15% non-fossil primary energy by 2020 and recently announced another ambitious 20% non-fossil primary energy target by 2030 [
43]. Wind power is certainly a promising contributor for realizing these targets. Therefore, when the LCOE of wind power is already competitive to coal power, in the future it is important for the Chinese government to concentrate on decreasing the system cost of wind power. The following measures are especially suitable in China: providing better conditions for grid-access; constructing enhanced transmission channels, especially trans-regional transmission lines [
44,
45]; building more reserve capacity to enhance the flexibility of the system [
46,
47]; and establishing fair and renewable-friendly dispatch rules. In such a facilitating environment, onshore wind power can overcome the market barriers and becomes fully economically efficient and competitive in China.
The development pattern of wind power also closely relates with its system LCOE. Unlike in many developed countries where wind power is mostly developed in a distributed way, in China wind power is developed in a concentrated way. Until presently, most wind farms in China are located in western or northern resource-abundant regions and then transmission systems are built to transmit the electric power to the demand centers. This development pattern certainly has its own advantages in that it cannot only accelerate the scale-up of capacity installation promptly, but also ease the coordination difficulty between renewable development and grid planning. The other advantage is that it fits in the existing power grid infrastructure and operation conventions well. Therefore, we argue in this paper that the concentrated development pattern actually helps cut down the LCOE of wind power in China. But on other side, the system LCOE is high because of additional transmission system, longer transmission distances and extra reserve capacity requirement. However, below certain generation share and under certain generation mix conditions, integrating wind or solar power into the distributed power system doesn’t necessarily result in extra integration costs. In the future, wind power can be developed in a concerted combination of concentrated and distributed way in China.