Latest Legal Developments in China’s New Energy Power Market

The release of China’s 14th Five-Year Plan promotes the development of new energy across the whole industry chain. The transformation and upgrade of the energy sector to achieve goals of “carbon emission peak” and “carbon neutrality” is underway. China has achieved outstanding gains in the development of renewable energy in recent years. By the end of 2022, China’s newly installed power generation capacity of wind and solar power reached 700 GW, accounting for 78.8% of the country’s newly installed power generation capacity, and the installed power generation capacity for wind and solar power are number one in the world. In 2022, more than 55% of the yearly increased power generation in China came from wind and solar power. While the newly installed capacity and power generation have largely increased, the consumption and utilization rate of renewable energy is still at high levels. In the first three quarters of 2022, the utilization rates of solar photovoltaic power, wind power and hydropower in the major river basins in the country have all reached at least 95%.
Overall, China’s new energy industry is still in a rapid growth stage. The guidelines for the new energy industry in China are “accelerating the establishment of the new electricity system, improving the management of new energy projects and comprehensively supporting the development of the new energy industry.” A series of new regulations and policies aimed at safeguarding the fast development of the new energy power industry have been promulgated, covering various aspects of the industry such as project development, construction compliance, power grid connection and power consumption, tariff subsidies, the trading of green electricity and green rights certificates and carbon emission permits. In this article, we introduce and analyze the latest developments in China’s new energy power market from a legal perspective.
The promulgation of new policies and the strengthening of industry regulations have gone hand in hand.
In December 2022, the National Energy Administration of China (“NEA”) issued administrative measures for the development and construction of centralized ground photovoltaic power stations to promote the investment and operation of such stations. The measures cover industry management, annual development and construction plans, project construction, power grid access management and other related issues concerning centralized ground photovoltaic power stations. In 2021 the NEA proposed to carry out the large-scale development and construction of distributed roof top photovoltaic power stations in counties and small cities with relatively rich rooftop resources. Subsequently, many regions such as Hebei Province and Zhejiang Province issued further implementation regulations on the construction and management of distributed photovoltaic power stations built on roof tops. It is worth mentioning that both the state and local governments have further standardized policies on land use for photovoltaic projects, which relate to agricultural land, forests, rivers and lakes. In this context, there are potential investment and development opportunities for water photovoltaic power projects. In 2022, Zhejiang Province and several other provinces issued policies to promote the use rights of sea areas by layers, providing a pilot path for the multilayered development of offshore photovoltaic projects.
In terms of industry regulations, since March 2022, several ministries have jointly carried out self-check and inspection programs for renewable power projects eligible for tariff subsidies across the country. The inspections focus on six aspects: project compliance, scale, power generation quantity, tariff, subsidies and environmental protection. Projects with compliance defects have been punished based on the severity of their noncompliance, and some companies were required to return subsidy amounts of over RMB 10 million due to noncompliance.
There is a significant trend in promoting large-scale projects and base projects in the renewable power sector.
The term “Large Wind Power/Solar Photovoltaic Power Base Projects” refers to a group of important wind and solar photovoltaic power projects that ensure the national security of the energy supply. To achieve the goals of carbon emission peaking and carbon neutrality, the 14th Five-Year Plan provided outlines for wind power and solar power bases. As such projects are usually initiated and promoted at the national level, it will be easier for sponsors to obtain regulatory approvals and permits and to make power grid interconnection with the power grid company. Such projects may receive preferential treatment from the state in terms of land, environmental protection formalities, financing and power grid interconnection. It should be noted that, in terms of the specific mandatory procedures for project approval, construction and power grid interconnection, such projects are not substantially different from other wind and solar photovoltaic power projects. The timing requirements for the completion of the construction of such projects may be much higher than normal projects.
As the core factor for new energy power projects, the tariff is gradually changed from an area’s benchmark tariff to a tariff of grid parity projects, and even the tariff generated from the competition process.
In 2021, China’s new energy projects officially entered a phase of grid parity projects. The state no longer provided subsidies for newly filed or approved centralized solar photovoltaic power projects, distributed solar photovoltaic power projects and onshore wind power projects, and the tariff for such projects should generally be equal to the local base price of coal-fired power projects. Some provinces and municipalities still provide local subsidies to distributed solar photovoltaic power stations. The tariff for newly approved or filed offshore wind power projects will be determined by the competent price authorities at the provincial level or determined through competitive allocation procedures as applicable. Projects filed or approved prior to 2021 will continue to enjoy the national subsidies in accordance with the previous tariff policy. However, the power generation amount that is eligible to benefit from national subsidiary is limited to 20 years commencing from the project interconnection of the power grid, or to the number of the whole-life-cycle reasonable utilization hours of the project, as regulated under relevant regulations.
The reform of the electricity market has led to a significant increase in the scale of green electricity transactions.
With the promotion of the market-oriented reform of the electricity market and the construction of a national unified electricity market, more provinces require that the electricity generated by new energy power projects be traded in the electricity market, and the tariff of such traded electricity is no longer fixed but will fluctuate with the market. The policy trend for various types of new energy projects to fully participate in market-oriented transactions is becoming increasingly obvious in all regions of the country. In practice, it is difficult to implement long-term PPA in the near future. Therefore, given the uncertainty of tariff and electricity quantities, the risks of power projects during the operation period have increased. Since 2021, China has implemented a model of “integration of the trading of permits and electricity” for green electricity trading. For power that no longer enjoys national subsidies, project companies may receive additional profits from environmental attributes other than electricity, through green electricity trading. The rules for green electricity transactions stipulate that annual transactions are the main transactional model, supplemented by monthly transactions, and long-term transactions beyond one year are encouraged. This increases the possibility of new energy power plants to obtain long-term PPA. Based on the previous green electricity transaction rules at the national level, the green electricity transaction rules respectively promulgated by the State Grid Company and by the Southern Grid Company have been implemented one after another in 2022, ensuring that green electricity transactions become one of the hot spots in the electricity market.
The requirements on energy storage have been further strengthened.
At present, China promotes the development of the energy storage industry by implementing a policy of compulsory storage on the power generation side, to solve the risks on power consumption and power grid security caused by the large-scale grid interconnection of new energy projects. In 2021, China introduced policies to encourage renewable energy power generation enterprises to build energy storage or peak regulating capabilities by means of self-construction or purchase. Based on such policies, several provinces have further introduced mandatory policies, i.e., specifying that centralized wind and solar photovoltaic power projects must simultaneously build and operate supporting energy storage facilities. Since 2022, the number of provinces covered by such compulsory storage allocation policies has increased, and the proportion and hours of mandatory storage have also increased. The policies released in 2022 by Shandong Province, Hebei Province and several other provinces also raised the requirements for the mandatory storage of distributed solar photovoltaic power projects. In terms of the business model for independent energy storage, energy storage entities may participate in the electricity market as independent businesses. Several provinces in China have successively issued policies to encourage the investment and construction of independent energy storage stations and issued compensation policies for such projects participating in auxiliary peak regulation.
Outlook
China’s new energy industry has entered a stage of rapid development. According to the requirements of the 14th Five-Year Plan, and against the background of the continuous expansion of the industrial scale, in the next five years, the government will focus on increasing the electricity generation of new energy, consumption capacity and non-electricity utilization. Building a clean, low-carbon, safe and efficient energy system is a long-term goal of China. In terms of specific approaches, the country will optimize renewable energy development, accelerate the development of wind power/solar power base and distributed projects, and promote energy storage and consumption accordingly. The country will also encourage innovation, improve energy systems and mechanisms, adhere to open international financing, provide policy support and safeguards and other comprehensive means to enable China’s renewable energy to achieve a high-quality development from a high-speed development.