Renewable energy sources offer an environmentally and socially sound alternative to the increased use of coal in China. However, non-technical barriers to widespread commercialisation need to be removed.
This project promotes the widespread adoption of renewable energy technologies (RETs) in China by removing a range of barriers to increased market penetration of the technologies. It will strengthen the capacity of China to shift from supply-oriented technology deployment to demand-driven, investor- and consumer-friendly approaches.
The project will develop market-based institutions and instruments to attract new players in the renewable energy industry and increase investments in RETs. To provide first-hand knowledge of a particular instrument or institution and demonstrate its validity to increase market penetration of RETs, the project support pilot activities for five promising technologies, namely:
Problems addressed: Renewable energy sources could offer an environmentally and socially sound alternative to the increased use of coal in China. Ongoing programmes in China provide technical support to investors, manufacturers and users of RETs. However, for renewable energy resources to make a significant contribution to the sustainable development of China, the following non-technical barriers to their widespread commercialisation will need to be removed:
1. Limited scale of existing investments in renewable energy technologies: To date, renewable energy projects are essentially pilot or demonstration projects, relying on grant, soft loans and support from local authorities. For renewable energy to make an appreciable contribution to sustainable energy development in China and for the industry to generate economies of scale to reduce production costs, a development programme of an internationally unprecedented size will be required. As an illustration, one percent of primary commercial energy supply in China in 2020 will be equivalent to the base-load output of at least 16,000 MW of electric power plant capacity, requiring an investment in the range of US$ 15 to 30 billion. Current investments in the renewable enery sector fall short of this mark.
2. Lack of familiarity with successful market-oriented efforts to commercialise RETs: Few policy makers and professionals are familiar with legislation and regulations which resulted in substantial investments in renewable energy development in other countries such as Denmark, Germany, India, the Netherlands, UK and USA. While several pilot projects have already successfully demonstrated the technical performance of RETs, the potential of market-oriented approaches to develop renewable energy remains to be established in China.
3. Limited awareness of investment opportunities in RETs: To date renewable enery investment opportunities remain obscure and undifferentiated from other rural and small resource utilisation opportunities. In addition, they are often perceived as a high-risk and low-return investment by potential investors. There is no facility to collect and provide potential project proponents with easy access to renewable enery investment information in China.
4. High up-front costs and lack of access to credit: Although renewable energy alternatives can have very low operating costs - and thus lower life-cycle costs than conventional alternatives - the high initial capital cost of the technology often forms an insurmountable barrier to its users, particularly for small rural energy users. Individual households and small rural communities, which is a large untapped market for renewable energy, frequently are unable to access the necessary credit to cover the up-front costs for such projects.
5. Incomplete assessment of renewable resources: Current knowledge of the quantity and distribution of renewable resources and the data collecting system for renewable resources assessment are largely inadequate, particularly data on wind regimes and solar insolation levels in much of the country. This limited information poses a serious constraint to policy formulation and investment promotion. Where data do exist, they are often gathered by meteorological offices on an infrequent basis at locations not necessarily suitable for wind or solar applications. However, siting wind or solar facilities requires the availability of continuous data over several years in order to minimize the risk of resource unavailability.
6. High transaction costs: renewable enery technologies, particularly off-grid electricity and thermal applications, are often small and decentralised. This leads to proportionally higher transaction costs on investment for renewables compared to conventional centralised sources. The transaction costs per kW for a central coal plant are lower than the sum of the costs of the many thousands of transactions required for comparable capacity from solar home systems. Faced with the choice, investors are wary of the latter.
7. Lack of standards and testing facilities for equipment: In many countries, early enthusiasts who installed renewable energy facilities found that the equipment did not live up to expectations. The manufacturers of such equipment were usually small companies that did not make use of the experience that had been gathered world-wide. As a result, there has been public scepticism about the viability of renewable energy systems. The low quality of renewable energy equipment and the resulting lack of consumer confidence have been shown to be an important barrier to the adoption of renewable energy technologies in China. For both small off-grid systems and large grid-connected systems (especially with mid-sized wind turbines), a lack of standards and codes of practice increase the perceived risks of consumers and investors in renewable enery. Industry compliance with standards increases confidence in the product and hence the market.
8. Poor linkages from research and development to commercialisation: Chinese renewable energy technology designs, with some exceptions such as the evacuated tube solar hot water system, have not been widely commercialised in the Chinese market. Research institutes, while providing highly competent researchers, are not equipped for the production and marketing function. Few professionals familiar with the state of the art in several RETs have any more than a passing familiarity with market finance, commercial enterprise operation, and economic project appraisal. However, in the absence of strong linkages with the business community, they often take on this role with mixed success. Without a strong marketing function, technology developments in one region which could have wider applications, are often not widely transferred.
Expected outcome by the end of project :
It is expected that at the conclusion of project activities the following measurable results will have been attained:
1. Market-based instruments such as (i) concessionary financing arrangements; (ii) targeted, but market value, credit lines; (iii) tax relief to investors; and (iv) standardised Power Purchase Agreements (PPA) will have been developed to increase the financial attractiveness of RETs to potential investors and consumers over the short-term and expand the renewable enery market in China. Market-based companies such as Independent Power Producers (IPP) and Energy Service Companies (ESCO) will have been established to attract larger players and substantially increase private investments in the renewable energy industry.
2. Pilot projects will have been established to provide national policy-makers and businessmen with first-hand knowledge of market-based instruments and institutions and demonstrate the potential of market-oriented approaches to develop RETs in China. Linkages established through the project will ensure that those implementing pilot projects benefit from the guidance of the national level agencies. Likewise the linkages will ensure that the national level policy-makers carefully account for the findings in the pilot projects. International study tours to visit operating examples and in-country training will have been organized to further enhance the exposure of national policy-makers and businessmen to market-based instruments and market-based institutions.
3. Alternate financing mechanisms will have been explored to overcome RE high front-end costs for individual households and small rural communities. The role of ESCOs in making credit available and in marketing the services of renewable energy will have been demonstrated in pilot sites and the results will have been widely disseminated in China.
4. The demand and supply for credit for small energy users, particularly for hybrid and biogas systems in the project areas, will have been assessed and appropriate recommendations to set-up funds for renewable energy submitted to Government.
5. Awareness of renewable energy investment opportunities will have been raised. An industry association, the Center for Renewable Energy Industries Association (CREIA), will have been created with the support of the project to collect and provide information about renewable energy investment opportunities and returns on existing renewable enery investments. CREIA will provide this information through an Investment Opportunity Forum on the Web and through regional networking meetings. CREIA will also act as a forum between regulatory authorities, research institutes and industry professionals and will endeavour to bring together project proponents and investors.
6. A national renewable resource assessment will have been carried out and the database will be accessible free of charge to potential project proponents on the web. The database will be established and maintained by the Project beneficiaries. The database will be made widely accessible, for example to CREIA.
7. Transaction costs will have been lowered by 'packaging' small investments. Pilot projects using ESCOs and IPPs will demonstrate the ability of these mechanisms to increase investment opportunities by bundling small user investments. Transaction costs will have been further lowered by giving investors easy access to investment information maintained by CREIA and on the database.
8. Standards will have been developed for the manufacture and installation and commissioning of four RETs (solar hot water heaters, intermediate wind turbines, industrial scale biogas and bagasse systems). Standard-setting methods will be within the existing capacity of energy research institutes across China so that compliance can be readily established. These standards will be set in collaboration with industry and receive a high level of co-operative agreement. Certification procedures will have been set in place for a popular consumer technology, solar water heaters, to increase their consumer acceptance.
9. Research and development to market linkages will have been improved. Generic and appropriate designs will have been developed and/or compiled for hybrid (PV, wind) systems, biogas and bagasse cogeneration. These will have been widely promoted and distributed within the renewable energy development and investment community with the assistance of CREIA.
All the above will have been developed and tested over several sites for the five RETs.