Bad connection

manufacturers took advantage of Western demand: Solar panel firm Suntech Power shipped 80% of its output to Europe in 2008. Then the global economic downturn and falling oil prices took the bottom out of the market.

With US and European utility companies unable to fund their renewable energy projects, Chinese firms suffered. Suntech axed 10% of its workforce and posted a net loss of US$65.9 million in the fourth quarter of 2008. It wasn’t the only casualty – rivals such as Yingli Solar also cut production as sales dried up.

Beijing came to the rescue with two subsidy programs, effectively seeking to replace foreign demand with domestic. One program endorsed the use of rooftop solar panels for water heating; the other, named Golden Sun, called for large-scale solar projects, backed up by plans for 15% of China’s energy to come from non-fossil fuel sources by 2020.

Not surprisingly, solar firms hailed the moves. "We applaud the decisive steps taken by China’s central government to support sustainable energy development and establish a greener economy in China," said a spokesman for Suntech. 

Quantity over quality

While the Golden Sun program supports solar panel production, it does so by emphasizing production quantity over technical quality. It also does nothing to solve a more difficult problem: connecting solar panels to the electricity grid. For all of China’s renewable energy sources, this is a real and potentially crippling bottleneck.

The trouble starts with the bidding process power generation companies use to buy renewable energy equipment. Most domestic power producers have a policy of accepting the lowest bid from equipment makers. This often means purchasing from large state-owned companies, which industry observers say tend to produce inefficient, unreliable equipment.

Once installed, renewable energy projects face the problem of distance. Wind and solar farms are often located in remote areas of the country, far from existing transmission lines. While China is working at reaching remote areas with its power grid, the cost of extending cables is high. Without a grid connection, renewable energy projects are little more than a nod to the environmental movement.

The situation is particularly severe for wind power. China was generating 12 gigawatts of wind power at the end of 2008 and wants to add 100 gigwatts to its existing network within the next decade. But at the end of last year, 20% of the country’s wind power farms were not connected to the power grid, said Paulo Soares, head of China operations at Suzlon Energy, a wind power firm. (See: Q&A: Blowing in the wind, p34.)

"The grid hasn’t had a great incentive to accept the energy," said Yu Jie, head of policy for China at the Climate Group. "The government has recognized this problem and is going to revise the Renewable Energy Law. By the end of this year all of the grid companies will have portfolios of the electricity they buy – and 5%, for example, would have to come from renewable energy."

Beijing isn’t expecting power companies to comply based on that regulation alone. The central government brought in a feed-in tariff for wind power at the beginning of August to make up for some of the additional generating costs not covered by the current power pricing model. A feed-in tariff ensures that the grid pays producers a premium for wind energy.

According to Stéphane Gasne, a Shanghai-based associate with the law firm Gide Loyrette Nouel, the tariff is designed to encourage investment in the sector by creating clear expectations on  returns. Rumors are that a feed-in tariff for solar power may soon follow.

Dirty, reliable coal

Feed-in tariffs may solve some of the cost issues for power generators, but they still don’t address reliability. This helps to explain why, although a gap also exists between China’s traditional sources of energy – coal mines in the north and west – and demand centers concentrated on the east coast, coal power remains China’s first choice for electricity generation.

Once operational, coal plants can be relied upon to a provide stable and predictable supply. Wind and solar power plants, however, are uneven – and China’s grid, like most, can’t handle the fluctuations.

"The grid may be reluctant to take power because it’s intermittent and it doesn’t know when the power’s going to come in," said Bill Ruccius, executive vice chair of the Independent Power Producers Forum, an industry association.

One option for power producers is using a reliable source, such as a coal-fired plant, as a load stabilizer – but even though China’s modern coal-fired power plants are highly efficient, doing so could erase the environmental benefits of using renewable energy sources.

These problems have led Dr Wang Yi, team leader at the Chinese Academy of Science’s Sustainable Development Strategy Study Program, to suggest that China needs to re-examine its renewable energy goals and put in place a road map with more realistic policies.

Any program that endorses renewable energy would require China to rethink how it distributes electricity. Many experts see a smart grid, which uses digital technology to distribute electricity more efficiently and is able to handle intermittent power sources, as the best option.

While there is no precise definition of a smart grid, the US Department of Energy (DoE) has named five fundamental smart grid technologies: integrated communications providing real-time information; sensing and measurement technologies for more accurate response, pricing and management; advanced components, including superconductors; advanced control methods; and improved interfaces for visualizing systems.

As planned in the US, a smart grid would lead to a more decentralized, efficient and ultimately more reliable power network. The DoE wants to have a grid in use by 2030, although it has concerns about its ability to attract investment.

Relatively unburdened by the need to raise capital given its strong state backing, State Grid Corp of China, the larger of China’s two grid operators, hopes to get there first: It says it will construct a smart grid by 2020, made up of a network of ultra-high voltage lines and upgraded urban and rural distribution grids. The project is expected to cost over US$580 billion.

While State Grid’s plan may take advantage of smart-grid technology, it lacks another key feature: competitive pricing.

"In order for China to begin investing in the kind of smart-grid technology that will allow for a competitive electricity market, the government will first have to push for reform of its state-owned grid companies and utilities," said Tristan Edmonds, a partner with Mint Research.

Attempted reforms

There have been plenty of pricing pilot projects but Beijing has struggled to expand them. Apparently this is because the National Development and Reform Commission, which is responsible for power pricing, is unwilling to give up control. It may have good reason: Observers say the higher prices that would likely result from a liberalized power market could have unpopular consequences for economic growth.

If Beijing is serious about integrating renewable alternatives into its power network, competitive pricing may be its best hope. The change would boost renewable energy by removing the need for a feed-in tariff and allowing grid companies to set prices based on the source of power.

Encouraging renewable energy use on a larger scale would also mean good business for equipment manufacturers.

"If China’s adding 100,000 megawatts a year – even if wind can get 1% of that, that’s 1,000 megawatts every year," said Ruccius. "That’s a lot of business for wind turbine manufacturers."