China wants more wind power. Per the requirements of China's Renewable Energy Law, which mandates that 10 percent of China's energy come from renewable sources by 2020, the country plans to massively boost its production of wind-generated electricity. Right now, China gets about 1 gigawatt of electricity from wind. The goal is a whopping 30 gigawatts by 2020.
But how to get there? This morning, while leafing through the quarterly report of the China Sustainable Energy Program, I stumbled upon a befuddling wonkish mystery. Why was China flip-flopping between two different incentive methods for pushing wind power development?
The China Sustainable Energy Program believes that "feed-in tariffs" are the best way to encourage wind power development. Pioneered in California in the 1970s, a feed-in tariff program requires an electricity utility to pay a fixed price over a fixed period of time for power from, say, a wind power plant. The price is set by government, usually based on what it would cost to generate electricity from coal or some other source, with a little premium added on top. The idea is that by guaranteeing a fixed return, cautious investors will be encouraged to take risks on new technologies.
There is ample evidence that feed-in tariffs work better than other strategies, such as quotas, which require a utility to ensure that a certain percentage of power is from renewable sources, or competitive auctions, in which government awards a bid to develop a power plant to whoever promises to deliver power at the lowest price. Germany, the world leader in wind energy, is a star example of feed-in tariff success.
But according to an article published by the WorldWatch Institute, in January, China stunned the worldwide wind industry by reversing plans to rely on feed-in tariffs and moving instead to a competitive auction system.
The problem? According to analysts who study these pricing mechanisms, a competitive auction system can actually reduce incentive for new investment, because it puts so much downward pressure on potential profit. "Such a model would likely primarily benefit large utility-affiliated wind power developers, and may not provide the needed profitability and market stability for robust market growth," says the China Sustainable Energy Program. In other words, only state-owned utilities would be able to afford to make the winning low bids. Worldwatch quoted Xu Hongliang, general manager of China Fulin Windpower Development Corporation, as arguing that the regulation will "throttle the whole industry."
But Worldwatch didn't answer the question of why China reversed its policy. For that, we turn to Zhang Zhongxiang, an energy and environmental economist at Hawaii's East-West Center.
"The reason for not choosing the expected model," Zhang notes in an East-West wire report, "is the Beijing government's belief that under [the feed-in tariff] model, the wind power tariff in the southeast coastal areas would be about double those in the western regions of the country where much of the wind resources are located. And, that would make it unlikely that investors would be interested in the western regions where their return would be much smaller."
Since the feed-in tariff price is calculated according to what it would cost to produce power by conventional methods, and prices are higher in China's more developed regions, then the potential for profit would be greater in those regions. But China is desperate to address the development gap between the coastal regions and the western part of the country. Thus the turn to competitive auctions.
Zhang says that China is continuing to tweak its system, looking for some combination of incentives that will satisfy both its development goals -- more renewable energy, and more industrial development in the hinterland. It's a fascinating experiment to watch, offering ample testimony to the complexity of China's challenge: achieving sustainable economic growth and development in an increasingly carbon-constrained world.