China: The Green Paper - China Renewable Energy Bulletin

Welcome to the third edition of the China Green Paper. In this edition we follow the main features and changes in legislation across China in the renewable and clean energy sector.

Anticipating the new Energy Law

China's Office of the National Energy Leading Group ("ONELG") recently released its fifth draft Energy Law for public comment. The new law reveals key insights into the issues that the Chinese government will, in the coming years, place at the top of its policy agenda concerning cleaner energy production.

The draft law specifically requires Chinese oil companies to build up their own government-managed reserves to supplement existing reserves. China's state-owned oil producers have been irritated by the proposed measures because the costs of building up the required reserves will be borne by the oil companies themselves. The balance sheets of China's oil refiners have already been hit by the nation's state-mandated price ceilings on refined oil. The ceilings are well below the market price of crude oil, which China's refiners have to purchase as inputs.

The government will continue to control the ultimate price of energy. ONELG has explained that energy pricing should reflect "the scarcity of resources and the cost of damage to the environment". In November 2007, the Chinese government raised the retail prices of petrol, diesel oil, and aviation kerosene by around ten per cent to encourage refiners to release more product to ease a wave of nation-wide fuel shortages.

The draft law establishes a new energy department under the direct control of the State Council (China's Cabinet) to oversee relevant industries. The department would not have ministry-level status, but it is expected that it would unify the management of the country's energy industry, with smaller independent departments to be established for overseeing specific sectors. The proposed new department is expected to exercise stronger control over market entry and pricing than the energy division that is now part of the NDRC. ONELG recently announced the establishment of an expert-led advisory commission that will assist with energy-related policies, planning and other energy issues.

The draft law makes little mention of specific measures for tackling climate change. It does, however, call for China to adjust its energy use to help protect the environment. The draft also suggests that, among other penalties, enterprises which over exploit energy resources would face a fine of up to five times their illegal gains.

Peter Corne, the Managing Director of Eversheds' Shanghai office commented: "The draft Energy Law is another significant step in China's progress towards cleaner energy production. Whilst it lacks detail on how China will uphold its commitment to raise energy efficiency and reduce carbon emissions, it lays down a useful bases for further developments in this area."

Channelling foreign investment toward cleaner energy production

The most recent version of the Guidance Catalogue for Foreign Investment Industries ("Catalogue") came into effect on 1 December 2007. Foreign investors in China are required to comply with the restriction on shareholding interest in different industries as outlined in the Catalogue.

The new Catalogue aims to direct foreign capital towards helping China upgrade its industrial structure and improve unsound aspects of its economic growth. A key area of focus of the new Catalogue is resource conservation and environmental protection. In particular, it reflects the Chinese government's determination to eliminate backward' production techniques and capacity, realise energy-saving and emissions reduction, synchronize foreign investment with improvements to China's domestic industrial structure, and encourage foreign investment in recycling, clean production techniques, renewable energies and environmental protection methods.

The new Catalogue also aims to strictly limit market access to heavy-polluting industries that involve high energy consumption. Foreign investment is no longer encouraged in projects involving important and scarce mineral resources or non-renewable energy production, such as the mining and sifting of low-grade metallurgical ores. The production and supply of electricity, gas and water is now off-limits to foreign investors. Exploration for, and mining of, tungsten, tin, antimony, molybdenum, fluorspar, and the smelting of electrolytic aluminium, copper, lead, zinc, tungsten, molybdenum, stannum (stannum compound excluded), antimony (including antimony oxide, sulfurated antimony) and other rare metals have been removed from the restricted' category and placed in the prohibited' category.

In respect of small-scale power grids in Tibet, Xinjiang and Hainan, the construction and operation of condensing steam coal-fired power stations with a single unit capacity of 300,000 kW or less and coal-fired heat and electricity cogeneration power stations with extracting and condensing steam turbine units, of which the single unit capacity is 100,000 kW or less, was previously permitted' but is now restricted'. With the exceptions of small-scale power grids in Tibet, Xinjiang and Hainan, such construction and operational activities are now prohibited' (they were previously permitted'). The utilization of mine gas; the development of new technology for increasing the utilization rate of mine gangue and the application of technology for recovering mine ecology; the exploration for, and exploitation of, non-conventional oil resources, such as oil shale, oil sand, heavy oils, extra heavy oils, were all previously permitted', are now explicitly encouraged', though in most cases foreign investment must take the form of a joint venture with a Chinese party.

Apart from the Catalogue, in the near future the Chinese government is expected to set and apply standards for energy consumption, environmental protection and safety, resource recovery and quality control in respect of applicable technologies and project construction.

Andrew Halper, the Head of China Law Practice at Eversheds commented on the changes to Catalogue: "this is a typically macroeconomic move by the Chinese Government, designed to accelerate the development of efficient usage of energy resources in China."

China on course to become the global leader in renewable energy

China's rapid expansion has lead to an incredibly heavy reliance on fossil fuels. There is concern within China that this reliance makes the country susceptible to increased environmental, economic, social and security risks. To counter these risks, the Chinese government is taking the development of renewable energy extremely seriously. The Worldwatch Institute recently reported that China is likely to achieve, and possibly exceed, it's target of sourcing 15% of its energy from renewables by 2020. It has been further suggested that renewables could provide as much as 30% of China's energy by 2050.

In excess of $50 billion was invested in renewable energy worldwide in 2006. In 2007, it is estimated that China invested $10 billion in this area alone. This figure puts China second only to Germany in terms of national investments in renewables. Continued investment at these levels could see China overtake developed nations in terms of renewables technology and manufacturing capability in a matter of years.

In the immediate to short term, China is already moving into the position of world leader in wind and solar energy. Chinese production of wind turbines and solar cells doubled in 2006, and it is projected that China will overtake the current global leaders in the these areas by 2009. China is already the global market leader for solar heated water and small hydropower.

Small Hydropower: Increased Tariffs

The Small Hydropower' ("SHP") category in China includes hydropower stations with installed capacity of no more than 50MW. SHP is found mainly in poorer, rural areas of China, where populations tend to be widely spread and larger grids are not economically feasible. The total installed capacity of SHPs is more than double the total installed capacity of the Three-Gorges Dam. More than 300 million people in rural areas rely on electricity supplied from SHPs.

Compared with Large Hydropower, SHP has much less negative impact on the eco-environment. Low operational costs, low risks and stable returns have made SHP a sector which is attractive to private investment. The Chinese government has always offered preferential policies for the development of SHPs, such as special tariffs, special funds and loans.

The central government recently implemented additional policies to encourage development of renewable energies, such as requiring grids to purchase all the electricity output of SHPs. Renewable energies such as wind power, solar power, tidal and hydro power, that have no adjustment capacity, have also been placed at the top of the power scheduling list by the government to ensure that they are fully utilised.

Low tariffs have, however, proved a major obstacle for the development of SHP. Recently, to encourage construction of SHP plants in rural areas, local governments in various provinces have issued new policies to increase SHP tariffs. For instance, the Price Bureau of Fujian Province reformed the price mechanism for newly constructed SHP plants and the authorities of Guangdong Province have tied the grid tariff for SHP to average purchase price as a floor price.

Michelle Thomas, the head of Eversheds' Renewable Energy Team commented: "These policies will encourage the development of SHPs and attract more foreign capital flows into this sector."

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.