China's Wind Power III

To support the development of wind power technology and growth of the in-grid wind power market, the Chinese government has recently pushed hard on renewables, and it implemented a series of projects and also stipulated a series of economic incentive policies:

- Ride the Wind Program:
To import technology from foreign companies and to establish a high-quality Chinese wind turbine generator sector, the former State Development and Planning Commission (SDPC) initiated the Ride the Wind Program in 1996. This initiative led to two joint ventures, NORDEX (Germany) and MADE (Spain). These JVs effectively introduced 600kilowatts wind turbine generator manufacturing technology of 600 kilowatts into China.

- National Debt Wind Power Program:
To encourage the development of domestic wind power equipment manufacturing, the former State Economic & Trade Commission (SETC) implemented the "National Debt Wind Power Program." This program required the purchase of qualified, locally-made wind power components for new generation projects. China's government provided bank loans with subsidized interest to wind farm owners of as compensation for the risk of using locally-made wind turbine generators. These loans funded construction of demonstration project wind farms with a total installed capacity of 8megawatts. This program has been completed.

- Wind Power Concession Project:
The National Development and Reform Commission (NDRC) initiated the "Wind Power Concession Project" in 2004 with a 20-year operational period. This program aims to reduce the in-grid wind power tariff by building large capacity wind farms and achieving economies of scale. Each of the wind farms built in this program must reach a 100 megawatts capacity. By 2006, NDRC had approved 5 wind farms, in Jiangsu, Guangdong, Inner Mongolia, and Jilin Province.

In any typical wind power concession, the power grid company signs a long-term power purchase agreement with the wind power project investor and agrees to purchase electricity generated by the project. The bidding competition determines in-grid tariff and the agreement clearly prescribes the quantity of in-grid wind power to be purchased. The duration of the agreement covers the total operation period of the wind project.

Therefore, the investor minimizes risk in recovering investment costs. The concession agreement between the government and project investor guarantees the power-purchase agreement. All end-users of the grids electricity share the tariff increase due to wind power purchase. As incentives, the government waves import customs tariff and VAT on the equipment and accessories.

Although Chinas government has, for many years, encouraged the use of wind power, favorable conditions for wide-scale development have yet to develop. Through the wind power concession project, the Chinese government hopes to create further incentives for companies to develop this renewable energy resource. The concession agreement and long-term power purchase agreement protect the interests of wind power investors, encouraging large companies, especially foreign ones, to invest in the Chinese wind power sector. Under this policy, market risk is reduced significantly, which in turn reduces the risk premium of the internal rate of return for wind power projects. Eventually, the wind tariff shared by end-users will be cut due to this decreased risk.

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