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This article is brought to you based on the strategic cooperation of The European Sting with the World Economic Forum. Author: Lin Boqiang, Director, China Center for Energy Economics Research The development of renewable energy in China has attracted global attention in recent years. In 2012, China’s installed capacity of wind and solar power was 61GW and 3.4GW respectively, while the annual electricity generated by renewables was only 2.1% of China’s total consumption. By 2017, China’s wind and solar power capacity had increased to 168.5 GW and 130.06 GW respectively, and renewables were generating 5.3% of China’s electricity supply. At present, China leads the world in terms of wind and solar power capacity. And with large-scale industrial applications, the costs have fallen substantially. A good example is photovoltaic (PV) technology: the price of PV modules decreased from about 30 Yuan per watt in 2007 to about 10 Yuan in 2012, and by 2017 it had decreased further to just 2 Yuan per watt. The success of China’s renewable energy drive fully illustrates the effectiveness of China’s on-grid tariff subsidies. The advantage of the on-grid tariff policy – through which the government can make renewable energy production more competitive and attractive to businesses and investors – is that it anchors the revenue of power generation throughout the entire life cycle. In this way, it conveys a clear price signal to investors, and can effectively support the early stages of renewable energy development.

China’s investment in renewables is leaving the rest of the world in its wake Image: Bloomberg New Energy Finance

However, alongside the rapid expansion of installed capacity, the total amount of renewable subsidies is also mounting rapidly. Based on the average on-grid electricity tariff, the total amount of wind and PV subsidies in 2012 came to about 60 billion yuan, a figure that had increased to 170 billion yuan by 2017. Although the government reduced the subsidy several times during this period, the total amount of subsidy continued to climb. The subsidies for renewable energy should be compensated by the renewable surcharge collected from end consumers. China’s renewable surcharge was 0.015 yuan/kWh in 2012, and rose to 0.019 yuan/kWh in 2016. There was a surplus of 15 billion yuan in the account of China’s ‘renewable energy subsidy’ in 2012, but by 2017 it had turned into a large deficit of about 80 billion yuan. Therefore, China’s expansion of renewables will inevitably lead to a rapid increase in subsidies. Solutions to accommodate rapid renewable expansion usually lead to two phenomena: one is the rapid growth of end consumer tariffs, such as in Germany, and the other is maintaining high subsidies, such as in China, but with a large subsidy deficit.

The rapid development of renewables in Germany has led to a significant rise in electricity tariffs, which have nearly doubled over the past decade, making Germany one of the countries with the highest electricity tariffs in Europe. Of these tariffs, the largest incremental has been the renewable energy surcharges. At present, Germany’s renewable surcharge roughly amounts to 0.8 yuan/kWh – or €0.11 – which alone is equivalent to China’s average end consumer tariffs. This has had a considerable negative impact and has provoked great opposition. As a result, the development of renewables in Germany has slowed sharply in the last two years. Last year, there was an appeal to increase China’s renewable surcharge to 0.3 yuan/kWh in order to balance the subsidy deficit. But it did not happen. Instead, the government this year lowered the end consumer tariffs for industrial and commercial consumers by 10%. It would seem it is not possible to increase funding for renewable subsidies. At the same time, the installed capacity of China’s PV surged significantly. In the first nine months of 2017, about 42GW of new capacity had been installed and this increased the subsidy bill by nearly 30 billion yuan. At present in China the quality of renewables, rather than the quantity, should be prioritized. Since competitiveness is crucial to future development, subsidies should be designed in such a way as to favour competitiveness. The current approach – subsidy based on quantity (generation hours) – could possibly prompt some enterprises to overlook the long-term interests of the industry in order to make short-term profits.