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Eversheds' China renewable energy bulletin: The Green Paper - edition 6

  • China

    26-06-2009

    The Green Paper

    Eversheds’ China renewable energy bulletin

    Welcome to the Sixth edition of “The Green Paper”. In this edition we follow the changing situation in China’s renewable and clean energy sectors. For further information, please contact Peter Corne at petercorne@eversheds.com or on 0086-21-6137 1001, Michelle Thomas at michellethomas@eversheds.com or on 0044 20 7497 9797, or Andrew Halper at andrewhalper@eversheds.com or on 0086 130 128 11129.

    Soaring Growth - China’s Wind Power Industry

    By the end of 2008, the global wind power capacity reached 120.8 GW, with an annual growth rate of 28.8%. Even more dramatically, according to a report of Global Wind Energy Council, China has overtaken India to become the top wind power generator in Asia and the fourth largest wind power nation in the world.

    As the leading wind power nation in Asia, China has doubled its wind power installation in the last four years and has successfully increased its total installed wind power capacity to 12,210 megawatts. Statistics show that China’s wind power capacity in 2008 has achieved an increase of 6.3 GW, representing 91% growth over 2007.

    Even with this exceptional growth China’s wind power industry is expected to continue to expand. Li Junfeng, Secretary General of the Chinese Renewable Energy Industry Association (CREIA), predicts that the number of new wind installations in China is expected to double in 2009, contributing to one-third of all new installations globally. At this rate, Mr Li expects that China will realise its goal to produce 20 GW wind power by 2010, a decade ahead of schedule, as set out in China’s Long-term Development Plan for Renewable Energy.

    Recently, the Inner Mongolia Autonomous Region government announced detailed plans to accelerate the construction of power grids, with a total planned investment of more than RMB 20 billion. A 500 kilovolts power grid will be constructed in the west and the east of Inner Mongolia, and these will be connected to North-China power grid and North-East power grid. The transmission capacity of these two power grids will be dramatically increased, and thus extra capacity will be available for the power generated from wind. To date, wind power providers in many parts of Inner Mongolia have been struggling with serious grid connectivity issues. Hopefully this announcement will mean that the reluctance of the grid companies to accept wind power without limitation will disappear as grid capacity increases.

    Local Preferential Power Price - Deviation from the State Power Price Policy

    The economy of Western China, which has abundant natural resources and low power prices, is dominated by high energy-consuming industries. Undoubtedly, the economy of these regions has been affected by the central government’s decisions to abolish preferential power pricing. More importantly, the global financial crisis has greatly reduced the demand for both high energy-consuming products and power from the eastern regions of China.

    In order to combat the impact of the global financial crisis and high energy costs of these companies, eight provincial governments in Western China have issued local preferential power price policies during the last quarter of 2008.

    These preferential power price policies were developed to safeguard local economic growth rate by promoting development of local industries and stabilising their corresponding employment markets. Even though the policies have only been in place for a relatively short period of time, they have already helped to rescue a number of high energy-consuming enterprises.

    Under the current power pricing mechanism in China, however, provincial governments are not authorised to set power prices. Only the central government, currently the NDRC (National Development and Reform Commission), is authorized to formulate and adjust power prices nationwide. More seriously, by rescuing such high energy-consuming enterprises, the local preferential power pricing policy has violated China’s long-term policy of “energy-saving and emission-reduction” and in fact disturbed the consistency of the nation’s transmission to a new industrial structure. As a result, analysts indicate that the preferential power pricing policies imposed by provincial governments are a reflection of the necessity to accelerate reform of the power pricing mechanism, because in a real market economy, power prices should be determined by market need.

    Eventually, on February 25, 2009, the NDRC issued a circular on the “Problems of Clearance of Preferential Power Price”  that abolished the local preferential power pricing policies for high energy-consuming enterprises. The circular provides that large-scale enterprises with voltage levels of more than 110 kilovolts will be able to purchase power directly from power plants, on the condition that these large enterprises shall pay transmission charges, governmental funds and additional charges as provided for by relevant laws or regulations.

    Solar Downturn

    China’s booming solar industry enters into the first severe winter.

    Statistics indicate that by the end of 2008, approximately 350 out of 400 solar enterprises in China have been closed. Suntech, a leading solar company in China, has already laid off 10% of its employees and has also stopped half of its product lines since the fourth quarter of 2008. Oversupply is predicted to drive the overall revenue of China’s solar industry down 19% from $15.9 billion in 2008 to $12.9 billion in 2009.

    The downturn of China’s solar industry is due to many reasons. Most significantly, since China’s solar industry relies heavily on overseas market demands and material supply, as the global economic crisis continues and governments in several developed countries continue to loose their regulatory requirements for green house gas emission reduction, overseas demand has dropped remarkably. In additional, weak international oil prices have also caused less demand for solar energy as an alternative source of energy. The fluctuation of foreign exchange rates and the technological pre-eminence of foreign solar enterprises also contribute to the decline of the green industry.

    Nevertheless, optimistic insiders and experts point out that the current predicament offers new opportunities to reshuffle the structure of the industrial sector. Some commentators have predicted that the government will provide financial support to aid the merger of large and small solar firms; others have indicated that the final solution hinges on the innovative capacity of China’s solar industry and the growth of domestic demand.

    To help the industry recover from the severe winter, the Ministry of Finance has recently issued the Tentative Measures on Financial Subsidies to Application of Photovoltaic Solar Energy in the Buildings (“Measures”). According to these Measures, those that own buildings that utilize photovoltaic solar products and manufacturers of such products are now eligible to apply for financial subsidies if installed capacity of photovoltaic solar products in each project is no less than 50kWp, and if the power generation efficiency is of advanced level. The subsidy will be calculated at a standard of 20 yuan/Wp in 2009.

    These new incentives, according to Peter Corne, the Managing Director of Eversheds Shanghai, should reduce production cost and boost domestic demand of photovoltaic solar products.

    MoF and SAT clarify Enterprise Income Tax Policy on CDM Projects

    Recently, the Ministry of Finance and the State Administration of Taxation promulgated a Circular on Policy of Enterprise Income Tax for China CDM Fund and CDM Projects(the “Tax Policy”). The policy is retroactive to January 1, 2007.

    Under this Tax Policy, “enterprises incomes generated from CDM projects” are defined as the net income generated from the emission reduction transactions, excluding the portion turned in to the State and the relevant costs and expenditures for the implementation of CDM projects. The following portion of the income generated from GHG emission reduction transactions which is the portion of income payable to the government CDM fund may be deducted when calculating enterprise income tax:

    1. 65% of the amount of transfer of the emission reductions  generated from HFC projects and PFC projects;
    2. 30% of the amount of transfer of the emission reductions generated from  N2O projects;
    3. 2% of the amount of transfer of the emission reductions generated from the projects in the key areas prescribed in article 4 of the Measures for Operation and Management of Clean Development Mechanism Projects and afforestation projects. 

    According to this Tax Policy, CDM projects described in Item 1 and 2 enjoy tax holidays. For the first three years from receiving payment from emission reduction transactions, enterprises will be exempted from income tax for the incomes generated from those CDM projects, and from the fourth to the sixth year, enterprises will pay income tax at a 50% discount on the income generated from those CDM projects.

    It is worthy noting that in order to enjoy the tax holidays mentioned above, enterprises shall calculate incomes from CDM projects separately, and make a reasonable allocate the relevant period costs. If incomes from CDM projects are not accounted separately, those enterprises will not be able to enjoy favourable tax treatment.

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