Policy
is an important administrative measure for promoting small
hydropower (SHP) development in China. At present, the critical
topics to be studied and solved urgently are: to find out
questions and reasons that constrain SHP development upon
investigation and analysis of policy environment of macro-economy
and techno-economic indices of SHP development, and to hammer
out the policy framework and operation mechanism complying
with the requirement of market economy, enabling the sustainable
development of SHP.
I. Technical-economical
feasibility analysis for SHP
In China, SHP
is defined as stations with installed capacity up to 50
Mw. SHP technology is mature and proven. Its major features
are as follows:
1. Rich resources.
The exploitable SHP resources in China is 87 million kw
( as per the general investigation of hydraulic resources
in 1980s) which occupies 23% of total hydropower resources
in the whole country and stands top in the world.
2. Widely spread.
The exploitable SHP resources are widely spread over 1,573
counties in the nation. There are 58.28 million kw in west
China, occupying 67% of the country¡¯s total exploitable
one; 28.72 million kw in central and east China, 33% of
the same. The allocation of SHP resources is more widely
dispersed than other energy resources such as coal, petroleum,
and natural gas. In particular, it has better accessibility
and affinity to local economy in west China.
3. Flexible development.
SHP could be separately developed, could formulate local
grid and supply electricity dispersedly. The capacity developed
could be several, several tens, several hundreds up to several
tens of thousand kw according to demand. It is capable of
providing power to household, village, township (town) and
county (city) and has very strong adaptability and capability
of radiation. In addition SHP is of small scale, needs comparative
less capital investment, with mature technology, short construction
period, fast effective, easy maintenance and low operation
cost. It is more technically and economically feasible to
construct SHP than to develop large and medium hydro and
thermal power in economically poor regions. It should be
pointed out that it is most appropriate for local government
to organize the SHP development while the central government
is focusing capital for large power generation projects.
SHP has attained
rapid development in China due to its significant function
in solving rural energy supply, improving ecological environment,
alleviating poverty and promoting rural economic development.
Since 60-70s of last century, the supply area of rural hydropower
has gradually expanded to cover nearly 1/2 of the whole
nation¡¯s territory, with 1/4 of the whole nation¡¯s population.
Number of SHP stations completed is about 40 more thousands
with installed capacity of 26.26 million kw and annual generation
of 90,000 odd Gwh, occupying 30% of total consumption in
rural electricity market in the country.
Remarkable economic
and social effect has been achieved through development
of SHP. Currently, SHP has acted as vital support for socio-economic
development in hilly areas in central and west China. It
drives the urbanization and industrialization through electrification
and also promotes the regulation of economic structure.
Following the prosperity and continuous development of local
economy, steps of poverty alleviation were speeded up, rural
energy consumption solved, ethnic solidarity strengthened
and stability of border areas promoted as well.
Especially, in
providing electricity to basic public service sector for
people in remote area un-accessible to electricity, SHP
possesses evident advantages and has been consistently playing
the un-replaceable role. The construction of rural 653 hydro-based
primarily electrified counties during ¡°7th, 8th and 9th
Five Year Plan¡± not only solved the electricity supply to
120 million people not accessible to electricity but also
widely and greatly increased the rural electricity consumption
level in the respective areas. At present, there are still
30 more million people not accessible to electricity, more
than half of them are distributed in the regions with rich
SHP resources. The geological position of these areas is
extremely remote, with dispersed low load. It is not practical
to provide electricity through extension of national grid
to these areas. Therefore, SHP will continuously play the
important role in the final fortifying storm for resolution
of non-electrified population.
The ecological
effect of SHP is also excellent. Currently the total annual
generation from SHP in China is equivalent to 30 million
tons of standard coal. Its ecological effect is equivalent
to preventing 70 million tons of emission of greenhouse
gas as CO2 and large amount of flue dust and polluted water.
Development of SHP could create fundamental criteria for
replacing fire wood by electricity in providing energy for
living and for agricultural processing. Replacing firewood
by electricity reduces deforestation in SHP supply area.
Evident results of hill blocking and forest raising and
returning farmland to forest was attained, as the percentage
of forest coverage increased year by year. Water resources
were reserved and soil erosion prevented which caused the
fast recovery and improvement of ecological environment.
II. Analysis of present
status of SHP policy environment
In comparison
with exploitable SHP resources in China, the percentage
of exploitation is rather low, only around 30%. Reasons
for this slow development are resulted from weakness of
SHP itself and external economic policy environment, etc.
It should be pointed out that the macro economy policy environment
for energy is not favorable to SHP development. SHP has
been developing through a rough and bumpy road onto the
present mainly due to initiatives of developing local economy
from local government. This signifies its good external
economics but could hardly ensure its internal economics
and benefit of its own thus lacks the mechanism of sustainable
development.
For promoting SHP
development, a series of supporting policies were stipulated
by central and local government during various development
period of SHP. According to their nature, these could be
classified into administrative compulsory type (AC), economic
incentive (EI) type and market creation (MC) type. Relevant
stipulation of SHP in the¡¶Law of Electric Power¡·belongs
to AC type policies. The strategy of ¡°self-construction,
self-management and self-consumption¡± for rural SHP formulated
by the state belongs to MC type policy. The EI type polices
include: (1) policy of profit of SHP reserved for further
expansion of SHP; (2) permission of utilizing nation¡¯s poverty
release capitals for construction of rural SHP; (3) policy
of 6% value-added tax for SHP; (4) policy of specified loan
for SHP development (dismissed).
These prevailing
policies takes policy of economic incentive based on planning
economy as major one, but rarely related to basic element
of market economy, i.e. price and relation of demand and
supply. The function of market mechanism has not been reflected
fundamentally. The AC type policy also did not make any
stipulation for qualification and quantification of SHP.
Especially, it lacks concrete subsidiary policy and operational
function relating to the right of integration into the grid
and volume to electricity. The MC type policy, though came
up rather earlier and had touched the issue of property
right, is much imperfect and could hardly be executed under
various complicated factors of the nation¡¯s reformation
for economic institutional system. In the EI type policy,
only regulation function of tax and subsidies were focused
while the disposition function of capital by the market
element---price was not fully utilized. The SHP as a public
welfare sector, has actually been drifting with the tide
in the tough market competition due to abolition of specified
loan, limitation of financial subsidies and non-execution
of 6% value-added tax policy in most regions. SHP will exert
even more impact in the ¡°separation of plant and grid, competitive
price for sales to the grid¡± policy from the reformation
of power institutional system, if necessary protective measures
were not adopted. In a word, the significant reasons for
the slow development and difficult walking of SHP were its
divorce from policy support of the government. At present,
the SHP development urgently needs to gain a foothold on
new incentive polices under market economy condition.
III. Problems existed in
the marketing operation of SHP
For SHP development,
the internal unfavorable factors of itself are: small scale
production, consistent increase of capital investment, contradiction
of seasonal variation, low level of technical equipment
and operation and management, etc; in the meantime, there
are also external impact such as difficulties of selling
electricity, unsmoothness of price mechanism, slow development
of market, constraints of its public welfare character,
etc. Within all contradictions, the most critical ones are
small scale generation, difficulties in selling, seasonal
variation, price mechanism and constraints of its public
welfare characters. These have directly affected the economic
effect and competitive capability of SHP and resulted in
the low capital return rate, difficulty of financing and
lack of capability for sound cycle rolling development.
1. Small scale
generation
The common problems
facing commercial operation of renewable energy are: relative
narrow market for renewable energy and comparative high
capital investment caused by small scale production, and
in turn, comparative high energy production cost derived
from low volume energy production. SHP is of no exception.
Under present macro economic policy environment for energy,
SHP mostly with installed capacity less than tens of Mw
would no doubt be in an inferior position in competing with
large conventional power plant with capacity of several
hundreds Mw and even several thousands Mw.
2. Difficulty of
selling out
Due to different
affiliation of SHP and national grid, the problem of integration
of SHP into the grid could not have been solved for long.
It would either be uncapable of integration or with very
low electricity price in connecting to the grid, thus decrease
the profit of SHP and increase the risk of investment.
3. Contradiction
of seasonal variation
Most SHP stations
are run-of the-river type in China, which lack the capability
of regulation. During raining season, SHP would have large
volume of spilling water due to surplus power in the grid;
while in dry season, shortage of electricity would occur
in the grid. This is also one of important causes for cost
increase for SHP.
4. Unsmoothness
of price mechanism
Formulation of
electricity price for SHP lacks standardized policies and
regulations. Stipulation and regulation of electricity price
bears considerable subjectivity and randomness, and lacks
scientism as decision were usually made by work experience,
enterprise status and understanding of future tendency of
national policies of decision makers themselves. In addition,
the structure of SHP price does not include rational award
of its external economic factors. The current price level
of SHP not only deviates from the law of value but is also
not able to reflect the relation of demand and supply. This
is not favorable to dispose natural resources through market
and severely affects the survival, consolidation and development
of SHP.
5. Constraint of
public welfare character
Quite a lot of
SHP projects were constructed in conjunction with water
conservancy project, with comprehensive function of flood
protection, irrigation, water supply etc. in addition to
power generation. Spilling water in flood season, as well
as irrigation and water supply would all affect the generation.
SHP has to spill water and empty the reservoir in advance
for protecting the flood disaster. It also usually raises
water level reverse with normal seasonal demand for ensuring
industrial, agricultural and city water supply, thus misses
the opportunity for generation; or under long time low head
operation resulting in decrease of turbine output and loss
of economic benefit. These losses in cascade developed stations
would be even greater.
¢ô. Conceptual strategy
for incentive policies for SHP
The design of
incentive policy for SHP is a complicated system engineering.
In the policy framework design, not only background of national
macro economic policy should be taken into consideration
for finding out the major factors that affect its development
through comprehensive analysis and evaluation of its internal
and external economic characters, but foreign successful
experience should also be absorbed to introduce the market
mechanism into the system of incentive policy for SHP. In
addition, as SHP possesses the feature of clean energy and
ecological environment protection, environmental economy
policy should be coordinated during stipulation of SHP policies.
This is for ensuring the mergence of policy with relevant
sectors for the purpose of enhancing entirety effect of
economic system.
At present, the
average specific construction cost for conventional energy
large thermal power plant is 4000-5000 Yuan/kw; that for
SHP, 6000-8000 Yuan/kw; and that for wind power generation
9000-12,000 Yuan/kw. The average specific energy cost for
conventional energy large thermal power is 0.20-0.30 Yuan/kwh;
that for SHP 0.30-0.40 Yuan/kwh and that for wind power
0.40-0.50 Yuan/kwh. The economic feasibility of SHP is superior
than that of wind power, while it lacks competitive capability
versus conventional energy large thermal power.
Typical investigation
and analysis for economic feasibility of SHP shows that:
generation volume is the major constraint within all factors
affecting the benefit and development of SHP. Most of SHP
benefit from power generation and supply could not reach
the expected value in financial evaluation for the project
design. The actual generation volume is the major factor
for determining the specific construction cost of electric
energy and production cost of SHP. The annual generation
utilization hour of SHP in China is evidently on the lower
side. Its actual generation volume is greatly lower than
the design one and also lower than the effective volume
after reduction from conversion calculation with the grid.
The reasons for affecting generation utilization hour are
closely related to above-stated problems both from SHP itself
and from external causes. In addition to factors such as
difficulty of electricity selling out, contradiction between
rainy and seasons, and constraint of public welfare character
etc, there are other factors also affecting the utilization
hour, such as year to year and in-year variation of run-flow
due to climate change, contradiction between peak and valley
load, limitation of load character and repairing and emergency
shut down, etc. All these factors have resulted in reduction
of actual generation volume from design value at least at
30%, some even over 50%.
Depreciation and
interest of SHP are another important factors in determination
of specific electricity energy cost and production cost.
Investigation shows that depreciation and interest occupy
19.6% and 31% for average specific cost of SHP respectively.
The reason for that is most SHP project are constructed
in economically backward remote hilly areas where financial
capability is very limited. Therefore the debt rate of SHP
is generally high, mostly at about 80%, some even higher
than 90%.
The operation cost
of SHP occupies 26.6% of average specific cost, in which
maintenance, repairing and salary and welfare of staff are
of larger portion. This signifies that the level of technical
equipment and management need urgent improvement in one
side and also that the low profit rate of SHP has caused
insufficient financial capacity of enterprises for technical
reformation and scientific and technical innovation on the
other side.
The fundamental
principle to be followed in building up the incentive policy
framework for SHP should be: Holding the key line of actual
generation volume and other factors that affect the benefit
of SHP and setting the starting point of incentive policy
on the market basis, purposely utilizing macro control and
coordinating measures such as administrative command, economic
incentives, creation of market etc, stressed on administrative
compulsory policies and function of electricity price to
help SHP overcome various barriers and difficulties from
interior and exterior.
¢õ. Design of framework
for incentive policies of SHP
1. Strengthening
the administrative compulsory policies
Drawing reference
from foreign countries, administrative compulsory policies
should be more used in promoting the development of renewable
energy which is the weak sector in energy industries during
the period of transition to market economy. These policies
include quota system and relevant regulations of government
at various level. The focal point of the policies should
define and quantify the quota and target of development
for SHP market, and confirm that renewable energy generation
should occupy a definite proportion in local electric power
construction. Confirmation should also be made for the priority
of integration of renewable energy including SHP onto the
grid and full purchasing all the electric energy. This will
be favorable to eliminate the unfavorable factors from institutional
system that affect the benefit of SHP generation and supply.
The quota system
has been proved to be the effective incentive policy for
renewable energy in many developed countries. It is recommended
that the execution should be accelerated. In the mean time,
promotion should be made for the State Council to promulgate
the regulation relevant to acceleration of the development
of rural SHP, and push forward the stipulation of regulation
from local government. For instance, the ¡¶ Decision of Acceleration
of Rural SHP Development ¡· issued by the Guangdong Provincial
government in 1996 is a local regulation with restraint
of law, which clearly defines the priorities of development,
of integration into grid, and of purchasing of SHP and its
mechanism of price and financial subsidies, etc. The Shanxi
Province has also made stipulation relating to production
quota of SHP and favorable price for SHP. These local governments¡¯
regulations have all promoted the SHP development in their
respective places.
2. Stressing the
function of resource disposal by electricity price
Severe distortion
still exists in the electricity price system in China so
far as environmental cost is referred. This is saliently
shown in the lower cost of productive raw material of thermal
power plants with high pollution. The environment cost resulted
from pollution has not been counted into production cost
and the environmental space is of free use. Later on, environment
factor should be taken into consideration in determining
the electricity price mechanism so that the real value of
electricity and environment could be accurately reflected,
and to establish a price mechanism for sustainable development
eventually.
It is recommended
that after execution of ¡°separation of the grid and the
plant, competitive price in selling to the grid¡±, the protection
of market price for SHP onto the grid should be implemented
by the government so that SHP will not be directly competed
with conventional energy. On this basis, the limit price
system of SHP onto the grid with a combination of incentives
and restraints should be established. On the one side, price
protection for SHP onto the grid should be implemented to
subsidize the additional production cost caused by constraints
of public welfare and external economic character, thus
enabling its rational profit, and on the other side, it
is also necessary to push the SHP to continuously reduce
its cost and raise its competitive capability. The core
of the system is: The government defines the upper limit
price for SHP onto the grid, the latter should then be obliged
to purchase and not to refuse in case the claimed price
from the SHP plant is lower than the limit level. Those
SHP plant requesting price higher than the limit will thus
be eliminated out of the sector.
In decision of
competitive limit price for SHP onto the grid, the model
of comparatively mature price system for public service
sector in market economy countries like UK etc. could be
used as reference. Accordingly, the initial price decision
model of limit price for SHP onto the grid could be:
P = C * ( 1+R )
+ T + V
in which, P is
the upper limit price for SHP onto the grid set by the government;
C is the average social production cost of SHP enterprises;
R is the profit rate of the cost; T is officially fixed
tax; V is a regulation value considering factors such as
demand and supply as well as policies.
The regulation
model of limit price for SHP onto the grid is:
P¡¯= P[ 1+( ROI-X
)]
in which , p¡¯ is
the regulated price; ROI is the index of price of consuming
goods; X is the increasing amplitude of labor productivity
for SHP.
This method copes
with the principle of price decision by combination of incentives
and restraints, and could effectively reflect the turn-back
to external economic character for SHP and the subsidies
to the additional cost resulted from constraint of public
welfare character.
3. Improvement
of tax policy
The policy of 6%
value-added tax for SHP should consistently be executed.
It should be clarified that for the SHP which does not supply
power by transferring from national grid, the amount of
value-added tax of the supply sector of the grid shall be
checked and ratified according to the principle of making
out value-added tax invoice by 6% hand-in and 11% exemption¡±.
It could also be implemented in the form of returning after
advanced levy to ensure the execution of tax reduction policy
for SHP. According to the experience of foreign countries,
the tax policy for energy environment should be actively
stipulated for collecting the emission payment for environment
pollution produced through the energy production process
especially those greenhouse gas like CO2, etc. This collected
fund shall be used for subsidies to the construction of
clean renewable energy.
4. Strengthening
of policy guidance for SHP financing
SHP carries strong
public welfare character, and therefore needs support of
government with respect to financial budget, channel of
investment and financing and credit loan market. A long
stable system of investment and credit loan should be set
up by the state to enable more capital input into SHP construction.
It is recommended that the investment loan for SHP development
shall be listed in the financial budget of government at
various levels in the nation. The capital from financial
treasury will mainly be used for disposal of capital, technical
renovation of SHP, quality examination and establishment
of systems for after-sale services, etc. The loan for SHP
shall be recovered(with maturity over 25 year). Multiplization,
multiple channel and multi-direction of major investment
part for raising capitals for SHP construction should be
implemented through opening up of market, and absorbing
investment from the society, foreign funds and private enterprises.
This policy is especially appropriate for isolated SHP separated
from the grid and operated dispersedly.
5. Creation of
SHP market
SHP policy should
eventually be set on the basic foothold of the market, the
government direct subsidies should be implemented through
self-regulated mechanism by fully taking advantage of market
element of relationship between price with demand and supply.
It should reflect the principle of ¡°who pollutes, who pays;
who solves, who be benefited¡± and formulate the market mechanism
with sound cycle of energy and environment development.
Following the continuous deepening of reformation of power
institutional system, market should be actively set up for
promoting environment protection and rational development
of SHP resources through multiple measures such as division
of properly rights, transferring power to a lower level,
privatization, public tendering, licensing, transaction
of environmental right, and development mechanism for clean
energy, etc.
