China - Renewable energy for electric power

Report No. 15592-CHA China Renewable Energy for Electric Power September 11, 1996 Asia Alternative Energy Unit IASTAE) Asia Technical Department East Asia ancl Pacific Regional Office Pover Development, Efficiency ancl H Lousehol(i Fuels Division (IENPDj IndUJstry and Energy Department Finance andc Private Sector Development Document of the World Bank  CURRENCY EQUIVALENTS (As of December 1, 1995) Current Unit = Yuan (Y) $1.00= Y 8.3 Y 1.00= $0.12 FISCAL YEAR January I - December 31 WEIGHTS AND MEASURES km = Kilometer (=0.62 miles) kWh = Kilowatt hour (=860.42 kcal) MWh= Megawatt hour (= 1,000 kWh) GWh = Gigawatt hour (=1,000,000 kilowatt hours) TWh = Terawatt hour (=1,000,000,000 kilowatt hours) kW = Kilowatt (=1,000 watts) GW = Gigawatt (=1,000,000,000 watts) MW = Megawatt (=1,000,000 watts) kV = Kilovolt (1,000 volts) ABBREVIATIONS AND ACRONYMS BOO - Build, Own and Operate MOWR - Ministrv of Water Resources BOT - Build, Owin and Transfer NEPA - National Environmental EIRR - Economic Internal Rate of Return Protection Agency ESMAP - Energy Sector Management NFFO - Nonfossil Fuel Obligation Assistance Programme NPV - Net Present Value FIRR - Financial Internal Rate of Return PV - Photovoltaics FIRREQ - Financial Internal Rate of Return SEGS - Solar Electric Generating Stations on Equity SETC - State Economic and Trade GEF - Global Environment Facilitv Commission GOC - Government of Chinla SHS - Solar Home Systems IPP - Independent Power Producer SHP - Small Hydropower IREDP - Integrated Rural Energy SPC - State Planning Commission Development Program SSTC - State Science and Technology ISCCS - Integrated Solar Combined Cycle Commission Systcms UNDP - Unitcd Nations Development LEC - Levelized Energy; Cost Programme LOLP - Loss of Load Probability VAT - Value Addcd Tax MOA - Ministry of Agriculture VAAT - Value Added Addition Tax MOEP - Ministry of Electric Power Wp - Watt-peak MOF - Ministry of Finance  CONTENTS Preface .............................................................. Executive Summary ............................................................ vii 1. INTRODUCTION ............................................................I1 2. RENEWABLE ENERGY DEVELOPMENT STRATEGY OF THE GOVERNMENT OF CHINA ...................... .......................................2 A. Environmental and Social Impetus for Development of Renewable Energy for Power . ............................................................2 B. Resource Base and Status of Power-Related Renewable Energy Development In China ............................................................. 3 C. GOC's New and Renewable Energy Development Program, 1996-2010 ..........4 D. Analysis of GOC's Renewable Energy Development Program-Lessons from Other Countries .............................................................6 3. TECHNOLOGY ASSESSMENTS .............................................................9 A. Selection of Technologies .............................................................9 B. Evaluation Framework and Methodology ...................................................... 10 C. Grid-Connected Windfarms ............................ ................................ 1 D. Solar Home Systems ............................................................ 18 E. Bagasse Cogeneration ............................................................ 26 F. Biogas Power ............................................................ 29 G. Geothermal Power .32 H. Other Technologies ......................................................... 35 1. Environmental Benefits from Power-Related Energy Technologies ......... ........ 39 4. INSTITUTIONAL AND POLICY ANALYSIS ..................................................... 43 A. Experience in Other Countries .......................................................... 43 B. Existing Institutional Framework for Renewable Energy for Power in China .......................................................... 48 C. Existing Policies For Renewable Energy Development in China .......... ........... 50 5. PRIORITIES FOR RENEWABLE ENERGY DEVELOPMENT FOR POWER IN CHINA ......................................................... 54 A. Overview .......................................................... 54 B. Policy Priorities .......................................................... 54 C. Technology Development Priorities .......................................................... 55  - ii - ANNEXES Annex 1: Executive Summary of the Avoided Cost Study .......................................... 63 Annex 2: Analysis of Environmental Benefits from Power-Related Renewable Energy Technologies ................................................ 67 Annex 3: Organization Charts For The Solar Home System Program ......................... 77 Annex 4: Economic And Financial Cashflows For Case Study Analysis ...................... 80 TABLES IN TEXT Table 2.1: Geographical Areas with Highest Resource Potential ................................... 4 Table 2.2: Current and Future Installed Capacity of Renewable Energy for Power, from MOEP Plans (MW) ................................................ 6 Table 3.1: Characteristics of Main Known Windfarm Sites ......................................... 12 Table 3.2: Characteristics of Windfarm Sites ................................................ 14 Table 3.3: Economic and Financial Viability of Windfarms ......................................... 15 Table 3.4: Plan for Household Electrification in Qinghai Province (Households Electrified) ................................................ 20 Table 3.5: Main Characteristics of SHS and Service Provided .................................... 21 Table 3.6: Economic and Financial Life-Cycle Benefit/Cost of 20 Wp SHS on Qinghai (NPV at 12%) ................................................ 21 Table 3.7: Preliminary Estimate of Potential Households to be Served by an Expanded SHS Program ................................................ 24 Table 3.8: Preliminary Estimate: Five-Year Project Investment Costs ........................ 25 Table 3.9: Technical Parameters for Bagasse Cogeneration Case Study ...................... 27 Table 3.10: Assumptions for Economic/Financial Analysis .27 Table 3.11: Assumptions for Biogas Case Study Analysis .31 Table 3.12: Estimated Annual Biomass Production in China .36 Table 5.1: Priorities for Investment and Technical Assistance .56 Table 5.2: Summary of Evaluation Results ..................... 57  - 111 - PREFACE This report is the main output of a study executed organized jointly by the World Bank and the Government of China (GOC), and carried out by a group of Chinese and international experts (see the following page). The study identifies priorities and strategies for power-related renewable energy development in China. It complements a parallel study on thermal applications of renewable energy completed by GOC, with assistance from the Global Environment Facility (GEF). Together, the two studies provide a comprehensive assessment of renewable energy development priorities in China. The principal GOC agency coordinating both studies was the State Economic and Trade Commission (SETC). The studies were completed between July 1995 and June 1996. On the Chinese side, a study coordinating committee composed of officials from various agencies was chaired by Zhao Jiarong, Deputy Director, Resources Conservation and Comprehensive Utilization Department, SETC. In addition, three working groups were formed by SETC: a technical group, an economic and financial group, and a policy and institutions group. The working groups also had memberships from various agencies and were coordinated by Zhu Junsheng, Division Chief for Renewable Energy, SETC; Liu Hongpeng, Deputy Division Chief, SETC; and Li Junfeng, Assistant Director, Energy Research Institute, State Planning Commission (SPC). On the World Bank side, Anil Cabraal of the Asia Altemative Energy Unit (ASTAE) and Emesto Terrado of the Power, Development and Household Fuels Division of the Industry and Energy Department (IENPD) were the co-task managers of the study. Robert Taylor, of the Infrastructure Operations Division of the China and Mongolia Department (EA2IN), provided coordination. The principal author of the report was Susan Bogach (ASTAE). Three international consultants were commissioned by the Bank for specific substudies: Robert Vernstrom, utility economist (avoided cost analysis); Rick Allis, geothermal expert, and Robert Chronowski, bagasse expert. Under a special cooperative arrangement with the Bank, the US National Renewable Energy Laboratory (NREL) provided the services of three experts to assist in the main mission of the study: Brian Parsons, Project Manager, Wind Applications; Ralph Overend, Principal Scientist, Industrial Technologies Division (Biomass); and Dave Renne, Program Manager, Resource Assessment. The study was made possible by substantial grant funding from the Netherlands Directorate General for International Cooperation (DGIS). The study also benefited from support provided by the Swedish International Development Agency (SIDA), the UNDP Energy and Atmospheric Programme, and the United States Department of Energy (USDOE).  - Iv - Joint GOC-World Bank Team GOC Study Coordinating Group Chairmnan: Zhao Jiarong, Deputy Director, Resource Conservation and Comprehensive Utilization Department, State Economic and Trade Commission (SETC) Vice Chairman: Zhou Fengqi, Director, Energy Research Institute, State Planning Commission (ERJ) Zhu Junsheng, Division Chief, Renewable Energy Division, Resource Conservation and Comprehensive Utilization Dept., SETC Wu Changlun, Division Chief, Energy Conservation and New Energy Division, State Planning Commission (SPC) Li Baoshan, Deputy Division Chief, Energy Division, Industry Department, State Science and Technology Commission (SSTC) Yang Jinlin, Deputy Division Chief, World Bank Department, Ministry of Finance (MOF) Zhang Yuan, Deputy Division Chief, New Energy Division, Ministry of Electric Power (MOEP) Bai Jingrning, Deputy Division Chief, Energy Division, Ministry ofAgriculture (MOA) Xing Yuanyue, Deputy Division Chief, Ministry of Water Resources (MOWR) Luo Gaolai, Division Chief, Foreign Economic Cooperation Office, National Environmental Protection Agency (NEPA) Liu Hongpeng, Deputy Division Chief, Renewable Energy Division, SETC Li Junfeng, Assistant Director, ERI GOC Technical Experts Group Task Manager & Coordinator: Li Junfeng, Assistant Director, ERI Zhang Zhengmin, Energy System Analyst Shi Pengfei, Wind Power Expert Li Defu, Micro-wind Power Expert Wang Sicheng, Solar PVExpert Lu Weide, Solar Thermal Expert Li Xingyu, Bagasse Cogeneration Expert Huang Zhijie, Biogas Power Expert Ren Xiang, Liu Shibin, Zhang Zhenguo, Geothermal Expert Gao Xiansheng, Guo Huairang, Biomass Expert Kong Li, Renewable Energy Hybrid System Expert GOC Economic Analysis Group Xu Litong, Coordinator, Energy Economist, ERI Wang Leiping, Power Economist, Avoided Cost Analyst Liu Hongpeng, Energy Economist Zhou Jin, Environmental Economist Zhu Li, Economist Su Zhengming, Supporter  -v - GOC Policy Analysis Group Li Jingjing, Energy System Analyst, Coordinator Gu Shuhua, Energy System Analyst In addition, all the coordinating group members are also members of the Policy Group. World Bank Team Anil Cabraal, Renewable Energy Specialist, ASTAE (co-task manager) Emesto Terrado, Principal Energy Planner, IENPD (co-task manager) Robert Taylor, Senior Energy Economist, EA2IN Susan Bogach, Energy Economist, ASTAE Ernest Scott Piscitello, Renewable Energy Specialist, ASTAE Achilles Adamantiades, Principal Power Engineer, IENPD Rangaswamy Vedavalli, Principal Energy Economist, ASTAE Ron White, Energy Planner, IENPD  I  - vii - EXECUTIVE SUMMARY Introduction 1. In working toward sustainable economic development, the Government of China (GOC) faces major challenges. These include reducing reliance on coal with its associated adverse environmental impacts, and providing energy to the 80 to 100 million poor people living mainly in remote areas of the north and west. 2. Consequently, GOC is giving increased attention to renewable energy as a means of providing least-cost electricity to these remote areas, and, in the longer term, as a means of diversifying energy sources and curbing growth in pollution from coal plants. In 1995, the State Planning Commission (SPC), the State Science and Technology Commission (SSTC) and the State Economic and Trade Commission (SETC) jointly formulated a "Program of New and Renewable Energy Development, 1996-2010," and an implementation plan for the Ninth Five-Year Plan. The Electricity Law, passed in December 1995, also supports the development of renewable energy. 3. The present study was organized jointly by GOC and the World Bank and carried out by a team of Chinese and international experts. It identifies priorities for power- related renewable energy development in China. The study includes assessments of the economic andfinancial viability of renewable energy for power technologies, a review of institutional and policy issues affecting their development and an outline of priorities for investment and technical assistance support. The study covers both grid-connected and off-grid applications of renewable energy for power. GOC, with assistance from the Global Environment Facility (GEF), completed a complementary study of direct thermal applications of renewable energy. Together, the two studies provide a comprehensive assessment of renewable energy development priorities in China. Status of Power-Related Renewable Energy Development in China 4. China has a rich renewable energy resource base. Wind resources at windfarm sites are "world class," superior to commercial windfarm sites in the United States and India. National wind resource potential exceeds 250 gigawatts (GW). Solar radiation is excellent, particularly in the northwestern parts of the country. Hydro, geothermal and biomass resources are abundant in some provinces. However, only small hydropower is fully commercial in China, with an installed capacity of 15 GW in 1993, 8 percent of the  - viii - total national generating capacity.' Small wind generators are commercial on a lesser scale, with over 140,000 in use, and a total capacity of 17 MW. 5. With the above exceptions, development of renewable energy for power has been on a research and pilot demonstration scale. At the end of 1994, China had 14 grid- connected windfarm sites with a total installed capacity of 30 MW. While there is a limited domestic manufacturing base for small wind turbines, there is no local production capacity for turbines of 200 kilowatts (kW) and larger. Photovoltaic (PV) module manufacturing capacity in China is 5 MW, although much of this capacity does not meet modern international standards and actual production in 1994 was only 1.4 MW. There were about 3 MW of solar photovoltaic systems in use in China at end 1994, of which about a third was in dispersed household systems. Similarly, there are only 30 MW of installed geothermal generating capacity and about 87 MW of biomass-fueled systems in the country. 6. These demonstration activities have established the technical performance of renewable energy systems in providing power. However, development of markets for power from renewable energy, and demonstration of cost-effective applications are only beginning in China. Commercialization of Renewable Energy Systems in China 7. To realize its long-term social and development goals, GOC is recognizing the need to develop nonpolluting renewable energy sources on a major scale, over the long term, to help curb environmental damage. Concern is growing, within and outside China, about the environmental impact of massive and rapidly growing coal burning, and its consequences in terms of air pollution, acid rain and greenhouse gas emissions. Chronic pulmonary disease, linked to particulate pollution, is the number one cause of all adult deaths in China, at 26 percent of the total. 8. GOC's New and Renewable Energy Development Program aims to raise the efficiency of renewable energy, lower production costs, and enlarge its contribution to the energy system. From now to the year 2000, the plan calls for the creation of a modern industrial base and market infrastructure for production of mature technologies, such as wind generators and solar home systems. From 2001 to 2010, new technologies will be "popularized" and technology development in China will reach the level of industrialized nations. 9. However, according to Ministry of Electric Power (MOEP) targets, renewable energy (excluding small hydropower) will still account for only I percent of total power capacity by 2010. More ambitious development goals are needed, given the planned rapid While small hydropower development is of great importance in China, it is not studied in depth in this report as it has been the subject of other World Bank, ESMAP and GOC studies. Also, large hydropower is considered a conventional technology that is outside the frame of new and renewable energy, as defined in the study.  - ix - development of coal-fired power plants. Without a strong push for renewable energy, coal use for power is predicted to increase by 3.5 times by 2010 and 5 times by 2020. Even with the use of pollution controls and "cleaner" coal burning technologies, the environmental damage from air pollution, acid rain and global warming would be serious. A stronger GOC program to develop a commercial renewable energy industry is urgently needed now, to help reduce the role of coal in China's energy balance in the long term. 10. China's efforts to develop renewable energy for power also need to be seen in an intemational context. One example is India, which also faces rapid growth in coal-fired power capacity, but has an ambitious plan to use renewable energy for power. In 1992, the Government of India shifted from a supply-based to a market-based approach to renewable energy development, using innovative financing models based on cost recovery and the private sector. As a result of the new approach, by late 1995 India had installed 560 MW of windfarms, 2 MW of PV, and 26 MW of biomass power, including 16 MW of cogeneration. India is on its way to installing 2,000 MW of renewable energy for power facilities by 2000 and 16,000 to 27,000 MW by 2015, through private-sector investment. By 2015, renewable energy is expected to account for 8 to 12 percent of total power capacity. India's forecast share of renewable energy in total generating capacity is especially notable because it started from near zero in 1992. This effort to support large- scale market development for renewable energy has already resulted in reduced costs through domestic manufacture of advanced technology and economies of scale. 11. Experience in other countries, including the United States and the United Kingdom, indicates that GOC needs to take a larger-scale and more market-based approach to renewable energy development. This means indirect government encouragement of investment rather than direct investment by government. It requires removing institutional barriers to investment, such as high perceived risk, lack of familiarity with proper power purchase agreements, high transaction costs, and poor access to credit. It also requires careful structuring of any financial incentives to support specific market development and cost reduction goals through increasing market size, developing local manufacture of advanced technologies, and developing market infrastructure. The objective must be development of technology packages that are cost- competitive with conventional technologies and can be sustained through market activity. 12. International experience with commercializing renewable energy indicates that a four-part approach is required: (a) identify technologies that are most promising in the near to medium term; (b) develop the market-based policies and institutional arrangements required to attract large-scale investment in the long term; (c) develop properly targeted financial incentives to accelerate market development of key technologies in the short term and to obtain the environmental benefits of renewable energy over the long term; and (d) "kick-start" key technologies through targeted assistance for investment and technical support, including research and development and demonstration.  Approach to Technology Evaluation 13. The study identified the most promising technologies in relation to four criteria: economic and financial viability; potential to contribute to power supply; environmental impact; and institutional and policy requirements for large-scale commercialization. For grid-connected systems, the economic value of power was estimated by conducting avoided cost analysis for the three networks on which projects were sited. Financial analysis was based on the prices that utilities are willing to pay for power from the projects studied. For off-grid systems, the focus was on organizational issues, such as product quality, marketing and distribution facilities, and service and maintenance support. Financial issues, such as access to credit and willingness to pay of potential users, were also examined. 14. Potential was first estimated as technical resource potential. Then, if possible, economically exploitable resource potential was estimated. Local and global environmental benefits were estimated based on avoided emissions from thermal plants. 15. The renewable energy applications selected for detailed analysis were: (a) grid- connected windfarms; (b) solar home systems; (c) bagasse cogeneration for surplus power production, as part of mill expansion; (d) grid-connected biogas power in large agricultural operations; and (e) geothermal power, assessing its potential to meet power demand in western China. Since potential viability can only be judged based on actual conditions, each technology was examined through a case study at a specific location. In addition to the applications listed above, the potential for four other technologies was examined: PV and wind hybrid systems, large biomass power, solar thermal power and small hydropower. Because small hydropower is already commercial and has been reviewed in detail elsewhere, the study looked only briefly at possible improvements to programs. Conclusions of Technology Assessments 16. The study results indicate that windfarms, solar home systems and bagasse cogeneration projects have good potential to become commercially viable on a large scale. However, they need carefully targeted support from GOC in an initial phase of developing through commercial markets. Other technologies need further technical support before commercial development, but have substantial promise in the long term. 17. Windfarm projects have the largest potential to contribute to power supply and are fully economic at good sites, if local environmental benefits (health effects of offsets of emissions from thermal generation) are considered. GOC has given windfarm development high priority, setting a target of 1,000 MW installed by 2000. However, current financial returns are insufficient to attract large-scale utility or independent power producer (IPP) investment. To be sustained by investment in the long term, the following developments are required: (a) commissioning times would need to be reduced to about six months; (b) domestic manufacturing of advanced turbines must be established, which can reduce costs by some 20 percent; (c) standard power purchase contracts and  - xi - streamlined approval processes must be put in place; (d) wind resource data for prime sites need to be made available to developers; and (e) performance monitoring and analysis is needed to better understand the possible capacity benefits of windpower. 18. With a large-scale market development program, the recent experience in India indicates that these conditions can be expected to be met within five to ten years, after which further development will be fully financially viable through market channels. Given the quality and quantity of excellent windfarm sites that coincide with areas of load growth, GOC support to lay the foundation for a sustainable, commercially viable windpower industry should be given high priority. 19. Investment in commercial windfarm demonstration projects (100 to 200 MW), at high-potential sites such as Huitingxile, is a high priority, in order to (a) provide operating experience, reducing cost and performance uncertainties; (b) provide a market for gradual domestic manufacture of advanced turbines; and (c) establish an appropriate value for power from wind. As commercial windfarms take off, investment will be required in domestic manufacture of state-of-the-art, 500+ kW turbines. Technical assistance support required for windfarm development includes: (a) wind resource assessment at main potential sites; (b) monitoring of wind resources and performance at main existing sites; and (c) building the capacity of utility staff to support integration of windfarms with the grid, e.g., through analysis of loss-of-load probability (LOLP), estimation of capacity credits, and introduction of dispatch strategies. 20. Solar home systems (SHS) represent relatively small amounts of total power but address an essential need: the provision of electricity for basic needs of remote area households. A 12 MW SHS investment program could serve 500,000 homes in five northwestern provinces, equal to 25 percent of the unelectrified homes in these provinces. In the areas considered, SHS are least-cost electricity supply sources. They improve living conditions by providing new service levels well above those from kerosene/butter oil lamps and dry-cell batteries. A large-scale SHS program requires: (a) market development activities; and (b) improvement in module manufacturing and system assembly facilities, product certification and quality control, and sales and service support. Financial incentives and/or consumer credit are required to increase the market potential, in an initial phase. However, based on current international costs, PV system costs can be reduced by 10 percent within five years, reducing the need for financial incentives. 21. While the immediate environmental impact of displacing small quantities of fuels and batteries is not large, a SHS program on the scale described would triple the Chinese market for solar PV modules. The increased market would justify investment to improve existing manufacturing capacity and develop new capacity, which would reduce PV costs for the industry as a whole and increase the range of cost-competitive PV applications. 22. A GOC SHS development program would aim to rationalize the PV industry, increase market scale, lower costs and improve product quality, and develop commercial infrastructure. Investment priorities are (a) an SHS market development program, to provide electricity to 500,000 households in five northwestern provinces (12 MW);  - xii - (b) installation of centralized PV stations and PV/wind hybrid stations in remote county towns, where cost-effective; and (c) strategic expansion of silicon manufacturing, module and balance of systems manufacturing, and system assembly operations. 23. Technical assistance priorities are to: (a) develop a PV industry sector strategy to increase efficiency and lower costs; (b) establish product specifications and a national quality certification agency to test and qualify products; (c) provide product and business development assistance to PV system suppliers; (d) training and support for sales and service networks; and (e) market studies and consumer education programs. 24. Bagasse cogeneration systems to produce surplus power have more limited potential than some other renewable energy sources, but offer immediately attractive investment opportunities, on both an economic and financial basis, with an EIRR estimated at 33 percent and FIRR at 20 percent. While bagasse cogeneration for in-mill energy needs is currently practiced, generation of surplus power for sale to the grid is not. The potential for surplus power production, to 2000, is 350 to 450 MW in Guangxi alone, and 700 to 900 MW in the primary sugar-producing regions. As the sugar industry continues to grow, the potential will expand beyond 2000. To obtain this potential, the sugar industry needs access to long-term debt financing on commercial terms, and technical assistance to develop mill-specific design and operating plans. 25. The study indicates that investment in bagasse cogeneration for surplus power production is a high priority, including: (a) installing cost-effective generating capacity as part of a mill expansion program in Guangxi, to deliver surplus power to the grid, estimated at 350 to 450 MW; and (b) similar cogeneration investments in other provinces. Technical assistance priorities for GOC support include the following: (a) feasibility and detailed design studies for cogeneration in sugar mills; (b) immediate demonstration of a surplus power system in one plant; and (c) development of power purchase agreements and investigation of grid integration issues. 26. Other Technologies. Biogas power projects are generally economic but have low financial viability. In addition, the total economic potential nationwide was found to be small (100 MW) in comparison with the other grid-connected options. For geothermal power, work is still needed to define the resources available and to estimate the benefits and costs of a proposed 10 MW installation in Tengchong County, west Yunnan, as well as to gauge national potential. 27. Investments in other technologies are considered to be of lower priority, since their potential commercial markets are more limited. Other recommended investments are: (a) subject to feasibility work, geothermal power facilities in Tengchong County, Yunnan, and in other locations; (b) biogas power plants at large piggeries (>50,000) and other large livestock operations; and (c) small wind generators, and wind/PV hybrids, as part of off- grid electrification programs.  - xlii - 28. Study results indicate that GOC needs to initiate or continue technical assistance activities, including research, development and demonstration of the following technologies, in addition to windpower, solar PVs and bagasse cogeneration: . Small hydropower-improve designs, efficiency of equipment, economic evaluation of projects, pricing of power. * Biomass for power-assess the feasibility of biomass for power production from other captive wastes and from biomass plantations in areas such as Yunnan; and further review technical and economic issues, and environmental externalities associated with large-scale biogas generation. * Geothermal energy-investigate the potential of geothermal energy in Tengchong County, through geoscientific investigation, well drilling and prefeasibility work; and reassessment of resource data for the rest of the country. - Solar thermal power-study economic and financial feasibility of parabolic trough thermal/coal hybrid power plants in selected sites; and maintain a watching brief on parabolic dish/Stirling engine system commercialization. * Small wind and wind/PV hybrid systems-include small wind generators and wind/PV hybrids in off-grid electrification programs to serve unelectrified households. Institutional and Policy Issues 29. The key issue is how to move power-related renewable energy applications from a demonstration to commercial stage. This will require large-scale investment from a variety of sources, both foreign and domestic. Experience from other countries provides lessons in the types of policies, incentives and other support that have been used and their results, positive and negative. GOC urgently needs to study, review and act on the following issues, in collaboration with key provincial governments. 30. GOC needs to strongly support renewable energy development, by increasing awareness of the technologies among government and energy company officials, and by better integrating renewable energy development into the nation's overall energy development program. Cooperation among the three commissions charged with responsibility for renewable energy development needs to be strengthened, as well as the capacity of each commission to play its role, especially SETC in leading commercialization efforts. 31. GOC should create a policy/regulatory framework that facilitates investment in renewable energy for power, in the long term. The following barriers need to be addressed:  - xIv - * the lack of standard power purchase agreements and tariffs for small-scale power producers; * the lengthy and complex approval processes for even small- to medium-size power facilities; * limited access to credit through commercial banks, investment banks and the bond market, because of their undeveloped state in China, lack of experience with renewable energy and consequent perception of high technology risk; and * lack of standards, certification procedures or other quality assurance measures for renewable energy technologies. 32. GOC also should consider putting in place modest, time-bound financial incentives, where they are deemed necessary, as part of a deliberate market development and cost reduction program. While some renewable energy technologies are financially viable today, such as bagasse cogeneration for surplus power, others may require targeted financial incentives during the initial phase of market development, to remove barriers and to reduce high implementation costs due to low market volumes. Incentives in place in China have not been effective in generating the large scale of activity required to reduce costs. 33. Where an incentive is considered, GOC needs to: (a) set the level of the financial incentives based on the difference between the current cost of power and its expected long-run economic value; (b) set a time boundary on the incentive and monitor cost reductions over time; and (c) ensure that the incentive mechanism does not create distortions in the market. 34. Especially in the case of solar PV, where scale is a critical factor, an overall development plan for the sector is needed, to ensure economic efficiency in light of potential domestic and export markets. 35. GOC also needs to study the damage costs from conventional power generation, in order to assign a value to the environmental benefits from renewable energy and work toward incorporating these benefits in economic and financial assessment of alternatives. Conclusions and Recommendations 36. GOC needs to take a larger-scale and more market-based approach to renewable energy development in China, including: (a) identifying the most promising technologies; (b) setting an appropriate policy and institutional framework to encourage development through commercial markets in the long term; (c) reviewing and restructuring financial incentives as part of a program to stimulate market demand and investment, in the medium term; and (d) providing investment, technical and other assistance to accelerate market development of the most promising technologies in the short term.  - xv - 37. This joint study has begun the process of identifying promising technologies. GOC needs now to give urgent priority to setting the policy framework; putting in place appropriate financial incentives, where necessary; and preparing and implementing investment and technical assistance projects. Priorities that emerge from the study for investment and technical assistance are summarized in Table 1. 38. Expanded support from multilateral and bilateral agencies will be important to implement many of the priority investment and technical assistance activities outlined below. International assistance is especially important in the following areas: (a) assistance in reviewing options for promotion policies and financial incentives to encourage investment in renewable energy facilities; (b) demonstration and transfer of advanced technology to China, to lower costs and improve technology performance; (c) assistance in developing institutional arrangements, e.g., in developing power purchase agreements for windfarms and biomass plants, and developing standards and certification procedures for equipment; and (d) provision of additional long-term capital from international public and private sources. Resources from the Global Environment Facility (GEF) can be used to promote and accelerate priority policies, investment and technical assistance projects for renewable energy development in China.  TABLE 1: PRIORITIES FOR INVESTMENT AND TECHNICAL ASSISTANCE Areas for Development Investments Technical and Other Assistance Expected Results Policy n.a. * Strengthen three commissions and improve coordination Develop institutional and policy * Make Renewable Energy Development Program larger-scale, more market-based framework to encourage large-scale * Develop policies to encourage small power production from renewable energy public and private investment * Review and restructure financial incentives * Develop industrial strategy for key technologies * Analyze and value environmental benefits from renewable energy for power Windfarms * Commercial-scale windfanns at * Wind resource and performance monitoring of existing windfarm sites and grid Build portfolio of windfarm projects, Huitingxile or similar sites (-1,000 MW) interconnection reduce uncertainty, reduce costs, * Large, 500+kW wind turbine manufacture * Wind resource assessment at potential and new sites demonstrate commercial arrangements, * Capacity building of power utility staff reach financial viability. Solar Home Systems * 500,000 households off-grid electrification * PV industry sector development strategy Rationalize PV industry, increase market program * SHS product development, business development and planning scale, lower costs and improve quality, * Expand silicon manufacture * Product certification and quality control develop commercial infrastructure, * Expand module and balance-of-system * Training and support for sales and service network increase productivity of PV module components manufacture * Consumer education industry * Expand systems assembly operations Bagasse Cogeneration * 350 MW, 39 mill expansion project in * Conduct feasibility and detailed design studies for sugar mills in Southern Produce power on commercial basis and Guangxi (finding required urgently to provinces serve as model for standard procedures in coincide with increased sugar processing * Prepare guidelines and designs for advanced cogeneration investments involving future mills capacity investments) high temperature/pressure equipment * Cogeneration in other provinces * Develop a demonstration project * Develop PPA and investigate grid integration issues Small Hydro * Further investment, especially to improve * Automation, efficiency improvement, quality control, design improvement, Increased effectiveness of existing efficiency and regulated capacity economic evaluation program. Geothermal Power * Conduct feasibility study of 10 MW * Geoscientific investigations, exploratory well testing Rehai geothermal field and if Investment at Rehai and other sites facility in Tengchong County, Yunnan warranted, feasibility study for development of Rehai field depending on results of feasibility studies * Subject to feasibility, production well and * Reassessment of geothermal potential, including both resource data and economic and resource assessments power plants at other sites viability in westem Yunnan and Tibet Biogas for Power * Biogas and power generation plants at * Study of areas for technical improvements, environmental extemalities and any Reduce effluents from large agricultural large piggeries (>50,000 pigs) and other incentive measures justfied operations livestock operations * Exchange of information on improving process efficiency, engine performance, develop low-cost materials Solar thermal electric, wind * Include wind and PV hybrids in off-grid * Develop/introduce advanced design techniques Add to portfolio of off-grid and grid- and PV hybrids electrification program * Assist product development of hybrids connected technologies * Examine potential for advanced wind-PV, PV diesel and other hybrids * Evaluate feasibility of parabolic trough technologies in regions other than Tibet with higher demand and availability of back-up fuel * Assess feasibility of coal-solar thermal parabolic trough designs * Pilot projects involving solar thermal dish Stirling and other advanced power generation technologies  1. INTRODUCTION 1.1 The Government of China (GOC) is giving increasing attention to renewable energy development for power, to provide least-cost electricity to remote areas, and, in the longer term, to diversify energy sources and to curb growth in pollution from coal plants. In 1995, the State Planning Commission (SPC), the State Science and Technology Commission (SSTC), and the State Economic and Trade Commission (SETC) jointly formulated a Program of New and Renewable Energy Development, 1996-2010, and an implementation plan for the Ninth Five-Year Plan (1996-2000), based on the Program. The Electricity Law, passed in December 1995, also supports the development of renewable energy. The new Law advocates the use of rural hydropower resources, solar, wind, geothermal, biomass and other energy for rural electrification and power generation. 1.2 Given the commitment by the Chinese Government to the development of renewable energy, the World Bank and GOC have carried out this study, with the assistance of a team of Chinese and international experts. The objective is to identify priorities for power-related renewable energy development in China. GOC has completed a complementary study of direct thermal applications of renewable energy, using a similar methodology, with assistance from the Global Environment Facility (GEF). Together, the two studies provide a comprehensive assessment of renewable energy development priorities in China. 1.3 This study includes: (a) assessments of the technical, economic and financial viability of power-related renewable energy technologies, compared with conventional technologies; (b) a review of institutional and policy issues affecting development of these technologies; and (c) an outline of priorities for investment and technical assistance support. 1.4 The main body of the study is composed of the following Chapters. Chapter 2 discusses the status of renewable energy development in China, for power generation, and analyzes GOC's Renewable Energy Development Strategy in the light of international experience. Chapter 3 summarizes the technology assessments, with details given in Annexes 3 and 4. Chapter 4 outlines the main institutional and policy issues affecting development of renewable energy for power in China. Chapter 5 presents the study conclusions and recommendations.  2. RENEWABLE ENERGY DEVELOPMENT STRATEGY OF THE GOVERNMENT OF CHINA A. ENVIRONMENTAL AND SOCIAL IMPETUS FOR DEVELOPMENT OF RENEWABLE ENERGY FOR POWER 2.1 China is on a path of strong and steady economic growth, fueled by expansion of the domestic market and exports. Economic growth averaged 11 percent from 1978 to 1993, and is expected to continue to 2020 at an average of 8 to 9.5 percent annually. The future of the economy is promising, but in order to sustain the expected growth rates China faces a number of challenges. Two of the most important are: (a) reducing the adverse environmental impacts associated with rapid economic growth in a coal-based economy; and (b) improving social equity by increasing the services available to the 80 to 100 million people living in highlands, deserts, steeply sloping and reservoir areas, mainly in the northwest and north-central parts of China. 2.2 Environmental problems in China are serious and growing, especially those caused by burning coal for energy and power. Urban air pollution in most cities exceeds international standards by a factor of three to five times. Air pollution contributes to chronic respiratory disease, cancer and premature illness and death. Chronic pulmonary disease, linked to particulate pollution, accounts for 26 percent of all adult deaths in China. This is the largest single cause of adult deaths in China, at five times the US rates. ' Acid rain is increasingly serious, especially in southern China, damaging forests, crops and animal life in water bodies. 2.3 The power sector accounted for about 25 percent of coal use in 1990, expected to increase to 40 percent by 2020.2 Coal use for power is expected to increase from 251 to 1,300 million tons between 1990 and 2020. Concern is growing, within and outside China, about the environmental impact of such massive coal burning, and its consequences in terms of air pollution, acid rain and greenhouse gas emissions. To realize its long-term social and development goals, GOC urgently needs to develop nonpolluting renewable energy sources that can reduce the growth in coal use and help to curb environmental damage. 2.4 The other set of challenges faced by GOC is related to poverty and the need to balance the benefits from economic growth among the different parts of the country. I World Bank, 1992, China Environmental Strategy, p. x. 2 See NEPA/UNDP/World Bank, China: Issues and Options in Greenhouse Gas Emissions Control, 1994, p. 22.  - 3 - GOC is committed to providing better social services in the poorer, more remote regions of the country. Off-grid renewable energy for power can improve the quality of life in these areas by offering a whole new level of services to households, above the kerosene/ butter lamps and dry-cell batteries now in use. Services include electric light, use of cassette players and television. 2.5 The Electricity Law of 1995 supports the use of renewable energy for rural electrification and power generation. This law adopts preferential policies for rural electrification and offers special support to areas inhabited by minority nationalities, frontier and remote areas, and poverty-stricken areas (see Articles 47 and 48). This is related to GOC's ambitious "8-7" plan, which aims to improve social equity by raising agricultural output and improving services to 80 to 100 million poor people living in remote areas. B. RESOURCE BASE AND STATUS OF POWER-RELATED RENEWABLE ENERGY DEVELOPMENT IN CHINA 2.6 Renewable energy for power generation has large potential in China. China has a rich resource base, found mainly in areas without conventional energy resources. However, with the notable exceptions of small hydropower and small wind generators, development to date has been on a government-sponsored research and demonstration scale. Small hydro is a fully-commercialized technology, with an installed capacity of 15 GW in 1993, about 8 percent of the total national installed generation capacity.3 Government promotion programs, led by the Ministry of Water Resources, continue the development of the remaining exploitable small hydro potential, estimated at 56 GW. The majority of the small hydropower (SHP) potential lies in the south/central provinces where forestry resources have traditionally been used for energy, and where difficult terrain isolates many communities. 2.7 The exploitable wind resources are very large, estimated at 250 GW, mainly distributed in two large wind belts: the Coastal wind belt; and the Northern wind belt from Xinjiang via Gansu to the plateau of Inner Mongolia. At end-1994, China had 14 grid-connected windfarm sites with a total installed capacity of 30 MW, and over 140,000 small wind turbines (50 to 5,000 W) with a combined off-grid capacity of 17 MW. There is a domestic manufacturing base for small-scale wind turbines, although there is no capacity for large turbines of 200 kW and greater. Solar resources are distributed widely, but the plateau a eas of northern and western China have excellent solar insolation. There were about 3 MW of solar photovoltaics (PV) installed in China at end-1994, of which about a third was in dispersed household systems. 2.8 While there are only 30 MW of installed geothermal generating capacity in China, estimates of theoretical resource potential exceed 6.7 GW. However, many of the resources are not located near existing grids and cannot be economically exploited. The 3 Small hydropower is defined as <25 MW in China.  - 4 - greatest potential for geothermal power facilities lies in the high-temperature resource zones in Tibet, Yunnan, and Sichuan Provinces, although low-medium temperature resources for power generation using binary-cycle technologies exist throughout China. TABLE 2.1: GEOGRAPHICAL AREAS WITH HIGHEST RESOURCE POTENTIAL Resource Criteria for Selection of Areas with Significant Potential Areas Small Hydro Provinces with Remaining Tibet, Yunnan, Sichuan, Xinjiang, Hunan, Hubei, Potential Greater than Guangdong, Fujian, Zhejiang, Guizhou, Jiangxi, Qinghai, 1,000 MW Shanxi Wind Wave>200W/m2, V>3mi/s Southeastern coast and 6300 islands, northern Inner for > 5,000 hrs Mongolia and Gansu, eastern Heilongjiang and Jilin, Xinjiang Solar C'lass I and II Ningxia, Mid-North Gansu, South Xinjiang, Qinghai, >3,000 hrs/yr Southeast and West Tibet, North Hebei, North Shanxi, >5,000 MJ/m2/yr Inner Mongolia Geothermal High Temperature Southern Tibet, Western Yunnan and Sichuan, Taiwan, >1500C Fujian, Guangdong Biomass Bagasse, Forest Residues Yunnan, Guangdong, Guangxi 2.9 China has limited experience with biomass power systems (total generating capacity of 87 MW at end-1994). Although biomass is heavily utilized in China in small- scale traditional applications and in biogas plants, opportunities for large-scale power generation have yet to be captured. The sugar industry in south-coastal regions could have significant potential for surplus power generation. 2.10 In summary, development of China's rich resource base of renewable energy for power has been minimal, and mainly on a research and demonstration level. Only small hydro, and, to a lesser extent, small wind generators have been developed commercially. Compared to most countries, however, Chiina's achievements in overall renewable energy development have been notable. Aside from small hydro, it is widely recognized as a world leader in its programs on nonpower technologies, including efficient fuelwood stoves, solar water heaters, and biogas digesters. In the development of large-scale power generation from sources other than small hydro, the country lags behind India. In September 1995, India had a total of 560 MW of grid-connected windpower, 2 MW of installed solar PV, and 26 MW of biomass for power, including 16 MW of bagasse cogeneration. C. GOC's NEW AND RENEWABLE ENERGY DEVELOPMENT PROGRAM, 1996-2010 2.11 However, this situation is beginning to change as GOC aims to move renewable energy development forward from demonstration to commercialization. The "White Paper on China's Population, Environment, and Development in the Twenty-First Century" represents a strategic plan for sustainable development, including renewable energy. This plan was approved by the State Council on March 25, 1994 and serves as a guide for medium- and long-term economic and social development of renewable energy  - 5 - technologies, leading to the preparation of the New and Renewable Energy Development Program. Three major commissions, SPC, SETC and SSTC, prepared the joint New and Renewable Energy Development Program, 1996-2010. While the program builds upon previous efforts,4 it marks a new level of commitment by GOC. 2.12 Its objectives are to raise the conversion efficiency of renewable energy, lower the production costs, and enlarge the contribution of renewables to the energy system. This will be accomplished in two stages. In the first stage, from now to the year 2000, the emphasis will be on creating the modern industrial base and market infrastructure for production of mature technologies such as wind generators and solar PV systems for homes and communities. At the same time, research and demonstration projects will be done to bring other technologies to maturity. In the second stage, from 2001 to 2010, new technologies will be "popularized" and technology development in China will reach the level of industrialized nations. The main tasks set for each technology are the following: * for small hydro, to continue development so that installed capacity increases as shown in Table 2.2, to 20 and 28 GW by 2000 and 2010. * for wind, the emphasis is on: (a) marketing of small-scale wind generators; (b) improving the performance of wind turbines; (c) developing local production capacity for wind turbines with capacity above 200 kW; (d) developing wind power control and management systems; (e) strengthening the capacity for wind measurement, planning, site selection, and design; and (f: construction of 1,000 MW of large-scale windfarms by 2000 and 3,000 MW by 2010. * for solar PV power, efficiency will be improved and system costs reduced through development of low-cost solar cells and associated equipment. The construction of PV power stations in nine Tibetan counties without power should be completed by 2000. Small PV systems should be promoted vigorously supplying the needs of the 28 counties, 10,000 townships and 1,000 islands without access to electricity. Distributed and centralized MW-scale PV power stations connected to grids should be demonstrated. * for geothermal energy, the aim is to actively exploit the resources in regions with high temperature resources, while solving problems of geothermal corrosion and water recharge. The use of heat pumps will be encouraged. 4 Including renewable energy programs in the National Science and Technology Development Program in the Sixth Five-Year Plan (1981-85), the Seventh Five-Year Plan, and Eighth Five-Year Plan.  - 6 - * for biomass, plans call for capacity of power stations using rice husks, wood scraps, and bagasse to be 50 MW or more by the year 2000, and 300 MW by 2010. Biogas for power plants is not included in this estimate. 2.13 Plans for power-related renewable energy projects are part of GOC's aim of providing power service to all counties and increasing the coverage of electricity supply to 95 percent of the population.5 The focus in the short term is on service to remote areas and islands, and development of nearly commercial applications like grid-connected windpower. Plans of the Ministry of Electric Power (MOEP) and the Ministry of Water Resources (MOWR) give concrete targets to the more general development framework described above (see Table 2.2). TABLE 2.2: CURRENT AND FUTURE INSTALLED CAPACITY OF RENEWABLE ENERGY FOR POWER, FROM MOEP PLANS (MW) Actual Planned Technology 1993 2000 2010 2020 Small Hydro 15,055 19,850 27,880 39,158/a Wind 30 1,000 3,17() 8,500 Solar PV 3 35 200 (PV and thermal) 500 (PV and thermal) Geothermal 30 106 200 330 Solar Thermal - 35 included in PV included in PV Biomass 87 n.a. n.a. n.a. Ocean 0 0 200 400 Total Renewables 15,211 20,726 31,650 48,888 /a Estimated. Source: Renewable Energy Development Program and MOEP Plans. 2.14 Renewable energy development is being given priority in several provinces. In Qinghai, Tibet and Inner Mongolia, rural electrification plans of the Provincial Power Bureaus/Corporations include support and targets for rural electrification using SHS, windpower, centralized PV and diesel/wind and/or PV hybrids. Inner Mongolia and Xinjiang have established targets of 200 to 400 MW and 100 MW of grid-connected windfarms by 2000, respectively. D. ANALYSIS OF GOC's RENEWABLE ENERGY DEVELOPMENT PROGRAM-LESSONS FROM OTHER COUNTRIES 2.15 The MOEP plans, as laid out in Table 2.2 will achieve only a modest increase in the role of renewable energy in power generation, in relation to the rapid planned expansion in coal-fired generation capacity, which is expected to increase 3.5 times by 5 See Zheng Qiren, MOEP, "To Develop Renewable Energy Actively and To Speed up Utilization of New Energy Resources for Electricity Generation Technology," in Solar Energy in China, Proceedings of the High Level Expert Meeting for China, Beijing, China, 1995.  - 7 - 2010 and 5 times by 2020. The share of renewable energy, other than small hydro, would increase from insignificance in 1994 to 1.3 percent in 2020. While the growth in renewable energy generation capacity is significant, the starting base is so low that it will not contribute substantially to the power balance of China during the planned period without even more aggressive expansion. China's small hydropower program is not expected to keep pace with growth in coal-fired power generation, with its share expected to decrease from 7.5 percent in 1994 to 5 percent in 2020. Faced with serious environmental problems from its massive and growing burning of coal, GOC needs to adopt a bolder approach to development of renewable energy power than is suggested by current plans, in order to make an impact in the long term. TABLE 2.3: ESTIMATED SHARE OF RENEWABLE ENERGY IN POWER GENERATING CAPACITY IN CHINA, 1994-2020 1994 2000 2010 2020 Thermal Capacitv (GW) - 188 384 595 Hydro and Other (GW) - 86 127 169 Total (GW) 199 274 511 764 Small Hydro (GW) 15 19.9 27.9 39.2 Share Small Hydro (%) 7.5 7.3 5.5 5.1 Other Renewable Energy (GW) 0.1 0.9 4.1 9.8 Share of Other Renewable Energy (%) 0.0 0.3 0.8 1.3 Source: China: Issues and Options in Greenhouse Gas Einissions Control, and Table 2.2 2.16 The GOC approach described above, of developing manufacturing and marketing infrastructure in the first phase and "popularizing technologies" with state investment in a second phase, is rooted in central planning. This approach was used for small hydro, where MOWR supported small hydro development through a combination of developing technology packages, staffing local offices to provide support for small hydro promotion and design, and providing investment funds to participating communities. Governments no longer have the resources to support development in this way. 2.17 GOC needs to provide strong government support for renewable energy development through the market by: first, encouraging the development of markets for renewable energy technologies, and then encouraging local production capacity and infrastructure to develop, following actual market demand, as appropriate. This is the approach being used successfully by India and a number of other countries. Financial incentives and government-assisted investment programs have been used to "kick-start" markets for renewable energy power in most of the leading countries, including the United States, the United Kingdom, Germany and the Netherlands. 2.18 The issue for GOC is how to mobilize resources to develop the most commercially viable technologies, rapidly and on a large scale. Experience in other countries suggests that GOC assist the development of commercial markets for renewable energy by:  - 8 - (a) identifying technologies that are the most promising in the near to medium term; (b) developing policy and institutional arrangements to encourage long-term investment in renewable energy for power facilities and manufacturing capacity; (c) developing financial incentives to accelerate market development for key technologies and encourage investment in the medium term; and (d) "kick starting" development of key technologies through investment and technical assistance in the short term. The elements of this strategy are analyzed in the following chapters, beginning with the assessment of technologies.  -9 - 3. TECHNOLOGY ASSESSMENTS A. SELECTION OF TECHNOLOGIES 3.1 Detailed assessments were carried out by the study team, to determine the economic viability of power-related renewable energy technologies in China; their potential contribution to power requirements; and actions required to accelerate their development. Technologies were selected for analysis based on the following criteria: (a) potential for large-scale application in regions of China with growing power demand; (b) short- to medium-term technical and economic viability, as demonstrated in China or elsewhere; and (c) the interest of GOC, as expressed in the Renewable Energy Development Program, or in provincial plans for power facilities. 3.2 Since viability can only be judged based on actual conditions, sites were selected for analysis based on: the resources available, local demand for power, and potential for replication to other sites. After site-specific analysis was completed, the potential application of the technology on a broader scale was assessed. The technologies and sites selected for detailed analysis were: (a) Grid-connected windfarms focusing on a 100 MW installation at Huitingxile in Inner Mongolia and an 11.2 MW installation on Nan'ao Island. The former evaluates large windfarms feeding extensive power networks, while the latter assesses smaller windfarms feeding island grids with multimegawatt capacity. (b) Solar home systems, examining a 50,000-home project in unelectrified counties in Qinghai province. Qinghai serves as a model for other northwestern provinces with large unelectrified populations. (c) Bagasse cogeneration, looking at a mill expansion case (3,000 to 5,000 tons of cane per day) in Guangxi province, where the milling season coincides with hydropower supply shortage in the dry season. (d) Grid-connected biogas power, examining a 15,000 pig breeder farm project outside Beijing, where there is a need to treat the plant waste and gas production far exceeds cooking and other thermal needs of the farm and facility. (e) Geothermal power, focused on the potential for meeting power demand in western Yunnan and the Tibet region. A number of counties with geothermal resources have supply shortages on isolated grids during the dry season.  - 10 - 3.3 In addition to the detailed assessments, analysis was done to answer questions about other renewable applications. To assess the potential for large biomass power facilities, the study assessed the scale, location and utilization of biomass resources, to determine if large biomass-fueled plants similar to the one being developed in Brazil may be attractive in China. For small hydro, the objective was to determine what improvements are needed in existing programs. With regard to solar thermal power, the potential for parabolic trough and other technologies was discussed. Finally, the potential for household PV/wind hybrid systems and community PV/diesel hybrids was examined, because of the cost advantages of complementarity in areas such as Inner Mongolia and Tibet. B. EVALUATION FRAMEWORK AND METHODOLOGY 3.4 The following framework was used to analyze and evaluate each of the main technologies: (a) site-specific economic and financial viability of a proposed project; (b) potential of the technology in China; (c) technical and policy requirements for development; and (d) environmental impact. Conventional economic and financial benefit/cost analysis was done using standard World Bank project appraisal techniques, excluding environmental externalities. The criterion used to judge economic and financial viability was a cutoff of 12 percent for economic internal rate of return (EIRR) and a judgment of about 15 to 20 percent for the financial internal rate of return (FIRR), equivalent to returns on other investments in China, both in real terms.6 The potential for the technology was estimated, first, based on the national theoretical resource potential. If possible, an estimate was made of the exploitable potential, considering the extent to which the resources are located near growing power demand and can be economically exploited. Technical and policy requirements for large-scale commercial exploitation include such issues as the need for resource assessment, power purchase agreements, credit for consumer purchase of off-grid systems, etc. After the technology assessments, this chapter contains a section analyzing the environmental benefits of the main technologies. The results of the evaluations are summarized in Chapter 5. 3.5 Grid-Connected Renewable Energy for Power Technologies. Econornic and financial capital and operating costs were estimated. The economic analysis included estimation of avoided cost for power generation from conventional alternatives, to establish the value of power from renewables.7 Avoided costs were estimated for the three grids on which facilities were sited-the JJT Main Power Grid (Beijing-Tianjin- Tangshan, see Annex 1), the Guangdong Grid and the Guangxi Grid. The avoided cost estimate includes avoided capacity, energy and network costs, by peak/nonpeak period 6 The EIRR is calculated from the national viewpoint, excluding financing charges, duties and taxes. The FIRR is calculated in constant yuan, assuming 100 percent equity financing and before income tax. It includes customs duties, the VAT, and the VAAT, although not local taxes because of incomplete data. 7 In fast-growing systems such as these, avoided cost means the cost associated with the deferred future increment of energy or capacity rather than the avoided use of existing capacity.  and by wet/dry season. Long-term load forecasts and investment plans were used in estimating avoided cost. Power production from the renewable energy facility was estimated for the corresponding periods and a weighted-average avoided cost derived for power from the facility. 3.6 The financial analysis includes customs, duties, value-added tax (VAT) and additional value-added tax (VAAT). Customs duties on renewable equipment were estimated at 12 percent long-term in the analysis, based on information from the SETC expert team. The VAT is 17 percent, while the VAAT is calculated as 8 percent of the VAT. Because renewable energy facilities are capital-intensive, these taxes add a heavy burden to their costs in initial years that cannot be carried forward and offset against profits. The power purchase price used in the financial analysis is the price that utilities are willing to pay for power from the specific project. The FIRR was first calculated from a national perspective, in real yuan before financing and income taxes. A second financial rate of return on equity (FIRREQ) was calculated, after income tax, in current yuan, based on assumptions about financing. The FIRREQ is calculated after income tax, in current yuan, assuming that 70 percent of the investment was financed with a 10-year loan at 15 percent interest. While financing arrangements may differ, the FIRREQ is an indicator of the attractiveness of equity investment. It overstates real returns, as it does not include local taxes and charges. 3.7 Off-Grid Technologies. For off-grid technologies, the assessment followed a similar approach, but examined organizational and financial issues in greater detail. Off- grid, household-scale technologies are large-cost consumer items. Prerequisites for success of such technologies are adequate manufacturing and assembly infrastructure, good-quality products, marketing and distribution facilities, and service and maintenance support. Willingness and ability to pay of potential users are also important issues. Access to credit is important for affordability of larger systems. C. GRID-CONNECTED WINDFARMS Background 3.8 Windfarms are given high priority by GOC for immediate development. China has world-class wind resources, with a total technical potential estimated at 250 GW.8 With bilateral assistance, 163 imported wind turbines (total capacity of 30.1 MW) were installed at 14 sites by the end of 1994. Installation of 550 to 600 kW machines is underway at a few sites, giving Chinese experts technical and operational experience with advanced, imported units. In addition, Chinese wind experts have conducted wind resource measurement programs at main sites. This compares to an estimated exploitable potential of 56 GW for small hydro. Exploitable potential of wind has not yet been estimated, but is probably similar to small hydro.  - 12 - 3.9 GOC has a stated goal of installing 1,000 MW of grid-connected windfarms by 2000, an ambitious goal given that total installed capacity worldwide was only 5,000 MW at the end of 1995. Inner Mongolia, Xinjiang and Guangdong also support grid-connected windfarm development. Development Potential 3.10 While definition of the prime sites for windfarms is at an early stage, MOEP has investigated the main known sites and estimated the near-term potential at 1,000 MW (see Table 3.1). The longer-term potential is many times this, for these sites alone. All of the sites have attractive wind speeds, and are located on grids with growing demand for power. The most attractive site, in terms of wind speed, site potential and location, is Huitingxile, Inner Mongolia. Inner Mongolian sites have the largest potential in the medium term, because they are interconnected with the large JJT Main Power Grid. The provincial government is supportive of windfarm development. If 1,000 MW of windpower were developed by 2010, this would amount to about 2 percent of the total capacity on the JJT portion of the North China grid. TABLE 3.1: CHARACTERISTICS OF MAIN KNOWN WINDFARM SITES Average Estimated Maximum Year 2000 Yr 2000 Annual Capacity Available Potential of MOEP Grid Potential Windfarm Site, Wind Speed Factor Land Area Windfarms Windfarm Capacity Province at 10 m (m/s) (Percent) (km2) (MW) Plan (MW) (MW) Huitingxile, Inner Mongolia 7.2 39 100 1,000 360 21,000 Zhurihe, Inner Mongolia 6.4 27 n.a. - 52 21,000 Boyonghu, Jiangxi 7.6 46 45 450 47 6,800 Nan'ao, Guangdong 8.5 34 20 200 100 23,000 Huilai, Guangdong n.a. - n.a. - 30 23,000 Dabacheng, Xinjiang 6.2 25 100 1,000 100 5,000 Zhangbei, Hebei 6.8 33 20 200 52 1,300 Hedingshan, Zhejiang n.a. - 7.5 750 20 Kuocangshan, Zhejiang n.a. - n.a. - 40 Donggang, Liaoning 6.7 31 12 120 34 Tongyu, Jilin 6.0 23 n.a. - 56 Changdao, Shandong 6.0 23 n.a. - 12 Laizhou, Shandong 5.9 21 n.a. - 10 Dongchudao, Shandong 6.6 30 n.a. - 10 Dongfang, Hainan 6.4 27 n.a. - 50 3,500 Total -3,700 973 Notes: About 10 MW can be installed per square kilometer (km2) of land. Typically, wind generating capacity should be about 15 percent or less of grid capacity, depending on local grid conditions. Capacity factor is estimated using 40m hub heights, and shear index of 0.144, except at Nan'ao which has a shear index of 0. For purpose of comparison, the best wind farm site in India (Muppandal in Tamil Nadu) has an average annual wind speed of 6.08 m/s at I Om and 8.15 at 40m (Huitingxile wind speed at 40m is 8.8 m/s). Source: Data from the SETC Expert Team, January 1996. Further monitoring, data verification, and refmement of estimates is required. 3.11 Although the Dabacheng site in Xinjiang has good wind speeds and potential, Xinjiang's power network is made up of isolated grids. The capacity of the entire network  - 13 - will be about 5,000 MW by 2000. A 600 MW pumped hydro facility is planned on the largest single grid, around Urumqi. This could be an advantage, since it indicates that windpower could be "stored" and given a capacity credit. However, development of the site will be limited by penetration limits on small, local grids (see note in Table 3.1). Windpower development on islands where wind resources are good and alternatives expensive could be attractive. Coastal provinces tlke Guangdong and Zhejiang are also likely areas for windfarm development. Project Analysis 3.12 Because of the large potential of windfarms, two projects were assessed: a 100 MW windfarm at Huitingxile, Inner Mongolia, representing large windfarms feeding extensive grids; and, an 11.2 NW windfarm on Nan'ao Island, Guangdong, representing windfarms that contribute a significant portion of local requirements on smaller island grids. Project Descriptions 3.13 Huitingxile. This site has the potential for large-scale development in the medium term. It is on a transmission line of the JJT Main Power Grid, which stretches from Inner Mongolia to the cities of Beijing-Tianjin-Tangshan. In 1995, the JJT grid had a capacity of 14,736 MW.9 Annual load growth is projected at 9 percent to 2000. Since the Inner Mongolia grid is being developed to supply Beijing, large investments in coal-fired power plants, pumped storage and transmission are planned. 3.14 The windfarm site has an average wind speed of 8.8 meters per second (mis) at 40 meter height, superior to most sites being developed in the United States and Europe. A 110 kilovolt (kV) line passes through the windfarm site, which is locate i on a highway about 120 kilometers (km) from Hohut. Another 110 kV line is under construction. There is no land constraint at the site, which is on a plateau that could be developed for 1,000 MW. However, the impact of a large windfarm on the local grid stability needs to be investigated and taken into account in planning. 3.15 The analysis assumed development of 100 MW of capacity at the site using 550 kW imported turbines, with increments of 20 MW added over a two-year period. The capacity factor was estimated at 39 percent, with annual production of 270 gigawatt-hours (GWh) per year, of which over 70 percent coincided with the long daily peak period.'