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Development policy for non-grid-connected wind power in China: An analysis based on institutional change
Energy Policy 45 (2012) 350–358
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Energy Policy journal homepage: www.elsevier.com/locate/enpol
Development policy for non-grid-connected wind power in China: An analysis based on institutional change Yong Fang a,n, Jing Li b, Mingming Wang a,n a b
School of Economics and Management, Beijing University of Chemical Technology, Beijing 100029, China Corporate Technology, Siemens Ltd., Beijing 100102, China
a r t i c l e i n f o
a b s t r a c t
Article history: Received 15 February 2011 Accepted 17 February 2012 Available online 18 March 2012
Government policy continues to play a crucial role in the development of wind power industry in China. The 2005 ‘‘Renewable Energy Law’’ and related policies have driven the rapid increase in wind power installed capacity in China over the past half-decade, with capacity doubling annually since 2005. However, a large number of wind farms generate electricity well below their installed capacity, resulting in considerable wastage of resources. Non-grid-connected wind power theory proposes that large-scale wind power output does not necessarily have to be fed into the grid, but can be used directly in industrial production. Thus, the use of the theory can promote the sustainable development of the wind power industry by obviating the need for power grid. In this paper we analyze the influence of government policy on wind power industry from the perspective of institutional change, by employing the basic theories of new institutional economics. A development model for non-grid-connected wind power is proposed in order to implement institutional change in accordance with the specific characteristics of wind power industry in China. This model requires the government to play an active role in institutional development by increasing economic efficiency in order to promote the sustainable development of wind power. & 2012 Elsevier Ltd. All rights reserved.
Keywords: Non-grid-connected wind power Energy policy New institutional economics
1. Introduction Wind power is an important form of green energy. Against the backdrop of current energy shortages, it represents a promising future direction in energy generation, and is therefore is strategically important to national and socio-economic development (Lema and Ruby, 2006). Therefore, wind power development is inextricably related to national policy. The demands for energy conservation and alternative energy sources have prompted the Chinese government to focus increasing attention on the development of wind power. Since 2005, the Chinese government has published a large number of wind power development policies involving legislation, development planning and other measures to support the wind power industry. These include favorable pool purchase pricing of wind power, tax exemption or reduction, and financial subsidies, which have stimulated the rapid development of the wind power industry. Data from the Chinese Wind Energy Association (CWEA) show that the wind power installed capacity in China increased from 760.2 MW at the end of 2004 to 41,827.3 MW at the end of 2010 (CWEA, 2011). The average
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Corresponding authors. Tel.: þ 86 10 6444 5123. E-mail addresses: [email protected] (Y. Fang), [email protected] (M. Wang). 0301-4215/$ - see front matter & 2012 Elsevier Ltd. All rights reserved. doi:10.1016/j.enpol.2012.02.043
annual growth in this period exceeded 100%, and the total wind power installed capacity in China has now surpassed the United States and ranks first in the world (NDRC, 2011). China has become a leading investor in wind power, and the wind power development policy of the Chinese government is therefore attracting close attention. China’s wind power development has obvious differences from that of other countries: (1) Wind power policy directly affects the wind power industry. In the development of China’s economy, government policy emphasizes both planning and the market, and China has a centralized government that can make policy decisions very quickly compared with the US and Europe. The economic and industrial development program of the Chinese government has a stronger influence than is the case for governments in the United States and Europe. China’s total power installed capacity is currently in excess of 9 million MW. When the Chinese government formulates successive Five-Year Plans, they assign quotas for the proportions of generation and installation capacity due to wind power in the whole power grid. Currently, wind power contributes a small proportion of the whole power grid, but only minor changes will bring huge investment opportunities which directly affect the entire wind power industry.
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Fig. 1. Distribution of wind power resources in China. Source: Distribution of Effective Wind Power Density in China (CWERA, 2010).
(2) There are abundant but unevenly distributed wind power resources in China, giving rise to problems in electricity transmission. China has a vast land area, and has rich wind resources in the northeast, northwest and eastern coastal regions. However, economic development in the country is also extremely uneven. The eastern coastal region is the most developed economic region, while the vast area of the west is underdeveloped. Therefore most areas that have rich wind resources are underdeveloped, meaning they consume comparatively little electricity (Fig. 1) (Yu et al., 2011). This gives rise to the problem of how to transmit a large quantity of electricity to the distant load centers. In contrast, economic development is more balanced in the US and Europe, so the problem of electricity transmission is less serious than is the case for China. (3) In China there is a centralized network structure, with a unified power grid, and most power grids being controlled by the State Grid Corporation of China (SGCC). SGCC is a huge state-owned enterprise, which to a certain extent reflects the aims of the government. SGCC has suggested that there remains a need for a unified and strong smart grid in China (SGCC, 2010). Wind power cannot supply electricity directly to end users via a local grid near to the load, but must be fed into the national transmission grid. This is different from the concept of a distributed grid common in Western countries (Nair and Zhang, 2009), where the emphasis is on the balance of supply and demand of local electric power. In this case, wind power either can supply local users or be transmitted via the electric distribution network. Therefore unlike in China, utilization of wind power in Western counties does not depend totally on the national grid. (4) Electricity markets in China are not complete. Since the 1990s, many countries have implemented market reform in the electric power industry. The traditional power industry was deregulated giving separate and competitive markets. The electricity industry involves separate power generation, transmission, distribution, and consumption markets. As the leaders of market reform, the US and Europe have constructed complete and competitive electricity markets, and electricity can be freely traded in the markets (Rahimi and Sheffrin, 2003; Toke, 2011). However, China is now still in the early stages of developing an electricity market. Only the northeast and eastern China have opened power generation to the market, and about 10–20% of electric power is currently traded in electricity markets (SERC, 2004). Wind power farms
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have no right to sell their power directly to end users or to bid in electricity markets. Wind power farms that have been approved by the government can only sell all the power they generate to the state power grid companies such as SGCC. (5) State-owned enterprises are the mainstay of the investment in wind power investment in China. All wind power investment requires the approval of the government and the entry threshold is very high for private companies. Therefore although there are many other sources of finance for wind power investment—including private capital and foreign investment—state-owned enterprises remain in a dominant position. At present, the five biggest state-owned power generation groups and some local government investment companies account for most of the investment in wind power (Li et al., 2011). The chief executives of state-owned enterprises are appointed or removed by government and their performance is also evaluated by government. Since enterprise strategies and national policies are closely related, investment in wind power must be a clear policy goal. Wind power access to the grid is traditionally the only route for large-scale wind farm applications (Gu, 2010), and the characteristics of wind power development in China have tended to strengthen the importance of the grid. The irregular output from wind power installations has a considerable effect on the traditional grid, directly influencing its safe operation. Given these safety concerns, current estimates indicate that wind power accounts for no more than 10% of the total transmission capacity of the power grid (Gu, 2006a). Given the total installed capacity, this indicates that a large number of wind turbines are idle because they cannot access the grid: The Ministry of Industry and Information Technology reported that the wind power installed capacity of China reached 25,805 MW in 2009, but only 62.51% is connected to the grid, giving an effective installed capacity of only 16,130 MW. The soaring increase in installed wind power capacity has led to a large number of wind farms that cannot generate energy in accordance with their installed capacity, and this has become a major impediment to the sustainable development of wind power (Yu and Qu, 2010; Lee, 2010). Non-grid-connected wind power theory proposes that the output of large-scale wind power can be supplied directly to specific industrial production units, and that can increase the proportion of wind power in total electricity consumption in some regional areas from less than 5% to 100% (Gu, 2006b). The theory challenges the traditional assumption that the output of large-scale wind power installations must be fed into the main grid, and attracted considerable attention as soon as it was proposed. The Non-Grid-Connected Wind Power Symposium was held in 2007 to explore technical issues in the advancement of non-grid-connected wind power and was sponsored by GE, Vestas, and Suzlon, among other companies. The World Non-GridConnected Wind Power and Energy Conference, jointly organized by the World Wind Energy Association, IEEE, the Power & Energy Society (PES), and other organizations has been held annually since 2009, and enjoys an excellent worldwide reputation. The Chinese Ministry of Science and Technology sponsored research on non-grid-connected wind power through the National Basic Research Program (973 Program) in 2007 and the results are currently being implemented in Jiangsu Province (Zhao et al., 2009). Therefore, non-grid-connected wind power serves as a feasible development path for the wind power industry in China. However, given China’s unique background, implementing non-grid-connected wind power is strongly influenced by policy factors. When wind power development in China faces a specific challenge, the government publishes an appropriate policy to solve it, and the state-owned enterprises follow this lead since
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their strategies must be consistent with government policy. However, this means that they often do not take sufficient account of technology and market implications, and this gives rise to more problems. Meanwhile electricity markets are not complete in China, these problems will be deteriorated further due to non free trade among enterprises, and enterprises seek help from the government again, and in response the government formulates updated or new policies. This results in a cyclical process of wind power development, in which the key variable is national policy. Given the influence of national policy on wind power development, many papers have focused on the analysis of Chinese policies on wind power (Liao et al., 2010; Cherni and Kentish, 2007; Brennand, 2001; Chang et al. 2003; Liu and Kokko, 2010). However, these authors were unable to formulate an overall policy framework since they did not utilize an effective theory to analysis the in-depth reason for policies and the relationships between policies. New institutional economics (NIE) has been shown to be a successful and effective tool to analyze a policy (Williamson, 2002). It can successfully explain the key role of institutions in economic development (North and Thomas, 1973), and has become a focus of current economics research. Given that nongrid-connected wind power is a new field, national policy or institutional factors will play a significant role in its future growth. This paper employs the basic theories of NIE, analyzes the evolution and development paths of non-grid-connected wind power, and proposes a development model and policy strategies for non-grid-connected wind power. Accordingly, Section 2 of this paper summarizes the historical development of Chinese wind power and the present situation, and analyzes the institutional changes affecting the development of non-grid-connected wind power in China. Section 3 analyzes the institutional changes affecting non-grid-connected wind power from the viewpoint of transaction costs, and explains the intrinsic features of these institutional changes. The analysis shows that the existing institutional change cannot solve the current problems of Chinese wind power. Then we propose a hybrid development mode of institutional change in Section 4, and analyze the role and function of each sector. Section 5 further analyses the potential policies and measures needed to promote institutional change according to the hybrid development mode, and Section 6 gives the conclusions.
2. Characteristics of institutional change in non-gridconnected wind power While adopting the method of cost-benefit analysis, NIE uses transaction cost theory to analyze institutional changes in terms of supply and demand. Institutional change is categorized into mandatory and induced institutional change; these classifications are based on the essence of institutional change and its causes (Williamson, 2002). The former refers to the process of institutional change imposed by laws and regulations when government pursues the maximization of monopoly rents and total social output, thereby generating institutional supply. The latter pertains to the process of spontaneous change when an individual or a group of people pursues potential profit opportunities, generating institutional demand. In the process of the development of wind power in China, the government employed economic development planning and energy development planning, and imposed mandatory requirements for wind power equipment and wind power farm construction, specifications for wind power access to the grid, and the price of wind power access to the grid. Thus the development of wind power has been strongly influenced by mandatory institutional change.
Although the institutional environment is dominated by the government, other parties including investment companies, operators of wind power, electric power users, power grid corporations, and local governments will seek to make full use of wind power resources and profit from them. These induced institutional changes have also played a role in the development of wind power. Based on these two kinds of institutional change, we can analyze the institutional change characteristics of non-grid-connected wind power. 2.1. Mandatory institutional change Mandatory institutional change is supply-dominated institutional change. Government is the principal driver of institutional change and adopts top-down changes. The origins of mandatory institutional change are very complicated. They may be based on ideology rather than logic, and can be enforced through coercion. This means that institutional change can be imposed rapidly, while reducing transaction costs because an administrative monopoly force sets artificial entry barriers and reduces external uncertainty. The key characteristic of mandatory institutional change is that it can be accomplished quickly in a very short period driven by the government. Wind power installed capacity in China maintained a slow growth rate before 2004. However, rapid growth in wind power installed capacity ensued after 2005 (Fig. 2). One of the core reasons for this was the approval of the ‘‘Renewable Energy Law’’ in 2005, which has had a greater influence than any other legislation governing renewable energy. Since this is an example of mandatory institutional change, we can put forth our first hypothesis concerning the development of wind power in China. Hypothesis 1. Wind power development is characterized by supply-dominated institutional change. This hypothesis can be tested by examining the development of wind power in the specific context of some important laws and regulations issued by the Chinese government. Before 2004, the government paid little attention to the wind power industry. The government neither provided sufficient scientific research funds (there were no major scientific research projects in this area), nor powerful policy support. By the end of 2004, there were 43 wind farms in the country, with 1292 wind power turbines and 760.2 MW of installed capacity. This ranked 10th in the world and, in Asia, was behind Japan and India. Under the influence of growing energy demand and the pressure for energy saving and emission reduction, the government began to pay more attention to renewable energy. On 28 February 2005, the ‘‘Renewable Energy Law of the People’s Republic of China’’ was approved. Its essence is reflected in the ‘‘Related Provisions about Renewable Energy Generation’’ (NDRC, 2006a) and the ‘‘Pilot Management Scheme of Price and
Fig. 2. Annual change in the installed capacity of wind power in China. Source: The Chinese Wind Energy Association (CWEA, 2011).
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Cost-Sharing of Renewable Energy,’’ (NDRC, 2006b) implemented by the National Development and Reform Commission (NDRC). These provided strong policy support for wind power generation and manufacturing, and included incentives such as those for pricing and taxes. In particular, under the policy for competitive pricing, government regulations explicitly prescribe that wind power should be enabled to access to a nearby regional power grid network and be allowed for the purchase of all the electricity. In 2006, newly installed wind power capacity reached 1340 MW, accounting for 8.9% of the world total, amounting to an increase of 165.83% compared with 2005 (Fig. 2). To date, the wind power generation in China has continued to grow at a rapid pace and, as noted above it is now the largest producer in the world. During this period, national policy played an extremely important role in stimulating the inflow of investment. Currently, there are multiple channels of investment in the wind power field, including private capital and foreign capital, but the main body of investment still comes from state-owned enterprises. In 2010, China’s newly installed wind power capacity reached 1892 MW and five state-owned power generation groups (China Electric Group, Huaneng Group, Datang Group, Huadian Group, and the CLP Group) accounted for 56% of the total. Of the total installed wind power of 41,827.3 MW in China, these five stateowned power generation groups accounted for 56.3% (Li et al., 2011). In addition, the majority of other companies investing in wind power, including China Nuclear Power Group and Guohua Power, are state-owned enterprises. Thus state-owned enterprises, which tend to be more focused on the government’s targets and subsidies than the operating efficiency of wind power farms, account for most of the investment in wind power. Since state-owned enterprises closely follow the government’s guidance and regulations, government policy has a direct impact on the development of the wind power industry. Therefore, the rapid development of the wind power industry in a short period is clearly characterized by mandatory institutional change. 2.2. Induced institutional change Induced institutional change refers to spontaneous institutional changes when individual and groups respond to potential profit opportunities. In contrast to mandatory institutional change, the principal drivers of induced institutional change are grassroots movements, local government, or individuals. It involves a progressive bottom-up reform mode. As discussed above, government regulations mandate that wind power access to the grid is currently the only application mode available to large-scale wind farms. However, the irregular nature of wind power severely affects the stability of the traditional power grid, restricting wind power access to the grid. This brings two challenges in the sustainable development of wind power. (1) The efficiency of wind power farms is poor, and many wind farms cannot generate electricity in accordance with their installed capacity. As discussed above, the Ministry of Industry and Information reported that over one-third of the installed capacity of wind farms was idle and that electricity could not be transmitted to the grid because of system restrictions. (2) The rapid development of wind power may be restricted in the future. Achieving a wind power contribution of more than 10% to the power grid is difficult if there is no gas power or hydropower available to deliver dispatchable power on demand for peak regulation of the grid. This is a global problem that poses considerable challenges to the sustainable development of wind power. In the other words, if China follows the traditional mode of large-scale development of
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wind power, it must also build a large number of dispatchable power sources to ensure the stability of the power grid. However, the high cost and the geographical environment in China will restrict construction of these dispatchable power sources, so that the traditional grid pattern seriously limits the development of wind power. At present some countries, such as Germany, have adopted distributed wind power farms to alleviate this contradiction. In 2009, the wind power installed capacity in Germany reached 25,700 MW, but most of this wind power comes from small and medium capacity distributed wind farms, with the biggest one being only 60 MW (CWEA, 2010). Thus Germany has avoided the enormous challenges posed by the Chinese model of large scale wind farm development, and the development of wind power has proceeded more rapidly.
Non-grid-connected wind power theory proposes that largescale wind farms can supply electric power directly to energyintensive industries, including chlor-alkali processing, seawater desalination, and electrolytic aluminum manufacturing plants (Fang et al., 2009; Fang and Huang, 2008; Gu, 2008). It provides a new model for the development of wind power. Since the wind power is not fed into the grid, the problems of grid instability associated with conventional wind power do not arise. It thereby offers a creative solution to the problems encountered in the large-scale and sustainable development of wind power. Generators of wind power, power users, power grid companies, and local governments will all benefit if wind farms can be operated effectively in this new mode. In Jiangsu Province, local governments and generators have established a non-connectedgrid wind power operation, driven by the potential profits to be made (Zhao et al., 2009). In addition, the Ministry of Science and Technology has increasingly supported enterprises and universities exploring the theory and application of non-connected-grid wind power through its major scientific projects (MOST, 2007). Hence, we can put forth the second hypothesis for the development of wind power in China. Hypothesis 2. Demand-induced institutional change is becoming increasingly important in the development of wind power. The characteristics and influence of this induced institutional change can be investigated by comparing the profit modes for traditional and non-grid-connected forms of wind power, as shown in Fig. 3. The electricity generated by a large-scale wind farm in the traditional mode can only be transmitted to a power grid, which then supplies electricity to end-users in accordance with network conditions. Thus, the profitability of wind power depends totally on the power grid, making this approach a unilateral incentive mode. National policy encourages wind farms to generate electricity, but the power grid enterprise is not necessarily capable of providing these high-risk electrical power from wind. Meanwhile, end-users are only supplied with power by the power grid and some energy-intensive industries are forced to accept higher electricity prices because they are not entitled to benefit from
Fig. 3. Two profit modes of wind power.
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government policies on discounted electricity applying to less energy-intensive industries. The non-grid-connected wind power mode enables the demand and supply sides to directly negotiate power output. Under this mode, wind farms can provide electricity at a lower price, as the cost of wind power decreases markedly because there is no need to invest in grid connection. This mode enables wind farms to generate electricity in accordance with installed capacity, while end-users can lower their operating costs because of the comparatively lower electricity price. Both suppliers and consumers can benefit from this mode; thus, non-grid-connected wind power is a shared incentive mode. The potential profit opportunities will motivate both wind farms and energy-intensive enterprises to promote the development of non-grid-connected wind power. This scenario illustrates the demand-induced characteristic of institutional change.
3. Analysis of impending institutional change for non-gridconnected wind power Institutional change for non-connected-grid wind power involves aspects of both mandatory institutional change and induced institutional change. Therefore in considering the origin and effects of institutional change in the development of wind power in China both need to be considered. In NIE, the value of economic institutions is believed to change under the influence of costs associated with long-term economic growth. Institutional change normally occurs when individuals or groups are willing to bear the cost of change, and the expected net profit exceeds the expected cost. The transaction cost should therefore be the focus in any analysis of institutional change. 3.1. Transaction cost analysis under mandatory institutional change Government is a central participant in the process of mandatory institutional change, which offers two major advantages in terms of transaction cost. (1) Economies of scale. As the principal driver of mandatory institutional change, government is a monopolist that has legal license to use coercive power. It can expand its influence and scope; thus, mandatory institutional change benefits from large economies of scale. (2) High efficiency of institutional implementation. Governments can compel institutions to eliminate institutional imbalance as long as expected returns surpass expected costs. The coercive power of the government can promote institutional change at the fastest pace in the shortest possible time; thus, mandatory institutional change has a high efficiency in terms of institutional implementation. The advantages of mandatory institutional change are relevant to Hypothesis 1 for non-grid-connected wind power. Historically, the oil imports have accounted for about 50% of consumption, and electricity is in short supply in China. Satisfying the demand for utility energy is a bottleneck in the efforts to sustain its rapid development. The wind power industry is a catalyst for growth in the industrial sector—particularly the machinery, electronics, electrical equipment, and other related industries—thereby promoting economic development. The policies issued by the government can therefore eliminate institutional imbalance and bring about economies of scale. In 2004, the market share of domestic wind turbines was 18%, and construction cost was about 9000 yuan/kW; thus, the cost of operating wind farms was considerably higher than the on-grid tariff. By 2009, the market
share of domestic wind turbines had increased to over 60%, whilst construction cost had decreased to about 5000 yuan/kW, generating profits for wind farms (CWEA, 2011). The rapid development of wind power since 2005 has benefited from favorable national policies. The ensuing development exceeded expectations, driving a rapid increase in wind power scale. However, a mismatch between supply and grid admission capacity occurred. This was also unexpected at the beginning of policy implementation. This problem may have resulted from the inherent weaknesses and disadvantages of mandatory institutional change: (1) The duality of interest and mutual conflict in the goals of institutional change. Through institutional innovation, government aims to achieve dual goals—economic and political. Once the economic goal conflicts with the political, the government is likely to prioritize the latter, which generally leads to increasing inefficiency in institutions. Influenced by these dual goals, even if it is aware that the grid can accommodate more wind power at lower risk, the government cannot lessen or eliminate inefficiency because it is unwilling to shoulder the high social costs that can stem from unexpected grid faults. (2) The limited rationality and incomplete knowledge of the principal driver. Mandatory institutional change requires government to have complete knowledge of institutional design. However, uncertainties always exist in the course of institutional implementation. From the approval of the ‘‘Renewable Energy Law’’ in 2005 to the ‘‘11th Five-year Plan of Renewable Energy’’ announced in 2008, the government consistently expected wind power to reach an installed capacity 10,000 MW by 2010 (NDRC, 2008). However, revisions to the policies during the past few years resulted in a much larger actual installed capacity of 25,805 MW by 2009. This poses difficulties for large wind farms in generating electricity in accordance with their installed capacity. Although the disadvantages of mandatory institutional change partly explain the current predicament of wind power development, the external environment also affects wind power access to the grid. The distribution of the wind power resources in China is mainly concentrated in the west, whereas the bulk of energy consumption is concentrated in the east. Thus, electricity must be transmitted from the west to the east via the power grid. However, the power grids are not sufficiently well linked with each other to enable efficient transmission of generated wind power. These key factors present challenges in wind power access to the grid (Chen et al., 2010). 3.2. Transaction cost analysis under induced institutional change Induced institutional change results from opportunities for profit. It has certain advantages over mandatory institutional change in terms of higher economic efficiency: (1) Priority given to economic efficiency. Induced institutional change results from opportunities for profit, which cannot be realized under existing institutional arrangements. The principal driver of induced institutional change can be an individual, a group of people, or an organization. They become aware of potential profit that cannot be obtained under existing institutional arrangements; thus, they are willing to change the current situation. However, institutional change will only occur when the potential profits exceed the costs of innovation. Therefore, induced institutional change follows the principle of prioritizing economic efficiency.
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(2) High efficiency of institutional operation. Induced institutional change is spontaneous. It is based on intrinsic optimization and evolution mechanisms, and incorporates an extensive correction system that lowers the decision-making error rate. Incentive mechanisms for the pursuit of profit can be permanent, which serves as a continuous driving force for reform. Therefore, an institution formed by induced institutional change has higher operating efficiency. The advantages of induced institutional change are explained in Hypothesis 2 for non-grid-connected wind power. In this scenario, a large number of wind farms cannot access to the grid, and construction of the necessary grid is a long-term prospect. This encourages stakeholders to seek alternative systems outside the grid. Non-grid-connected wind power is an example of spontaneous institutional change in response to this challenge and can serve as a new path for wind power development. In this model, the wind farm cooperates with specific industrial users based on considerations of economic efficiency. This is clearly different from the institutional change being promoted by the government. An increasing number of wind farms and users are beginning to focus their attention on this development model, and have begun shifting in this direction (Zhao et al., 2009). Despite this, however, the advantages of induced institutional change remain restricted by many factors: (1) Restrictions in relation to transaction costs. Induced institutional change is a process of gradual promotion. The principal drivers of institutional change need to search for trading partners, negotiate (one-on-one or in multiple modes), and work with various groups to maintain the transaction. Therefore, induced institutional change has higher organization and transaction costs, and takes longer to implement. (2) Solving externality and ‘‘free riders’’ through institution change is difficult to achieve. The groups who first carry out institutional innovation can reach agreement through internal negotiation, communication, and persuasion to eliminate the factors that hinder institutional innovation. However, the incompleteness of the agreement itself can lead to problems such as ‘‘free riders’’ who may hinder the promotion of institutional change. The shortcomings of induced institutional change explain the current status of non-grid-connected wind power in China. The high transaction costs and lack of institutional framework provide a considerable challenge to wind farms and users in initiating institutional change. Although both the government and power companies have been turning their attention to non-grid-connected wind power, this sector has not developed as hoped. Government and industry stakeholders have therefore now begun to focus their efforts on the promotion of non-grid-connected wind power and the resolution of the problems presented by wind power access to the grid.
4. Path of institutional change for non-grid-connected wind power Non-grid-connected wind power theory provides a new path for the sustainable development of wind power. Induced institutional change is clearly the right course but this entails a longer implementation period. The development of wind power in a non-grid-connected system is restricted by the policies on traditional wind power. Therefore, the further development of nongrid-connected wind power is confronted with problems of institutional change promotion and path choice.
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4.1. Transformation from supply-dominated type to demandinduced type Generally, the process of institutional change can be divided into five stages, according to NIE (Lance and North, 1971).
First, a group that first promotes institutional change or plays a key part in this process is established.
Second, the schemes for institutional change are proposed. Third, the schemes are evaluated and chosen in accordance with the principles of institutional change.
Fourth, a second group that promotes institutional change is established.
Fifth, institutional change is accomplished through the joint efforts of both action groups. From the perspective of the wind power development process, non-grid-connected wind power is currently undergoing institutional change. Attracted by potential profits, wind farms and energy-intensive enterprises have become the first groups to initiate institutional change, since they both have the incentive to promote the development of non-grid-connected wind power. This is the first stage of institutional change. Non-grid-connected wind power theory and breakthroughs in combining the operations of some energy-intensive industries and wind power companies serve as the bases for the preliminary plans for institutional change initiated by the first action group. Compared with the traditional wind power mode, non-grid-connected wind power incurs lower operating costs and a lower electricity price for end user, thereby becoming a feasible path choice. These are the second and third stages of institutional change. Non-grid-connected wind power in China is currently in the third stage of institutional change. The industry has attracted considerable attention because of the potential profits and, thus, its development clearly falls under induced institutional change. The process demonstrates the transformation from governmentled mandatory institutional change to enterprise-led induced institutional change, which is more efficient economically for the sustainable development of wind power. 4.2. Role of promotion in mandatory institutional change The promotion of non-grid-connected wind power development requires a second action group (which occurs in the fourth stage of institutional change). The profit potential of non-gridconnected wind power shows that institutional change in the context of non-grid-connected systems is not only beneficial to large wind farms and energy-intensive enterprises, but also to the state grid (by reducing the risks associated with connecting large wind farms to the grid). However the state grid cannot directly profit from non-grid-connected wind power; thus, convincing it to become the second action group of institutional change is a difficult process. In the process of wind power development, the government plays a part by implementing incentive policies. Those policies advance the development of wind power, while the cost is shouldered by society. As noted above, with the increasing scale of development, wind power construction cost decreased from 9000 yuan/kW in 2004 to 5000 yuan/kW in 2009. In addition, the market share of domestic wind power equipment now exceeds 60%. Since government promotion of the wind power industry has been so successful, the abolition of stimulation policies is inevitable. Nevertheless, the operation of many wind farms depends on these preferential policies, and they may experience losses if the government withdraws completely. The government is therefore obligated to regulate wind power policies and provide
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incentives to enterprises so that they can independently develop wind power capacity. As a result, the government is likely to become the second action group in the development of non-gridconnected wind power. As the second action group, the government can bring the advantages of mandatory institutional change to bear on the existing induced institutional change. The provisions for wind power in the ‘‘Renewable Energy Law’’ and other supporting policies are essentially based on the traditional mode of wind power (with access to a grid), and no supporting policies for nongrid-connected wind power are currently in place. In the next 10 years, China is planning to build seven wind power development areas of 10 GW capacity or higher in Gansu, Xinjiang, Hebei, Jilin, Inner Mongolia, and Jiangsu (Fig. 4). Such large-scale wind power development will further aggravate the problems posed by access to the grid, particularly in the northwest and northeast where there are more abundant wind power resources but less well developed power grids. Furthermore, since non-grid-connected wind power is based on induced institutional changes that cannot adapt to the rapid development of wind power, the government should, therefore, have the responsibility to promote the development of non-grid-connected wind power through appropriate policies (Su et al., 2010).
4.3. Hybrid development mode of institutional change The fifth stage of institutional change involves concerted action by both the first and second action groups. That is, mandatory institutional change and induced institutional change both play their parts. This development model is shown in Fig. 5. The wind power farms and end-users are the first action groups, and the government is the second action group. ‘‘Electricity Law’’ of China prescribes that a wind farm is not permitted to directly sell electricity to end-user so that policies on trade between wind farms and energy-intensive enterprises
requires reform. Direct trade between generators and end-users is currently undergoing trial runs in the electricity markets of China (SERC, 2010). Thus, grid companies (or the State Electricity Regulatory Commission, SERC) may also join the second action group and issue rules for electricity trading for non-grid-connected wind power. Since grid companies can only be involved in the formulation of such rules for electricity trading, they cannot directly profit from non-grid-connected wind power. They are thus an invisible member of the second action group. Lowering transaction costs is a key consideration in the hybrid mode. The first action group aims for economic efficiency, but its organizational and time costs are relatively high. The government, as the second action group, can exploit the advantages of mandatory institutional change to improve the efficiency of institutional implementation. Therefore, the government should play a role in economic efficiency and institutional constitution, including bridging the gaps in institutional arrangements, by issuing reasonable and legal interpretations and supporting the new institutional arrangements (Zhang et al., 2010b).
5. Policy implications Concerted effort from the first and second action groups is required to promote institutional change under the development model of non-grid-connected wind power. Owing to the limitations imposed by policies, wind farms and industrial end-users (the first action group) are confronted with high transaction costs. Consequently, this necessitates that the second action group (the government and power grid companies) improve economic efficiency and reduce transaction costs in areas such as institutional development, market environment, and power grid construction. 5.1. Preferential policies of the government Government policy is a key factor in driving the rapid growth of the wind power industry. Policies range from competitive pricing to tax incentives and support for companies in the field of wind power generation and manufacturing. However, the current policy is based solely on the traditional utilization of grid-connected wind power. Non-grid-connected wind power has not benefited from earlier policies. Therefore, it is necessary to amend the current preferential policies for wind power and issue equally competitive policies for non-grid-connected wind power to provide incentives for the growth of non-grid-connected wind power. Price subsidies and tax incentives are the most feasible measures. These preferential policies should inspire the first action group to invest in non-grid-connected wind power and promote institutional change. 5.2. Electricity market development
Fig. 4. Planned 10 GW wind power development areas in China. Source: Development and Planning of Wind Power in China (Zhang et al., 2010a).
Fig. 5. Development mode of non-grid-connected wind power.
The electricity markets in China are unique because only the generation side is open (a real electricity market should include not only generation, but also transmission, distribution, and consumption markets in general) among the four sectors involved (Jaccard and Mao, 2001). The current operational markets are the East China and Northeast electricity markets. Bilateral and multilateral trade is prohibited in these markets (SERC, 2004), that is, all generators must sell their electricity to power grid companies. Therefore, appropriate electricity trading arrangements formulated by SGCC or the State Electricity Regulatory Commission (SERC) are needed to enable non-grid-connected wind power to participate in the electricity market.
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The SERC has recently recommended that electric power companies be allowed to sell power directly to large power customers (SERC, 2010). It also hopes to facilitate trading arrangements supportive of bilateral trade, and lay the policy foundation needed by non-grid-connected wind power to directly supply electricity to their end-users. Wind farms should be provided with more self-operation rights, which will serve as incentives in the development of non-grid-connected wind power systems. Electricity trading arrangements should permit them to select various development models on the basis of environmental and market needs. If these measures are successful, grid connection will no longer be the only way for wind farms to operate and prosper.
the framework of new institutional economics, the development of non-grid-connected wind power is currently in the third stage of institutional change. Collaboration between the principal drivers is necessary for the successful accomplishment of institutional change. Institutional change theory indicates that the development of non-grid-connected wind power is recommended. Under the proposed model, the government can capitalize on the advantages of mandatory institutional change, and lower transaction and time costs through its important roles in influencing economic efficiency and institutional development. This will eventually ensure the sustainable development of wind power industry in China.
5.3. Market building in the wind power industry
References
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5.4. Smart grid construction The distribution of energy resources and economic development in China are uneven, in that the west is rich in energy resources while the regions with advanced levels of economic development are mainly concentrated in the east (Wu and Fang, 2009). Therefore, the electricity generated in the west must be transmitted to the east. However, the speed of grid construction has failed to satisfy the demand for electric power driven by economic development. Thus, SGCC has proposed a development program involving an investment of four trillion RMB to update and build a new smart grid (SGCC, 2010). A smart grid is important in order to address the issue of wind power access to the grid. However, it will incur substantial costs if the aim is merely focused on addressing the strong fluctuations in wind power. A more coordinated development is therefore necessary in the wind power industry. Part of the grid connection problem may be solved by the smart grid but industrial policies should complement this infrastructural approach. Incentives for non-grid-connected wind power will help achieve on-site balance between power supply and demand, and the pressure on the grid can be reduced. Therefore, non-grid-connected wind power should be integrated with the construction of the smart grid. 6. Conclusions Non-grid-connected wind power is an institutional innovation and a beneficial supplement to traditional wind power. Within
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Contents lists available at SciVerse ScienceDirect
Energy Policy journal homepage: www.elsevier.com/locate/enpol
Development policy for non-grid-connected wind power in China: An analysis based on institutional change Yong Fang a,n, Jing Li b, Mingming Wang a,n a b
School of Economics and Management, Beijing University of Chemical Technology, Beijing 100029, China Corporate Technology, Siemens Ltd., Beijing 100102, China
a r t i c l e i n f o
a b s t r a c t
Article history: Received 15 February 2011 Accepted 17 February 2012 Available online 18 March 2012
Government policy continues to play a crucial role in the development of wind power industry in China. The 2005 ‘‘Renewable Energy Law’’ and related policies have driven the rapid increase in wind power installed capacity in China over the past half-decade, with capacity doubling annually since 2005. However, a large number of wind farms generate electricity well below their installed capacity, resulting in considerable wastage of resources. Non-grid-connected wind power theory proposes that large-scale wind power output does not necessarily have to be fed into the grid, but can be used directly in industrial production. Thus, the use of the theory can promote the sustainable development of the wind power industry by obviating the need for power grid. In this paper we analyze the influence of government policy on wind power industry from the perspective of institutional change, by employing the basic theories of new institutional economics. A development model for non-grid-connected wind power is proposed in order to implement institutional change in accordance with the specific characteristics of wind power industry in China. This model requires the government to play an active role in institutional development by increasing economic efficiency in order to promote the sustainable development of wind power. & 2012 Elsevier Ltd. All rights reserved.
Keywords: Non-grid-connected wind power Energy policy New institutional economics
1. Introduction Wind power is an important form of green energy. Against the backdrop of current energy shortages, it represents a promising future direction in energy generation, and is therefore is strategically important to national and socio-economic development (Lema and Ruby, 2006). Therefore, wind power development is inextricably related to national policy. The demands for energy conservation and alternative energy sources have prompted the Chinese government to focus increasing attention on the development of wind power. Since 2005, the Chinese government has published a large number of wind power development policies involving legislation, development planning and other measures to support the wind power industry. These include favorable pool purchase pricing of wind power, tax exemption or reduction, and financial subsidies, which have stimulated the rapid development of the wind power industry. Data from the Chinese Wind Energy Association (CWEA) show that the wind power installed capacity in China increased from 760.2 MW at the end of 2004 to 41,827.3 MW at the end of 2010 (CWEA, 2011). The average
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Corresponding authors. Tel.: þ 86 10 6444 5123. E-mail addresses: [email protected] (Y. Fang), [email protected] (M. Wang). 0301-4215/$ - see front matter & 2012 Elsevier Ltd. All rights reserved. doi:10.1016/j.enpol.2012.02.043
annual growth in this period exceeded 100%, and the total wind power installed capacity in China has now surpassed the United States and ranks first in the world (NDRC, 2011). China has become a leading investor in wind power, and the wind power development policy of the Chinese government is therefore attracting close attention. China’s wind power development has obvious differences from that of other countries: (1) Wind power policy directly affects the wind power industry. In the development of China’s economy, government policy emphasizes both planning and the market, and China has a centralized government that can make policy decisions very quickly compared with the US and Europe. The economic and industrial development program of the Chinese government has a stronger influence than is the case for governments in the United States and Europe. China’s total power installed capacity is currently in excess of 9 million MW. When the Chinese government formulates successive Five-Year Plans, they assign quotas for the proportions of generation and installation capacity due to wind power in the whole power grid. Currently, wind power contributes a small proportion of the whole power grid, but only minor changes will bring huge investment opportunities which directly affect the entire wind power industry.
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Fig. 1. Distribution of wind power resources in China. Source: Distribution of Effective Wind Power Density in China (CWERA, 2010).
(2) There are abundant but unevenly distributed wind power resources in China, giving rise to problems in electricity transmission. China has a vast land area, and has rich wind resources in the northeast, northwest and eastern coastal regions. However, economic development in the country is also extremely uneven. The eastern coastal region is the most developed economic region, while the vast area of the west is underdeveloped. Therefore most areas that have rich wind resources are underdeveloped, meaning they consume comparatively little electricity (Fig. 1) (Yu et al., 2011). This gives rise to the problem of how to transmit a large quantity of electricity to the distant load centers. In contrast, economic development is more balanced in the US and Europe, so the problem of electricity transmission is less serious than is the case for China. (3) In China there is a centralized network structure, with a unified power grid, and most power grids being controlled by the State Grid Corporation of China (SGCC). SGCC is a huge state-owned enterprise, which to a certain extent reflects the aims of the government. SGCC has suggested that there remains a need for a unified and strong smart grid in China (SGCC, 2010). Wind power cannot supply electricity directly to end users via a local grid near to the load, but must be fed into the national transmission grid. This is different from the concept of a distributed grid common in Western countries (Nair and Zhang, 2009), where the emphasis is on the balance of supply and demand of local electric power. In this case, wind power either can supply local users or be transmitted via the electric distribution network. Therefore unlike in China, utilization of wind power in Western counties does not depend totally on the national grid. (4) Electricity markets in China are not complete. Since the 1990s, many countries have implemented market reform in the electric power industry. The traditional power industry was deregulated giving separate and competitive markets. The electricity industry involves separate power generation, transmission, distribution, and consumption markets. As the leaders of market reform, the US and Europe have constructed complete and competitive electricity markets, and electricity can be freely traded in the markets (Rahimi and Sheffrin, 2003; Toke, 2011). However, China is now still in the early stages of developing an electricity market. Only the northeast and eastern China have opened power generation to the market, and about 10–20% of electric power is currently traded in electricity markets (SERC, 2004). Wind power farms
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have no right to sell their power directly to end users or to bid in electricity markets. Wind power farms that have been approved by the government can only sell all the power they generate to the state power grid companies such as SGCC. (5) State-owned enterprises are the mainstay of the investment in wind power investment in China. All wind power investment requires the approval of the government and the entry threshold is very high for private companies. Therefore although there are many other sources of finance for wind power investment—including private capital and foreign investment—state-owned enterprises remain in a dominant position. At present, the five biggest state-owned power generation groups and some local government investment companies account for most of the investment in wind power (Li et al., 2011). The chief executives of state-owned enterprises are appointed or removed by government and their performance is also evaluated by government. Since enterprise strategies and national policies are closely related, investment in wind power must be a clear policy goal. Wind power access to the grid is traditionally the only route for large-scale wind farm applications (Gu, 2010), and the characteristics of wind power development in China have tended to strengthen the importance of the grid. The irregular output from wind power installations has a considerable effect on the traditional grid, directly influencing its safe operation. Given these safety concerns, current estimates indicate that wind power accounts for no more than 10% of the total transmission capacity of the power grid (Gu, 2006a). Given the total installed capacity, this indicates that a large number of wind turbines are idle because they cannot access the grid: The Ministry of Industry and Information Technology reported that the wind power installed capacity of China reached 25,805 MW in 2009, but only 62.51% is connected to the grid, giving an effective installed capacity of only 16,130 MW. The soaring increase in installed wind power capacity has led to a large number of wind farms that cannot generate energy in accordance with their installed capacity, and this has become a major impediment to the sustainable development of wind power (Yu and Qu, 2010; Lee, 2010). Non-grid-connected wind power theory proposes that the output of large-scale wind power can be supplied directly to specific industrial production units, and that can increase the proportion of wind power in total electricity consumption in some regional areas from less than 5% to 100% (Gu, 2006b). The theory challenges the traditional assumption that the output of large-scale wind power installations must be fed into the main grid, and attracted considerable attention as soon as it was proposed. The Non-Grid-Connected Wind Power Symposium was held in 2007 to explore technical issues in the advancement of non-grid-connected wind power and was sponsored by GE, Vestas, and Suzlon, among other companies. The World Non-GridConnected Wind Power and Energy Conference, jointly organized by the World Wind Energy Association, IEEE, the Power & Energy Society (PES), and other organizations has been held annually since 2009, and enjoys an excellent worldwide reputation. The Chinese Ministry of Science and Technology sponsored research on non-grid-connected wind power through the National Basic Research Program (973 Program) in 2007 and the results are currently being implemented in Jiangsu Province (Zhao et al., 2009). Therefore, non-grid-connected wind power serves as a feasible development path for the wind power industry in China. However, given China’s unique background, implementing non-grid-connected wind power is strongly influenced by policy factors. When wind power development in China faces a specific challenge, the government publishes an appropriate policy to solve it, and the state-owned enterprises follow this lead since
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their strategies must be consistent with government policy. However, this means that they often do not take sufficient account of technology and market implications, and this gives rise to more problems. Meanwhile electricity markets are not complete in China, these problems will be deteriorated further due to non free trade among enterprises, and enterprises seek help from the government again, and in response the government formulates updated or new policies. This results in a cyclical process of wind power development, in which the key variable is national policy. Given the influence of national policy on wind power development, many papers have focused on the analysis of Chinese policies on wind power (Liao et al., 2010; Cherni and Kentish, 2007; Brennand, 2001; Chang et al. 2003; Liu and Kokko, 2010). However, these authors were unable to formulate an overall policy framework since they did not utilize an effective theory to analysis the in-depth reason for policies and the relationships between policies. New institutional economics (NIE) has been shown to be a successful and effective tool to analyze a policy (Williamson, 2002). It can successfully explain the key role of institutions in economic development (North and Thomas, 1973), and has become a focus of current economics research. Given that nongrid-connected wind power is a new field, national policy or institutional factors will play a significant role in its future growth. This paper employs the basic theories of NIE, analyzes the evolution and development paths of non-grid-connected wind power, and proposes a development model and policy strategies for non-grid-connected wind power. Accordingly, Section 2 of this paper summarizes the historical development of Chinese wind power and the present situation, and analyzes the institutional changes affecting the development of non-grid-connected wind power in China. Section 3 analyzes the institutional changes affecting non-grid-connected wind power from the viewpoint of transaction costs, and explains the intrinsic features of these institutional changes. The analysis shows that the existing institutional change cannot solve the current problems of Chinese wind power. Then we propose a hybrid development mode of institutional change in Section 4, and analyze the role and function of each sector. Section 5 further analyses the potential policies and measures needed to promote institutional change according to the hybrid development mode, and Section 6 gives the conclusions.
2. Characteristics of institutional change in non-gridconnected wind power While adopting the method of cost-benefit analysis, NIE uses transaction cost theory to analyze institutional changes in terms of supply and demand. Institutional change is categorized into mandatory and induced institutional change; these classifications are based on the essence of institutional change and its causes (Williamson, 2002). The former refers to the process of institutional change imposed by laws and regulations when government pursues the maximization of monopoly rents and total social output, thereby generating institutional supply. The latter pertains to the process of spontaneous change when an individual or a group of people pursues potential profit opportunities, generating institutional demand. In the process of the development of wind power in China, the government employed economic development planning and energy development planning, and imposed mandatory requirements for wind power equipment and wind power farm construction, specifications for wind power access to the grid, and the price of wind power access to the grid. Thus the development of wind power has been strongly influenced by mandatory institutional change.
Although the institutional environment is dominated by the government, other parties including investment companies, operators of wind power, electric power users, power grid corporations, and local governments will seek to make full use of wind power resources and profit from them. These induced institutional changes have also played a role in the development of wind power. Based on these two kinds of institutional change, we can analyze the institutional change characteristics of non-grid-connected wind power. 2.1. Mandatory institutional change Mandatory institutional change is supply-dominated institutional change. Government is the principal driver of institutional change and adopts top-down changes. The origins of mandatory institutional change are very complicated. They may be based on ideology rather than logic, and can be enforced through coercion. This means that institutional change can be imposed rapidly, while reducing transaction costs because an administrative monopoly force sets artificial entry barriers and reduces external uncertainty. The key characteristic of mandatory institutional change is that it can be accomplished quickly in a very short period driven by the government. Wind power installed capacity in China maintained a slow growth rate before 2004. However, rapid growth in wind power installed capacity ensued after 2005 (Fig. 2). One of the core reasons for this was the approval of the ‘‘Renewable Energy Law’’ in 2005, which has had a greater influence than any other legislation governing renewable energy. Since this is an example of mandatory institutional change, we can put forth our first hypothesis concerning the development of wind power in China. Hypothesis 1. Wind power development is characterized by supply-dominated institutional change. This hypothesis can be tested by examining the development of wind power in the specific context of some important laws and regulations issued by the Chinese government. Before 2004, the government paid little attention to the wind power industry. The government neither provided sufficient scientific research funds (there were no major scientific research projects in this area), nor powerful policy support. By the end of 2004, there were 43 wind farms in the country, with 1292 wind power turbines and 760.2 MW of installed capacity. This ranked 10th in the world and, in Asia, was behind Japan and India. Under the influence of growing energy demand and the pressure for energy saving and emission reduction, the government began to pay more attention to renewable energy. On 28 February 2005, the ‘‘Renewable Energy Law of the People’s Republic of China’’ was approved. Its essence is reflected in the ‘‘Related Provisions about Renewable Energy Generation’’ (NDRC, 2006a) and the ‘‘Pilot Management Scheme of Price and
Fig. 2. Annual change in the installed capacity of wind power in China. Source: The Chinese Wind Energy Association (CWEA, 2011).
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Cost-Sharing of Renewable Energy,’’ (NDRC, 2006b) implemented by the National Development and Reform Commission (NDRC). These provided strong policy support for wind power generation and manufacturing, and included incentives such as those for pricing and taxes. In particular, under the policy for competitive pricing, government regulations explicitly prescribe that wind power should be enabled to access to a nearby regional power grid network and be allowed for the purchase of all the electricity. In 2006, newly installed wind power capacity reached 1340 MW, accounting for 8.9% of the world total, amounting to an increase of 165.83% compared with 2005 (Fig. 2). To date, the wind power generation in China has continued to grow at a rapid pace and, as noted above it is now the largest producer in the world. During this period, national policy played an extremely important role in stimulating the inflow of investment. Currently, there are multiple channels of investment in the wind power field, including private capital and foreign capital, but the main body of investment still comes from state-owned enterprises. In 2010, China’s newly installed wind power capacity reached 1892 MW and five state-owned power generation groups (China Electric Group, Huaneng Group, Datang Group, Huadian Group, and the CLP Group) accounted for 56% of the total. Of the total installed wind power of 41,827.3 MW in China, these five stateowned power generation groups accounted for 56.3% (Li et al., 2011). In addition, the majority of other companies investing in wind power, including China Nuclear Power Group and Guohua Power, are state-owned enterprises. Thus state-owned enterprises, which tend to be more focused on the government’s targets and subsidies than the operating efficiency of wind power farms, account for most of the investment in wind power. Since state-owned enterprises closely follow the government’s guidance and regulations, government policy has a direct impact on the development of the wind power industry. Therefore, the rapid development of the wind power industry in a short period is clearly characterized by mandatory institutional change. 2.2. Induced institutional change Induced institutional change refers to spontaneous institutional changes when individual and groups respond to potential profit opportunities. In contrast to mandatory institutional change, the principal drivers of induced institutional change are grassroots movements, local government, or individuals. It involves a progressive bottom-up reform mode. As discussed above, government regulations mandate that wind power access to the grid is currently the only application mode available to large-scale wind farms. However, the irregular nature of wind power severely affects the stability of the traditional power grid, restricting wind power access to the grid. This brings two challenges in the sustainable development of wind power. (1) The efficiency of wind power farms is poor, and many wind farms cannot generate electricity in accordance with their installed capacity. As discussed above, the Ministry of Industry and Information reported that over one-third of the installed capacity of wind farms was idle and that electricity could not be transmitted to the grid because of system restrictions. (2) The rapid development of wind power may be restricted in the future. Achieving a wind power contribution of more than 10% to the power grid is difficult if there is no gas power or hydropower available to deliver dispatchable power on demand for peak regulation of the grid. This is a global problem that poses considerable challenges to the sustainable development of wind power. In the other words, if China follows the traditional mode of large-scale development of
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wind power, it must also build a large number of dispatchable power sources to ensure the stability of the power grid. However, the high cost and the geographical environment in China will restrict construction of these dispatchable power sources, so that the traditional grid pattern seriously limits the development of wind power. At present some countries, such as Germany, have adopted distributed wind power farms to alleviate this contradiction. In 2009, the wind power installed capacity in Germany reached 25,700 MW, but most of this wind power comes from small and medium capacity distributed wind farms, with the biggest one being only 60 MW (CWEA, 2010). Thus Germany has avoided the enormous challenges posed by the Chinese model of large scale wind farm development, and the development of wind power has proceeded more rapidly.
Non-grid-connected wind power theory proposes that largescale wind farms can supply electric power directly to energyintensive industries, including chlor-alkali processing, seawater desalination, and electrolytic aluminum manufacturing plants (Fang et al., 2009; Fang and Huang, 2008; Gu, 2008). It provides a new model for the development of wind power. Since the wind power is not fed into the grid, the problems of grid instability associated with conventional wind power do not arise. It thereby offers a creative solution to the problems encountered in the large-scale and sustainable development of wind power. Generators of wind power, power users, power grid companies, and local governments will all benefit if wind farms can be operated effectively in this new mode. In Jiangsu Province, local governments and generators have established a non-connectedgrid wind power operation, driven by the potential profits to be made (Zhao et al., 2009). In addition, the Ministry of Science and Technology has increasingly supported enterprises and universities exploring the theory and application of non-connected-grid wind power through its major scientific projects (MOST, 2007). Hence, we can put forth the second hypothesis for the development of wind power in China. Hypothesis 2. Demand-induced institutional change is becoming increasingly important in the development of wind power. The characteristics and influence of this induced institutional change can be investigated by comparing the profit modes for traditional and non-grid-connected forms of wind power, as shown in Fig. 3. The electricity generated by a large-scale wind farm in the traditional mode can only be transmitted to a power grid, which then supplies electricity to end-users in accordance with network conditions. Thus, the profitability of wind power depends totally on the power grid, making this approach a unilateral incentive mode. National policy encourages wind farms to generate electricity, but the power grid enterprise is not necessarily capable of providing these high-risk electrical power from wind. Meanwhile, end-users are only supplied with power by the power grid and some energy-intensive industries are forced to accept higher electricity prices because they are not entitled to benefit from
Fig. 3. Two profit modes of wind power.
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government policies on discounted electricity applying to less energy-intensive industries. The non-grid-connected wind power mode enables the demand and supply sides to directly negotiate power output. Under this mode, wind farms can provide electricity at a lower price, as the cost of wind power decreases markedly because there is no need to invest in grid connection. This mode enables wind farms to generate electricity in accordance with installed capacity, while end-users can lower their operating costs because of the comparatively lower electricity price. Both suppliers and consumers can benefit from this mode; thus, non-grid-connected wind power is a shared incentive mode. The potential profit opportunities will motivate both wind farms and energy-intensive enterprises to promote the development of non-grid-connected wind power. This scenario illustrates the demand-induced characteristic of institutional change.
3. Analysis of impending institutional change for non-gridconnected wind power Institutional change for non-connected-grid wind power involves aspects of both mandatory institutional change and induced institutional change. Therefore in considering the origin and effects of institutional change in the development of wind power in China both need to be considered. In NIE, the value of economic institutions is believed to change under the influence of costs associated with long-term economic growth. Institutional change normally occurs when individuals or groups are willing to bear the cost of change, and the expected net profit exceeds the expected cost. The transaction cost should therefore be the focus in any analysis of institutional change. 3.1. Transaction cost analysis under mandatory institutional change Government is a central participant in the process of mandatory institutional change, which offers two major advantages in terms of transaction cost. (1) Economies of scale. As the principal driver of mandatory institutional change, government is a monopolist that has legal license to use coercive power. It can expand its influence and scope; thus, mandatory institutional change benefits from large economies of scale. (2) High efficiency of institutional implementation. Governments can compel institutions to eliminate institutional imbalance as long as expected returns surpass expected costs. The coercive power of the government can promote institutional change at the fastest pace in the shortest possible time; thus, mandatory institutional change has a high efficiency in terms of institutional implementation. The advantages of mandatory institutional change are relevant to Hypothesis 1 for non-grid-connected wind power. Historically, the oil imports have accounted for about 50% of consumption, and electricity is in short supply in China. Satisfying the demand for utility energy is a bottleneck in the efforts to sustain its rapid development. The wind power industry is a catalyst for growth in the industrial sector—particularly the machinery, electronics, electrical equipment, and other related industries—thereby promoting economic development. The policies issued by the government can therefore eliminate institutional imbalance and bring about economies of scale. In 2004, the market share of domestic wind turbines was 18%, and construction cost was about 9000 yuan/kW; thus, the cost of operating wind farms was considerably higher than the on-grid tariff. By 2009, the market
share of domestic wind turbines had increased to over 60%, whilst construction cost had decreased to about 5000 yuan/kW, generating profits for wind farms (CWEA, 2011). The rapid development of wind power since 2005 has benefited from favorable national policies. The ensuing development exceeded expectations, driving a rapid increase in wind power scale. However, a mismatch between supply and grid admission capacity occurred. This was also unexpected at the beginning of policy implementation. This problem may have resulted from the inherent weaknesses and disadvantages of mandatory institutional change: (1) The duality of interest and mutual conflict in the goals of institutional change. Through institutional innovation, government aims to achieve dual goals—economic and political. Once the economic goal conflicts with the political, the government is likely to prioritize the latter, which generally leads to increasing inefficiency in institutions. Influenced by these dual goals, even if it is aware that the grid can accommodate more wind power at lower risk, the government cannot lessen or eliminate inefficiency because it is unwilling to shoulder the high social costs that can stem from unexpected grid faults. (2) The limited rationality and incomplete knowledge of the principal driver. Mandatory institutional change requires government to have complete knowledge of institutional design. However, uncertainties always exist in the course of institutional implementation. From the approval of the ‘‘Renewable Energy Law’’ in 2005 to the ‘‘11th Five-year Plan of Renewable Energy’’ announced in 2008, the government consistently expected wind power to reach an installed capacity 10,000 MW by 2010 (NDRC, 2008). However, revisions to the policies during the past few years resulted in a much larger actual installed capacity of 25,805 MW by 2009. This poses difficulties for large wind farms in generating electricity in accordance with their installed capacity. Although the disadvantages of mandatory institutional change partly explain the current predicament of wind power development, the external environment also affects wind power access to the grid. The distribution of the wind power resources in China is mainly concentrated in the west, whereas the bulk of energy consumption is concentrated in the east. Thus, electricity must be transmitted from the west to the east via the power grid. However, the power grids are not sufficiently well linked with each other to enable efficient transmission of generated wind power. These key factors present challenges in wind power access to the grid (Chen et al., 2010). 3.2. Transaction cost analysis under induced institutional change Induced institutional change results from opportunities for profit. It has certain advantages over mandatory institutional change in terms of higher economic efficiency: (1) Priority given to economic efficiency. Induced institutional change results from opportunities for profit, which cannot be realized under existing institutional arrangements. The principal driver of induced institutional change can be an individual, a group of people, or an organization. They become aware of potential profit that cannot be obtained under existing institutional arrangements; thus, they are willing to change the current situation. However, institutional change will only occur when the potential profits exceed the costs of innovation. Therefore, induced institutional change follows the principle of prioritizing economic efficiency.
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(2) High efficiency of institutional operation. Induced institutional change is spontaneous. It is based on intrinsic optimization and evolution mechanisms, and incorporates an extensive correction system that lowers the decision-making error rate. Incentive mechanisms for the pursuit of profit can be permanent, which serves as a continuous driving force for reform. Therefore, an institution formed by induced institutional change has higher operating efficiency. The advantages of induced institutional change are explained in Hypothesis 2 for non-grid-connected wind power. In this scenario, a large number of wind farms cannot access to the grid, and construction of the necessary grid is a long-term prospect. This encourages stakeholders to seek alternative systems outside the grid. Non-grid-connected wind power is an example of spontaneous institutional change in response to this challenge and can serve as a new path for wind power development. In this model, the wind farm cooperates with specific industrial users based on considerations of economic efficiency. This is clearly different from the institutional change being promoted by the government. An increasing number of wind farms and users are beginning to focus their attention on this development model, and have begun shifting in this direction (Zhao et al., 2009). Despite this, however, the advantages of induced institutional change remain restricted by many factors: (1) Restrictions in relation to transaction costs. Induced institutional change is a process of gradual promotion. The principal drivers of institutional change need to search for trading partners, negotiate (one-on-one or in multiple modes), and work with various groups to maintain the transaction. Therefore, induced institutional change has higher organization and transaction costs, and takes longer to implement. (2) Solving externality and ‘‘free riders’’ through institution change is difficult to achieve. The groups who first carry out institutional innovation can reach agreement through internal negotiation, communication, and persuasion to eliminate the factors that hinder institutional innovation. However, the incompleteness of the agreement itself can lead to problems such as ‘‘free riders’’ who may hinder the promotion of institutional change. The shortcomings of induced institutional change explain the current status of non-grid-connected wind power in China. The high transaction costs and lack of institutional framework provide a considerable challenge to wind farms and users in initiating institutional change. Although both the government and power companies have been turning their attention to non-grid-connected wind power, this sector has not developed as hoped. Government and industry stakeholders have therefore now begun to focus their efforts on the promotion of non-grid-connected wind power and the resolution of the problems presented by wind power access to the grid.
4. Path of institutional change for non-grid-connected wind power Non-grid-connected wind power theory provides a new path for the sustainable development of wind power. Induced institutional change is clearly the right course but this entails a longer implementation period. The development of wind power in a non-grid-connected system is restricted by the policies on traditional wind power. Therefore, the further development of nongrid-connected wind power is confronted with problems of institutional change promotion and path choice.
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4.1. Transformation from supply-dominated type to demandinduced type Generally, the process of institutional change can be divided into five stages, according to NIE (Lance and North, 1971).
First, a group that first promotes institutional change or plays a key part in this process is established.
Second, the schemes for institutional change are proposed. Third, the schemes are evaluated and chosen in accordance with the principles of institutional change.
Fourth, a second group that promotes institutional change is established.
Fifth, institutional change is accomplished through the joint efforts of both action groups. From the perspective of the wind power development process, non-grid-connected wind power is currently undergoing institutional change. Attracted by potential profits, wind farms and energy-intensive enterprises have become the first groups to initiate institutional change, since they both have the incentive to promote the development of non-grid-connected wind power. This is the first stage of institutional change. Non-grid-connected wind power theory and breakthroughs in combining the operations of some energy-intensive industries and wind power companies serve as the bases for the preliminary plans for institutional change initiated by the first action group. Compared with the traditional wind power mode, non-grid-connected wind power incurs lower operating costs and a lower electricity price for end user, thereby becoming a feasible path choice. These are the second and third stages of institutional change. Non-grid-connected wind power in China is currently in the third stage of institutional change. The industry has attracted considerable attention because of the potential profits and, thus, its development clearly falls under induced institutional change. The process demonstrates the transformation from governmentled mandatory institutional change to enterprise-led induced institutional change, which is more efficient economically for the sustainable development of wind power. 4.2. Role of promotion in mandatory institutional change The promotion of non-grid-connected wind power development requires a second action group (which occurs in the fourth stage of institutional change). The profit potential of non-gridconnected wind power shows that institutional change in the context of non-grid-connected systems is not only beneficial to large wind farms and energy-intensive enterprises, but also to the state grid (by reducing the risks associated with connecting large wind farms to the grid). However the state grid cannot directly profit from non-grid-connected wind power; thus, convincing it to become the second action group of institutional change is a difficult process. In the process of wind power development, the government plays a part by implementing incentive policies. Those policies advance the development of wind power, while the cost is shouldered by society. As noted above, with the increasing scale of development, wind power construction cost decreased from 9000 yuan/kW in 2004 to 5000 yuan/kW in 2009. In addition, the market share of domestic wind power equipment now exceeds 60%. Since government promotion of the wind power industry has been so successful, the abolition of stimulation policies is inevitable. Nevertheless, the operation of many wind farms depends on these preferential policies, and they may experience losses if the government withdraws completely. The government is therefore obligated to regulate wind power policies and provide
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incentives to enterprises so that they can independently develop wind power capacity. As a result, the government is likely to become the second action group in the development of non-gridconnected wind power. As the second action group, the government can bring the advantages of mandatory institutional change to bear on the existing induced institutional change. The provisions for wind power in the ‘‘Renewable Energy Law’’ and other supporting policies are essentially based on the traditional mode of wind power (with access to a grid), and no supporting policies for nongrid-connected wind power are currently in place. In the next 10 years, China is planning to build seven wind power development areas of 10 GW capacity or higher in Gansu, Xinjiang, Hebei, Jilin, Inner Mongolia, and Jiangsu (Fig. 4). Such large-scale wind power development will further aggravate the problems posed by access to the grid, particularly in the northwest and northeast where there are more abundant wind power resources but less well developed power grids. Furthermore, since non-grid-connected wind power is based on induced institutional changes that cannot adapt to the rapid development of wind power, the government should, therefore, have the responsibility to promote the development of non-grid-connected wind power through appropriate policies (Su et al., 2010).
4.3. Hybrid development mode of institutional change The fifth stage of institutional change involves concerted action by both the first and second action groups. That is, mandatory institutional change and induced institutional change both play their parts. This development model is shown in Fig. 5. The wind power farms and end-users are the first action groups, and the government is the second action group. ‘‘Electricity Law’’ of China prescribes that a wind farm is not permitted to directly sell electricity to end-user so that policies on trade between wind farms and energy-intensive enterprises
requires reform. Direct trade between generators and end-users is currently undergoing trial runs in the electricity markets of China (SERC, 2010). Thus, grid companies (or the State Electricity Regulatory Commission, SERC) may also join the second action group and issue rules for electricity trading for non-grid-connected wind power. Since grid companies can only be involved in the formulation of such rules for electricity trading, they cannot directly profit from non-grid-connected wind power. They are thus an invisible member of the second action group. Lowering transaction costs is a key consideration in the hybrid mode. The first action group aims for economic efficiency, but its organizational and time costs are relatively high. The government, as the second action group, can exploit the advantages of mandatory institutional change to improve the efficiency of institutional implementation. Therefore, the government should play a role in economic efficiency and institutional constitution, including bridging the gaps in institutional arrangements, by issuing reasonable and legal interpretations and supporting the new institutional arrangements (Zhang et al., 2010b).
5. Policy implications Concerted effort from the first and second action groups is required to promote institutional change under the development model of non-grid-connected wind power. Owing to the limitations imposed by policies, wind farms and industrial end-users (the first action group) are confronted with high transaction costs. Consequently, this necessitates that the second action group (the government and power grid companies) improve economic efficiency and reduce transaction costs in areas such as institutional development, market environment, and power grid construction. 5.1. Preferential policies of the government Government policy is a key factor in driving the rapid growth of the wind power industry. Policies range from competitive pricing to tax incentives and support for companies in the field of wind power generation and manufacturing. However, the current policy is based solely on the traditional utilization of grid-connected wind power. Non-grid-connected wind power has not benefited from earlier policies. Therefore, it is necessary to amend the current preferential policies for wind power and issue equally competitive policies for non-grid-connected wind power to provide incentives for the growth of non-grid-connected wind power. Price subsidies and tax incentives are the most feasible measures. These preferential policies should inspire the first action group to invest in non-grid-connected wind power and promote institutional change. 5.2. Electricity market development
Fig. 4. Planned 10 GW wind power development areas in China. Source: Development and Planning of Wind Power in China (Zhang et al., 2010a).
Fig. 5. Development mode of non-grid-connected wind power.
The electricity markets in China are unique because only the generation side is open (a real electricity market should include not only generation, but also transmission, distribution, and consumption markets in general) among the four sectors involved (Jaccard and Mao, 2001). The current operational markets are the East China and Northeast electricity markets. Bilateral and multilateral trade is prohibited in these markets (SERC, 2004), that is, all generators must sell their electricity to power grid companies. Therefore, appropriate electricity trading arrangements formulated by SGCC or the State Electricity Regulatory Commission (SERC) are needed to enable non-grid-connected wind power to participate in the electricity market.
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The SERC has recently recommended that electric power companies be allowed to sell power directly to large power customers (SERC, 2010). It also hopes to facilitate trading arrangements supportive of bilateral trade, and lay the policy foundation needed by non-grid-connected wind power to directly supply electricity to their end-users. Wind farms should be provided with more self-operation rights, which will serve as incentives in the development of non-grid-connected wind power systems. Electricity trading arrangements should permit them to select various development models on the basis of environmental and market needs. If these measures are successful, grid connection will no longer be the only way for wind farms to operate and prosper.
the framework of new institutional economics, the development of non-grid-connected wind power is currently in the third stage of institutional change. Collaboration between the principal drivers is necessary for the successful accomplishment of institutional change. Institutional change theory indicates that the development of non-grid-connected wind power is recommended. Under the proposed model, the government can capitalize on the advantages of mandatory institutional change, and lower transaction and time costs through its important roles in influencing economic efficiency and institutional development. This will eventually ensure the sustainable development of wind power industry in China.
5.3. Market building in the wind power industry
References
National policies provide only the basic principles of electricity pricing, and wind farms can obtain different subsidies or prices because of their different local environments and stages of regional economic development. Some wind farms incur yearround losses because of low subsidies. Therefore, regional governments have to implement other measures to compensate wind farms for the losses that they incur. Competition in the wind power industry is covert—a characteristic that is harmful to its development, as this encourages unfair competition and corruption. With the improvements in technical competency in the wind power industry, manufacturing and operating costs are gradually declining while economies of scale are being strengthened. The preferential policies of the government will be gradually phased out as wind power costs continue to decrease. The primary obligation of the government is to regulate the industrial environment and cultivate an atmosphere of fair, transparent, and efficient competition in the wind power industry. In other words, it should foster a suitable market environment for the wind power industry.
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