Distributed solar photovoltaics in China: Policies and economic performance

Energy xxx (2015) 1e12

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Distributed solar photovoltaics in China: Policies and economic performance Xingang Zhao, Yiping Zeng*, Di Zhao School of Economics and Management, North China Electric Power University, Beijing 102206, China

a r t i c l e i n f o

a b s t r a c t

Article history: Received 17 January 2015 Received in revised form 28 April 2015 Accepted 31 May 2015 Available online xxx

The recent rapid development of distributed PV (photovoltaic) industry in China closely ties to the relevant policies support. This paper reviews some main points of relevant policies including financial support, technology innovation and management improvement. Scenario analysis both in residential sectors and industrial and commercial sectors are taken into account. We calculate IRR (internal rate of return) and static payback period of a specific distributed PV system in China's five cities located in different resource areas. In order to provide a realistic reference for investors, the historical data from real projects are used to calculate the generating capacity. The impacts of relevant policy variables such as subsidies, benchmark price, electricity price and tax on economic performance of distributed PV system are discussed. The results show that distributed PV system with high generation efficiency has produced good economic benefit in both two scenarios under China's current policies. The current policy instruments on distributed PV industry are efficient. At the end of the paper, policy recommendations are offered as references for the government. © 2015 Elsevier Ltd. All rights reserved.

Keywords: China Distributed PV Policy Industry development

Since the 21st century, as the rising industry for national strategy, the China's PV (photovoltaic) industry has been developing rapidly. Its capacity and production rank to the world's No.1. However, the lag of domestic PV market development diametrically results in the overcapacity. To speed up the domestic market development and solve the problems of overcapacity, it is essential to accelerate the development of distributed PV. As a new way to generate and utilize energy, distributed PV can greatly improve the generating capacity of the same scale PV power station. It can also effectively solve the problem of power loss during transport. The development of distributed PV industry has provided favorable conditions to realize China's energy reform. It can help to accelerate the adjustment of power structure and the transformation of conventional energy supply. Then the energy conservation and emissions reduction goals can be achieved. “Solar Power Development ‘twelfth five-year’ Plan” clearly designates distributed PV industry

as an important item for the future application of the domestic PV market. Nowadays the government has introduced a number of policies to support distributed PV industry. Financial assistance, technology support and management improvement are involved. Under the overall planning of the government, distributed PV power plants were built in many areas. There have been numerous distributed PV systems installed on conditional building roofs of urban public facilities, commercial buildings and industrial parks. Since the beginning of the concession tender1 in 2009, China's distributed PV installed capacity has increased year by year. The growth rate has increased sharply from 2011 to 2014. The total installed capacity of distributed PV in China has reached 5.15 million kW in 2014 [34,35]. The cumulative and newly installed grid-connected capacities of China's distributed PV from 2009 to 2014 shows in Fig. 1. However, China's current distributed PV industry still has a series of problems and restrictions. Distributed PV power generation remains in its infancy whose development mainly relies on policy support. Economic benefit is still a main factor to restrict the development of solar power generation. In recent years, the efficiency of

* Corresponding author. Tel.: þ86 152 1072 4986. E-mail addresses: [email protected] (X. Zhao), [email protected] (Y. Zeng), [email protected] (D. Zhao).

1 China's National Energy Administration launched the first batch of PV concession tender projects in 2009. It is through public tender to select investment companies who bid low tariff for PV projects.

1. Introduction 1.1. Background

http://dx.doi.org/10.1016/j.energy.2015.05.084 0360-5442/© 2015 Elsevier Ltd. All rights reserved.

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5000

6

4500 5

4000 3500

4

New grid-Connected capacity/MW

3000 3

2500 2000

2

1500 1000

Cumulave gridConnected capacity/MW Annual growth rate / %

1

500 0

0 2009 2010 2011 2012 2013 2014

Fig. 1. Cumulative and newly installed grid-connected capacities of China's distributed solar photovoltaics from 2009 to 2014. Source [34,35].

distributed PV has continued to improve and the price of PV components has also been reduced. However, compared to the thermal power, wind power, water power and nuclear power generation, the power generation cost of distributed PV is still high. The management of grid-connected operation is a key restriction to the development of PV industry. The electric power system and price mechanism adapting to the distributed generation have not been formed in China for now. Therefore, it is difficult to exploit the advantages of small scale, high efficiency and high economic benefit of distributed PV power generation. The initiative of business for PV is brought down, and the large scale development of distributed PV power generation could be restrained. Besides, some regional policies tend to support local protection which could hinder the formation of a healthy market competition mechanism. The development of distributed PV industry also faces the bottleneck because of the investment and financing issues. Since there is no debt financing channel, the yield rate of distributed PV project is unattractive to investors for now. Although the National Development Bank gives support to distributed PV industry, the resources are limited. Distributed PV enterprises need the support from other financing platform urgently. 1.2. Literature review For China's current policies of distributed PV, Niu Gang [37] sorts out the policy system of the distributed energy development and summarizes the main points of incentive policies. By studying policy tools for PV power generation in China, Germany and Japan, Zhu Yuzhi et al. [50] put forward that the character and applicability of policy tools is noteworthy in policy design for China's distributed PV industry. The adaptability between the policy tools and institutional environment should also be taken into account to improve the effectiveness of the policy implemented. Jiang Lin [11] references the policies in developed countries involving the feed-in tariff policy, the net metering policy, cost-sharing policy and technical regulations of grid-connected. He also proposes the grid-connected policy recommendations for the development of distributed PV power generation in Jiangsu Province. Wu Qiong et al. [44] propose that the most practical and effective policy to promote the development of China's PV industry is to improve the tariff. By comparing the FIT (feed-in tariffs) policy in Germany, Britain, Japan and the United States, Huang Haitao et al. [9] make innovative recommendations on China's price subsidies for distributed PV. Based on China's national conditions and energy strategy, Meng Xiangan [17] makes specific policy recommendations so as to achieve the goal of sustainable development of China's PV. Mandatory grid access, the full

indemnification of the acquisition, tariff classification and the share of the whole grid etc are included. As to the economic performance of distributed PV power generation, scholars have conducted a number of related researches. Gilberto de Martino Jannuzzi and Conrado Augustus de Melo [6] use a technology diffusion model and calculate the cost of the mechanisms to evaluate its effectiveness in Brazil. Antonio Colmenar-Santos et al. [1] analyze the profitability of the grid-connected distribute PV facilities for household electricity self-sufficiency. Lin Lihua et al. [14] establish an economic analysis model to obtain the cost of the distributed PV system. Gobind G. Pillai et al. [7] present a comparative assessment of the near-term economic benefits of grid-connected residential PV systems Martin Mitscher and Ricardo Rüther [16] use the metric of the LEC (levelized electricity costs) and NPV (net present value) to analyze the economic performance of a private-owned distributed PV system of small installed capacity in Brazil. Claudius Holdermann et al. [4] employ revenue and cost structure of the representative PV system to determine if PV systems are economically viable in the Brazilian residential and commercial sectors. Huang He [10] believes that the personal upfront investment cost of distributed PV power generation project of family is still high and the payback period is long. But the NPV is still positive under the current government incentives. Moreover, the environmental and social benefits of the project are high which make it more investable. To assess the cost-effectiveness, Constantine Iliopoulos and Stelios Rozakis [5] study the economic and environmental aspects of the currently adopted policy and compare them to three alternative scenarios. Xiao Fengjun [45] points out the operation of power system and policies of economic dispatch have great impacts on the efficiency of electricity generation. From the perspective of national economic development, Jin Qiang et al. [13] insist that the current PV power generation does not have the national economic rationality in some areas of China. By using financial analysis and risk analysis, Jiao Guanghua [12] indicates that for distributed PV projects, the social and environmental benefits are quite high. This paper focuses on both policy and economic performance of China's distributed PV. Through summing up the main points of the relevant policies the policy objectives are clarified. And by using financial analysis method the economic performance of distributed PV projects under current policy environment are evaluated. The main objective of this paper is to explore the internal relations of policies and economic performance. The impact of each policy variable on economic performance, efficiency of policy instruments and development prospects of distributed PV are discussed. Furthermore, under the goal of promoting economic efficiency of distributed PV projects, recommendations for future policy adjustment are proposed. 2. Policies Development of distributed solar photovoltaics mainly benefited from the incentive policies in China. Currently the cost of PV power generation is still higher than traditional energy sources. China's PV industry is incapable of competing in the energy market without policy intervention. In recent years, with the policy support, distributed PV is showing explosive growth. However, the relevant policies still do not fully take effects. Lacking of supporting measures, incompleteness of working mechanism and unstandardized operation all result in a series of problems. Therefore, in the long term, distributed PV development requires not only incentive and support, but also regulation and constraints of policy. From 2009 to 2014, the central government introduced a variety of policies to support the development of China's distributed PV industry. Over the years, policies for distributed PV industry have experienced continuous adjustment. The policy system for distributed PV industry is shown in Fig. 2.

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X. Zhao et al. / Energy xxx (2015) 1e12

Policies

Technology innovation

Management improvement

Distributed PV

Market Development

Grid-connected

Resources coordination

Investment subsidy Subsidy adjustment Feed-in tariffs

Tax

Golden Sun Demonstration program Solar PV building projects Purchase of gridconnected electricity

VAT concessions

Fig. 2. China's policy system for distributed PV industry. Source:Authors.

3

in the early stages of construction requires a lot of government expenditure thereby increasing the burden on taxpayers. FIT is a new model of distributed PV subsidies in recent years. In August 2011, NDRC (National Development and Reform Commission) announced the formulation of unified national solar PV feedin tariffs [27]. On August 30, 2013, NDRC issued a notice, which clearly defined the subsidy. It bases on the whole of distributed PV electricity with the standard 0.0678 $/kWh (including tax).2 What's more, the acquisition price of grid-connected electricity follows the local coal-fired units benchmark price [29]. This policy divided Chinese mainland into three resource areas. And it changed subsidy mode from the unified nationwide subsidy to different subsidies adoption in three areas. Compared with initial investment subsidy, Feed-in tariff emphasizes the actual efficiency of PV power generation more. FIT can promote a more effective operation of a photovoltaic device. With the adoption of FIT, the actual generation

Fig. 3. Comparison of different modes of subsidies. Source：Authors.

2.1. Financial support 2.1.1. Subsidy adjustment From bidding price to the initial investment subsidy, then turned to FIT, China's distributed PV subsidies undergone three modes shown in Fig. 3. The concession tender program is started in 2009. The electricity price of PV power generation project was determined by bidding at that time. However, the negative side of this policy is that it could cause vicious competition, which will result in extremely low bid price. To promote the application of PV technology in various fields, the construction of Golden Sun Demonstration program and Solar PV building projects started. The central government allocated funds from Renewable Energy Special Fund to provide subsidies in accordance with a certain percentage of the initial investment. This subsidy is construction subsidy, which is based on the initial investment. Investors can apply the subsidy at the initial stage of project construction. At that time, the electricity of the project is mainly for self-consumption. The advantage of initial investment subsidy is easy to implement. However, the big one-time payment

of distributed PV power plants will be increased. Either large-scale PV power plants or distributed PV power plants mainly adopt FIT now. With the diversification of the business model of distributed PV, financial subsidies have made an appropriate change. The electricity generated by distributed PV was mainly for self-sufficiency at first. The initial investment subsidy mode was found more apt to attract investors at that time. With the grid access policies proposed to further regulate the grid-connected of distributed PV, the subsidy mode is correspondingly adjusted to FIT. This mode is more conducive to resources coordination and grid-connected management. From nationwide unified subsidy to subsidies by areas, the current subsidy mode can better promote the utilization efficiency of resources. The new notice released by NEA in 2014 is also to improve the electricity billing and subsidies allocation procedures for distributed PV [36]. It is recognized that in the policy system, all aspects

2 Exchange Rates on January 12, 2015: 1$ ¼ 6.1987RMB. The further occurrences will be the same.

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from subsidy allocation to subsidy implementation are gradually clarified and improved (Table 1, Table 2). 2.1.2. Value added tax concession In September 2013, the Ministry of Finance website released a notice. From October 1, 2013 to December 31, 2015, the implementation of drawback 50% policy of the VAT (Value Added Tax) is given to the taxpayers who sell solar power electricity products [22] (Table 3). According to the whole electricity quantity subsidy policy, the subsidy standard is 0.0678 $/kWh including tax. For PV power station, the implementation of drawback 50% policy of the VAT means the actual VAT rate is 8.5%. Compared with the original rate 17%, it is equal to make the feed-in tariff increase 0.0032 $/kWh to 0.0065 $/kWh. The decreased part of tax will increase yield rate 1%e2% for PV power station. It will directly benefit the PV power enterprises [8]. The VAT reduces a certain part of the subsidy. The implementation of drawback 50% policy of the VAT will give some

compensation to the decreased part of subsidies for PV products. It is equivalent to raise the feed-in tariff of distributed solar PV. Furthermore, the increase of feed-in tariff will be beneficial and incentive to distributed PV operating companies. 2.2. Technology innovation The technology support is a very important content of policies for distributed PV power generation in China. The central government repeatedly emphasizes to enhance technical innovation, strengthen the supporting smart-grid technology, etc (Table 4). After the development in recent years, great progress has been made in PV technology. The cost has been significantly reduced, the efficiency has been improved, and the distributed PV has been gradually connected to power grid. Distributed PV power generation has the characteristic of stochastic volatility. However, the existing technology can not make overall arrangements for charging and discharging control and operation of the inverter. The influence of distributed PV access to grid on grid security also can

Table 1 Process of initial investment subsidy policies adjustment. Year

2009

Subsidy mode: Initial investment subsidy Law and regulation

Target

Comments on accelerating the application of solar PV building projects Management interim measures for financial assistance fund for solar PV building projects applications Notice on the implementation of the Golden Sun Demonstration Program

The central government allocate special fund to grant to solar PV building projects according to the initial investment Clear the subsidy standard is 3.2265 $/W For grid-connected photovoltaic power generation projects, according to the 50% of total investment to give subsidies. For independent photovoltaic power generation systems in remote areas without electricity, according to the 70% of the total investment to give subsidies.

Source [18,31].

Table 2 Process of policies adjustment on FIT. Year

Subsidy mode: FIT Law and regulation

Target

2011 2012 2013

Notice on improving FIT for solar PV Notice on the task of Gold Sun Demonstration in 2012 NDRC's notice on exert the price leverage to promote the healthy development of the photovoltaic industry

Formulate a unified national feed-in tariffs for solar PV Subsidies levels down to 1.2906 $/W The subsidy standard is 0.0678 $/kWh (including tax) and the acquisition price of grid-connected electricity in accordance with local coal-fired units benchmark price

Source: [20,21,23,29].

Table 3 Relevant policies of VAT. Year

Law or regulation

Target

2013 2014

Notice on VAT policy of photovoltaic power generation Further implementation of the policy of distributed photovoltaic power generation

Implement drawback 50% policy of VAT Grid enterprises should handle the problems about invoicing and imposing taxes of purchasing products of distributed photovoltaic power generation project.

Source [22,36]. Table 4 Technical support policies. Year

Law or regulation

Target

2009

Notice on the implementation of the Golden Sun Demonstration Program

2011

Research for China's energy and long-term (2030e2050) development strategy Notice on the issuance of solar power energy technology development “twelfth five-year” special plan Further implementation of the policy of distributed photovoltaic power generation

To combine the financial assistance, technological support and market driven methods for Golden Sun Demonstration Project To enhance technological innovation and break through the bottleneck for distributed photovoltaic power generation To break through the distributed PV generation technologies

2012 2014

To strengthen the supporting smart grid technology and build secure and reliable grid system

Source: [19] [24,36].

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not be ignored. In order to ensure safety, stability and reliability of the power grid system, the exploitation of micro power grid, power grid energy storage and smart grid technology is indispensable. At present, China is still lacking of a complete technical standard system for distributed PV power station. The construction standard, the operation control and specific requirements of grid-connected all need to be defined. Therefore, there is an urgent need to perform consistent innovation, formulate the technical standardization system and absorb international technological innovation resources. With the acceleration of the PV power generation technology progress, the PV industry competitiveness could be enhanced. 2.3. Management improvement For China's distributed PV industry, a sound management system could ensure a stable and fast industry development. It involves the choice of development pattern, the engineering quality standard, the management for grid-connected, resources coordination, supervision, monitoring system construction and other aspects.

5

China's distributed PV power generation is mainly distributed in the central and eastern region where the power load is concentrated. To promote distributed PV application, government makes most of the efforts in building distributed PV demonstration industrial parks under planning and management. Distributed PV systems on various kinds of urban and rural public facilities are applied. PV generation is taken as an important element on planning and design of the new buildings. To make good planning for distributed PV application, both the roof area and electricity load should be considered. What's more, various forms of distributed PV applications should be encouraged to make full use of the qualified roof resources and leisure venues. Resources coordination policies are shown as Table 7. To promote large-scale development of distributed PV generation and coordinate resources, PV transformation for all kinds of qualified roof resources is particularly necessary. Series of issues in coordination roof resources should be addressed at the current stage. For instance, the mechanism for PV application coordination, the property rights of the roof, reservation conditions for PV installation, etc. 3. Economic performance

2.3.1. Grid connected The management of grid-connected operation is a key factor restricting the development of PV industry. Distributed PV has been gradually connected to grid in recent years in China. It brings efficiency improvement and convenience for uniform management of operation and maintenance. In order to specify the grid-connected processes, Table 5 shows the relevant policies for grid-connected. The difficulty for distributed PV access to grid has always been a big obstacle for the development of distributed PV market. During the Golden Sun Demonstration program, the grid-connected policies for demonstration projects are put forward. In 2012, the State Grid released a notice that they would support distributed PV access to grid [40]. In this notice, the State Grid also clarified the gridconnected service program. It was a big step in the development of distributed PV grid-connected in China. It has set a clear regulation for declaration and approval of PV grid-connected. Subsequent policies emphasize to simplify grid-connected procedure and constantly improve the grid-connected operation service. China's current process of grid-connected (Fig. 4) is helpful to save time and reduce the fee. Comparing with other forms of energy, the cost of gridconnected for distributed PV power generation still takes a high proportion of the whole investment. Therefore it also requires adequate compensation and sharing mechanism for gridconnected issue. 2.3.2. Resources coordination According to the solar radiation level, the country can be broadly divided into five areas, as is shown in Table 6:

Economic performance of distributed PV power generation is to examine the economic efficiency of the project on condition of the existing technology, market and policies. It is an important indicator to evaluate the current distributed PV industry development in China. The economic performance will directly affect the investors’ willingness to invest. 3.1. Methodology To determine the economic performance of distributed PV power generation in China, comprehensive consideration of the local electricity price, light resources, annual generation capacity and electricity load is quite essential. This paper examines IRR (Internal Rate of Return) and payback period of distributed PV systems under several different operating modes in different resource areas. China's five cities located in different resource areas are selected for scenario analysis (Table 8). The annual electricity production of distributed PV power plant depends on a series of factors. To estimate the annual generation capacity of distributed PV, the installed capacity, solar radiation levels and other interference terms are the main relevant variables in the calculation [38]. The generating capacity of distributed PV system is mainly determined by the annual solar radiation. Nevertheless the use of annual radiation figures alone may be inaccurate. Table 8 collects the actual historical field data of distributed PV projects in the selected five cities in the last few years. As Table 8 shows, historical electricity outputs basically match the levels of radiation in different areas. However, the generating capacity of distributed PV system in Urumqi and Tianjin

Table 5 Relevant policies for grid-connected. Year

Law or regulation

Target

2012

Comments on the grid-connected service task for distributed photovoltaic power generation (Interim) Several opinions on promoting the healthy development of the photovoltaic industry Further implementation of the policy of distributed photovoltaic power generation

Support for grid-connected distributed PV, purchase all surplus electricity, clear the enterprises grid-connected service program Simplify grid-connected procedure

2013 2014

To improve the gird access and grid-connected operations service for distributed photovoltaic power generation, to set up a “one-stop” grid-connected service window

Source [36,39,40].

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Procedure

Project owner

Grid companies

Grid-connected application

Proposing applications

Accepting applications

Determining program of connection

Drafting program of connection

Program confirmation

Issuing comment letters of connection

Project criteria and construction

Construction Proposing applications Of acceptance and commission

accepting applications Of acceptance and commission

Installation of electricity metering devices

Signing the Contract

Debugging and operation

Signing purchasing and selling contract and grid-connected dispatching agreement

Acceptance and commission

Grid-connected operation Fig. 4. Grid-connected procedure for distributed PV. Source [43].

Table 6 China's solar resource status. Area

Annual sunshine hours（h/a）

Annual radiation quantity kWh/m2 a

Standard coal-fired equivalent to the same amount of heat（kg）

Main areas

Solar resource levels

I

3200e3300

1855e2333

225～285

richest

II

3000e3200

1625e1855

200～225

III

2200e3000

1393e1625

170e200

IV

1400e2000

1163e1393

140e170

V

1000e1400

928e1163

115e140

Northern Ningxia, northern Gansu, southern Xinjiang, western Qinghai and western Tibet Northwestern Hebei, northern Shanxi, southern Mongolia, southern Ningxia, Central Gansu, eastern Qinghai, southeastern Tibet and southern Xinjiang Shandong, Henan, southeastern Hebei, southern Shanxi, northern Xinjiang, Jilin, Liaoning, Yunnan, northern Shaanxi, southeastern Gansu, southern Guangdong Hunan, Guangxi, Jiangxi, Zhejiang, Hubei, northern Fujian, northern Guangdong, southern Shaanxi and southern Anhui Most parts of Sichuan and Guizhou

rich

Medium

poor poorest

Source [15].

Table 7 Resources coordination policies. Year

Law or regulation

Target

2011

Notice on the implementation of the annual solar PV building projects demonstration in 2012 Notice on the declaration for application demonstration area of distributed photovoltaic power generation Further implementation of the policy of distributed Photovoltaic power generation

Solar photovoltaic building tilt to green ecological urban, tilt to the high degree of integration projects To promote distributed PV systems on various buildings and public facilities in urban and rural areas To encourage various forms of distributed photovoltaic applications, take advantage of qualified building roofs resources

2012 2014

Source [23,32,36].

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X. Zhao et al. / Energy xxx (2015) 1e12 Table 8 The historical annual electricity output of distributed PV projects in the selected five cities. Cities

Urumqi Hohhot Tianjin Hefei

Area I II III Annual energy yield per kW of 1233.13 1510.92 921 PV installed (Unit: kWh/kW)

7

conducted to evaluate this impact. In this case, five operating modes are classified according to a ¼ 100%, a ¼ 75%, a ¼ 50%, a ¼ 25%, a ¼ 0%.

Chengdu

IV V 1024.39 769.23

3.2. Scenario analysis

Source: [47] [2,3,46,48].

are slightly lower than expected. It may because that many other factors such as wind, humidity etc. could have a very big influence. The historical electricity production data from those real projects will be more realistic to provide investors with a reasonable and reliable reference. The annual electricity production of distributed PV system Q is derived by the following equation:

Q ¼ PH

(1)

Q is the annual electricity production of distributed PV system, in units of kWh, P the installed capacity of PV power generation system, in units of kW, H the average of annual energy yield per kW of PV installed, in units of kWh/kW. It is assumed that the utilization rate of solar radiation, components efficiency and other losses are included in the average annual generating capacity data. The incomes of distributed PV can be divided into three parts: 1. State subsidies; 2. Offset expenses for using electricity; 3. Receipts for desulfurized coal-fired electricity purchase. The annual electricity production of distributed PV system can be divided into the self-consumption part and the grid-connected part. The income of distributed PV power generation system is denoted as Equation:

A ¼ aP0 Q þ BQ þ ð1  aÞP Q

(2)

Q is the annual electricity production of PV system, in units of kWh, a the percentage of grid-connected electricity to the annual electricity production, B the government (including national, provincial and municipal) subsidy, P the local electricity price. It is assumed that there are only operation and maintenance costs and the lifetime of distributed PV systems is 25 years. The unit operation and maintenance costs m are about 8.0639 $/kW a and units cost of distributed PV system is about 1.4515 $/W [38]. Let the net present value of the cash flows in each financial year equal to zero throughout the whole calculation period, IRR can be obtained.

Static payback period ¼ initial investment=annual net income: (3) The proportion of grid-connected electricity also has an influence on the economy efficiency of distributed PV system. Sensitivity analysis about the proportion of grid-connected electricity is

3.2.1. Scenario-residential sector Based on the current development of resident distributed PV, we take a 4 kW installed capacity of distributed PV system as an example for discussion. The price ladder adopted in residential electricity price will be taken into account. The proceeds A1 of resident distributed PV system is denoted as equation:

A1 ¼ aP0 Q r þ BQ r þ P1 Q 1 þ P2 Q 2 þ P3 Q 3

(4)

Qr is the annual electricity production of resident distributed PV systems, in units of kWh; a the percentage of grid-connected electricity to the annual electricity production, P0 the desulfurization benchmark price. B1 the government (including national, provincial and municipal) subsidies for resident, P1、P2、P3 the price ladder for each electricity stage of residential electricity, Q1、 Q2、Q3 the electricity within each stage correspond with the price ladder, besides 1aQr ¼ Q1þQ2þQ3. Table 9 shows the current desulfurization benchmark price, residential distributed PV subsidies and residential electricity price ladder in the selected five cities. Urumqi located in resource area I has the lowest benchmark price. It is followed by Hohhot located in resource area II. While the highest benchmark price exists in Chengdu located in resource area V which has the poorest radiation resource. According to this, the different subsidies intensity of benchmark price in different regions can be drawn. In terms of resident distributed PV subsidies, these five cities all take the national standard 0.0678 $/kWh. On this basis, Hefei grants additional initial investment subsidies 0.3226 $/W and electricity subsidies 0.0403 $/kW∙h for the first 15 years of the project. In addition to Urumqi, these cities all take the price ladder, which metered electricity price according to the different levels of electricity consumption. That is, with the electricity consumption increases, the electricity price increases. Table 10 shows the parameter calculation results in five cities. In addition to Chengdu, the IRR of other distributed PV systems range from 6.8% to 21%. These rates are higher than the long-term deposit interest rates of bank. Moreover, in addition to Chengdu, the payback period of these projects are in the range of 5.64e12.68. It means that these projects are economically viable and with high investment value under the current policy environment. Distributed PV power generation systems in different areas show significant differences in annual net income, IRR and static payback period, and it is mainly affected by the following factors. The selected five cities are located in different resource areas. On condition of the same installed capacity, electricity price and

Table 9 Desulfurization benchmark price, residential distributed PV subsidies and residential electricity price ladder in the selected five cities. Cities

Urumqi

Hohhot

Tianjin

Hefei

Chengdu

Benchmark price P0 ($/kWh) Resident distributed PV subsidies B1 ($/kWh)

0.0423 0.0678

0.0485 0.0678

0.0653 0.0678

0.0734 0.0678

0.0858

0.0694 0e170 0.0774 170e260 0.1129 >260

0.0790 0e220 0.0871 221e400 0.1323 >400

0.0691 0.0678 0.0403 0.3226 $/W 0.0912 0e180 0.0993 181e350 0.1396 >350

Residential price ladder

The first stage The second stage The third stage

P1($/kWh) Capacity(kWh) P2($/kWh) Capacity(kWh) P3($/kWh) Capacity (kWh)

0.0843 0e180 0.1004 181e280 0.1327 >280

Source [28e30].

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Table 10 Comparison of resident distributed PV systems in different areas a is the percentage of grid electricity to the annual electricity production. Cities

Urumqi

Hohhot

Tianjin

Hefei

Chengdu

Area Annual generating capacityQr(kW$h)

I 4932.52

II 6043.68

III 3684

IV 4097.56 The first 15 years

V 3076.92

725.38 671.73 618.09 564.45 510.81 0.136 0.123 0.109 0.096 0.082 8.004 8.643 9.393 10.286 11.37

932.75 835.45 741.63 702.2 670.62 0.188 0.164 0.140 0.130 0.122 6.225 6.950 7.829 8.268 8.658

517.01 496.93 483.32 470.7 458.08 0.083 0.078 0.075 0.071 0.068 11.230 11.684 12.013 12.335 12.675

800.08 769.14 739.11 716.47 693.83 0.211 0.200 0.190 0.182 0.174 5.644 5.871 6.110 6.303 6.508

Annual net income Ar0(unit：$)

IRR

Static payback period(unit：year)

a ¼ 0% a ¼ 25% a ¼ 50% a ¼ 75% a ¼ 100% a ¼ 0% a ¼ 25% a ¼ 50% a ¼ 75% a ¼ 100% a ¼ 0% a ¼ 25% a ¼ 50% a ¼ 75% a ¼ 100%

subsidies, the generating capacity can directly affect the IRR and static payback period. The more generating capacity, the higher IRR and the shorter payback period of investment resident distributed PV system will get. Overall, the distributed PV projects located in areas with richer solar radiation resource have a certain advantage. For instance, project in Hohhot has the higher IRR and shorter payback period than Chengdu. It closely ties to the rich solar radiation in Hohhot which located in resource area II. The difference in desulfurization benchmark price, electricity price and subsidies has a significant impact on the net incomes of distributed PV system. Assuming that there is no regional difference between the investment cost and fee of operation, the net income has a direct impact on the IRR and static payback period. For example, based on the national subsidies 0.0678 $/kWh, Hefei add municipal subsidies for resident distributed PV project. It grants a combination of the electricity subsidies 0.0403 $/kWh for the first 15 years and the initial investment subsidies 0.3226 $/W. Strong subsidy intensity in Hefei directly improves the net income. The economic efficiency of the project in Hefei is even better than Hohhot who has the highest annual generation capacity. Under self-sufficiency condition, it increases the IRR as high as 21.1% and shortens the static payback period to 5.64 years. The investment efficiency is very impressive. The proportion of grid-connected electricity is also a key factor notably affecting the economic performance of distributed PV

25.00%

Urumqi 15.00%

Hohhot Tianjin

10.00%

Hefei Chengdu

5.00%

0.00% α=0%

α=25%

α=50%

α=75%

α=100%

Fig. 5. Sensitivity analysis on the grid-connected percentage of resident distributed PV system.

450.5 429.73 418.97 410.59 402.2 0.066 0.060 0.057 0.055 0.053 12.888 13.511 13.858 14.141 14.436

system. The sensitivity analysis results are shown in Fig. 5. For the five cities, when a ¼ 0%, the IRR reaches the maximum. With the percentage of grid-connected electricity increasing the IRR is diminishing. Namely the larger proportion electricity for selfconsumption, the higher IRR and the shorter static payback period of investment resident distributed PV system will get (the reasons will be further clarified in the industrial and commercial scenario). 3.2.2. Scenario-industrial and commercial sector Based on the current development of industry and commerce distributed PV, we take a 200 kW installed capacity of distributed PV system as an example. The proceeds Ai of industry and commerce distributed PV generation system is denoted as equation:

Ai ¼ aP0 Q i þ B2 Q i þ ð1  aÞP4 Q i

(5)

Qi is the annual electricity production of distributed PV systems, in units of kWh, a the percentage of grid-connected electricity to the annual electricity production, P0 the desulfurization benchmark price. B2 the government (including national, provincial and municipal) subsidies for industry and commerce, P4 the industrial and commercial electricity price. The original VAT rate on grid-connected distributed PV electricity is 17%. The implementation of 50% drawback policy of the VAT reduces the tax to half of the original rate. That is, the effective rate of VAT is r0 ¼ 8.5%. The net income is determined by the following formula:

Ai0 ¼ ðAi  200mÞ=（1 þ r0 ） 20.00%

The last 10 years 634.94 604.01 573.97 551.34 528.7

(6)

The main differences between residential scenario and industrial and commercial scenario are the installed capacity, subsidies and electricity price. As Table 11 shows, in terms of industry and commerce distributed PV subsidies, these five cities all take the national standard 0.0678 $/kWh. On this basis, Hefei additionally grants electricity subsidies 0.0403 $/kWh for the first 15 years. In terms of industrial and commercial electricity price, Urumqi located in resource area I and Hohhot located in resource area II, have low electricity price. However, Hefei located in resource area IV and Chengdu located in resource area V have high electricity price. The calculation results of the five cities are displayed in Table 12. In addition to Chengdu, the IRR of the industry and commerce distributed PV systems are in the range of 5.8%e19.6%. The static

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X. Zhao et al. / Energy xxx (2015) 1e12 Table 11 Desulfurization benchmark tariff, industry and commerce distributed PV subsidies and industrial and commercial electricity price in the selected five cities. Cities

Urumqi Hohhot Tianjin Hefei

Benchmark price P0（$/kW$h） 0.0423 0.0485 0.0653 Industry and commerce distributed 0.0678 0.0678 0.0678 PV subsidies B2（$/kW$h） 0.1226 0.1103 0.1304 Industrial and commercial electricity price P4（$/kW$h）

9

local electricity price minus desulfurization benchmark price. Then the formula (2) can be denoted as:

A ¼ （P0 þ BQ þ DP）Q  aDPQ

Chengdu

0.0691 0.0734 0.0678 0.0678 0.0403 0.1375 0.1386

(7)

Because China's residential electricity price ladder and industrial and commercial electricity price are both higher than desulfurization benchmark price, DP is always positive. Therefore, the total receipts are always negatively correlated with a.

Source [25,26,29].

4. Discussion payback period of these projects are in the range of 6.03e13.75 years. It can be drawn that the economic performance of these projects is also good with policy support. Compared to resident distributed PV projects, the installed capacity of industry and commerce distributed PV projects are much larger. So the generating capacity advantage of Hohhot located in resource area II is more prominent. In the case of self-consumption electricity, the generating capacity advantage in Hohhot directly reflected in IRR and the static payback period of the project. The IRR is as high as 19.6% and the static payback period is only 6.03 years. Consistent with the residential scenario, Chengdu located in resource area V has the poorest solar radiation resource and the lowest generating efficiency. Therefore, the distributed PV project in Chengdu has the lowest IRR and the longest static payback period among all distributed PV systems. Different subsidy policies for industry and commerce distributed PV also has a significant impact on IRR and the payback period of distributed PV projects. On the basis of the national subsidies level 0.0678 $/kWh, Hefei also grants municipal electricity subsidy for industry and commerce distributed PV project. The municipal subsidy is electricity subsidy of 0.0403 $/kWh for the first 15 years without investment subsidy. Compared with residential scenario, the subsidy intensity has been mitigated to a certain degree. In the case of self-consumption electricity, the IRR of the distributed PV project in Hefei is 17.7% which is lower than 21.1% in residential scenario. Different proportion of the grid-connected electricity also affects the economic performance of industry and commerce distributed PV project. The result of sensitivity analysis shows a trend consistent with the residential scenario. It is, with the proportion of the gridconnected electricity decreasing, the IRR increasing. The reason is that both residential electricity price and industrial and commercial electricity price are higher than the desulfurization benchmark price in China. By equation A ¼ aP0 Q þ BQ þ ð1  aÞP Q , P is the local electricity price. Denote P ¼ P0 þ DP，DP is the difference that

4.1. Impacts of policy variables Currently, the variables mainly affected by policies are subsidies, benchmark price, electricity price, taxes, technology and management. The subsidies, benchmark price, electricity price and VAT prescribed by policy have a direct impact on the incomes of distributed PV power generation. In addition, technical condition, management efficiency, the local resource endowment, electricity load, market and other factors also have direct or indirect influences. The flowchart of policies impacting the economic performance is shown in the Fig. 6. FIT is the subsidy for the whole electricity output of distributed PV system that will directly increase the investment income. The more electricity can be generated by the distributed PV system, the more subsidies can be obtained. Desulfurization benchmark price is the price of grid-connected electricity of distributed PV system. It has an impact on the incomes of grid-connected electricity part. The local electricity price also affects the economic efficiency a lot. It mainly impacts the fee for using electricity. Self-sufficient electricity of distributed PV system can offset this outlay, thus to bring in benefits. Subsidies, desulfurization benchmark price and the local electricity price, these three variables all have a positive correlation with the total receipts of distributed PV project. The VAT for distributed PV grid-connected electricity constitutes a cost of distributed PV project. As the implementation of drawback 50% policy of the VAT, this cost has been cut down to a certain degree and the IRR of the project has been further increased. Technical condition mainly affects the unit cost and power generation efficiency of the distributed PV system. Furthermore, the unit cost mainly affects the investment cost of distributed PV projects. The generation efficiency and regional resource endowments have a combined effect on the total electricity output of distributed PV system which is closely related to the benefits.

Table 12 Indicators calculation results of industry and commerce distributed PV systems. Cities

Urumqi

Hohhot

Tianjin

Hefei

Chengdu

Area Annual generating capacity Qi(kW h)

I 246626

II 302184

III 184200

IV 204878 The first 15 years

V 153846

41.788 37.225 32.662 28.1 23.537 0.164 0.141 0.118 0.095 0.071 6.947 7.799 8.888 10.331 12.334

48.119 43.816 39.512 35.209 30.906 0.196 0.174 0.152 0.131 0.109 6.033 6.625 7.347 8.245 9.393

32.162 29.399 26.636 23.873 21.11 0.116 0.102 0.088 0.073 0.058 9.026 9.874 10.899 12.160 13.752

44.894 41.665 38.436 35.207 31.977 0.177 0.1598 0.143 0.126 0.109 6.466 6.967 7.553 8.246 9.078

Annual net incomeAi0(unit: thousand $)

IRR

Static payback period(unit: year)

a ¼ 0% a ¼ 25% a ¼ 50% a ¼ 75% a ¼ 100% a ¼ 0% a ¼ 25% a ¼ 50% a ¼ 75% a ¼ 100% a ¼ 0% a ¼ 25% a ¼ 50% a ¼ 75% a ¼ 100%

The last 10 years 37.284 34.054 30.825 27.596 24.367

27.771 25.460 23.15 20.839 18.529 0.093 0.081 0.069 0.057 0.044 10.453 11.402 12.54 13.931 15.667

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X. Zhao et al. / Energy xxx (2015) 1e12

VAT concession

Electricity price

self-sufficient electricity

Policies Benchmark price

grid-connected electricity

Electricity price subsidies

generating capacity

Efficiency of distributed PV system

Technology

Incomes of distributed PV system

Economic performance

Cost

Efficiency of resource allocation

Management

Fig. 6. The influence of policies on economic performance. Source: Authors.

In terms of management, allocation of resources should be as efficient as possible. The efficiency of distributed PV system is closely related to the local radiation resource. Full considerations of resource rational distribution and the region's electricity load are necessary to make good use of qualified roof resources and leisure field.

government, the objective is to use less financial funds to get better policy performance. The annual generating capacity of China's PV in 2014 is about 25 billion kWh [35], equivalent to 3.0725109 kg standard coal.3 The economic performance of distributed PV in private sector is also good. Overall, the current policy instruments are efficient.

4.2. Efficiency of policy instruments The development of distributed PV brings not only the economic benefits for private investment sector but also the environmental benefits for society. To examine the efficiency of policies, a comprehensive study of the surplus of private sector, the positive externalities on the environment and the economic burden on society is needed [41]. Government expenditure on policy instruments can roughly measure the economic burden on society. Take residential distributed PV in Hohhot as an example. The costs of policy instruments for distributed PV are shown in Table 13. Construction subsidies can effectively increase the enthusiasm of investors to investment. However, the large amount of one-time expenditure is a heavy burden on government finances. The FIT and VAT concession are subsidies for PV electricity production. Therefore FIT and VAT concession can bring more environmental benefits of energy conservation. The costs of FIT directly relate to the generating capacity. This subsidy is payable by instalments within the project life cycle. FIT is conducive to achieve the policy objectives and reduce the financial burden on the government at each stage. VAT concession has low cost and can help to improve motivation of distributed PV investors. Through full life-cycle cost and benefit analysis, Su Jian et al. [42] indicate that for distributed PV projects, FIT is more cost-effective than the construction subsidies. At present, there is a policy package for China's distributed PV. On the one hand, initial investment subsidies are utilized to guide and promote investment. On the other hand, FIT and VAT concession are used to promote the actual generating capacity. For

4.3. Prospects “Solar power development ‘twelfth five-year’ plan” is proposed to give impetus to the large-scale development of solar power installed capacity. Its overall goals are as follows: solar power installed capacity reaches 21 million kW or more in 2015 and PV system on the user side achieves grid parity. Solar power installed capacity reaches 50 million kW or more in 2020 and PV system on the power generation side achieves grid parity. Specific development indicators are shown in Fig. 7： As “Solar Power Development ‘twelfth five-year’ Plan” layout, the proportion of distributed PV system installed capacity will be increased gradually. The distributed PV installed capacity will be further expanded and exceed the installed capacity of large-scale ground PV power plants in the future. There will be a sharp increase in its generating capacity, which can basically solve the problem of electricity shortage in some areas in the next few years. Besides, the electricity price will increase due to the rising fuel price of traditional forms electricity generation. Policy would be more inclined to exert the market force to guide the development of distributed PV power generation. The desulfurization benchmark price and subsidies in China also have a downward trend. It can be expected that the economic benefits of distributed PV projects will be further increased in the future.

3

Electricity (equivalent): 0.1229 kg standard coal/kWh.

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X. Zhao et al. / Energy xxx (2015) 1e12

11

Table 13 Comparison of the policy instruments costs. City

Huhhot

Policy instruments Sources of funds Subsidies Total government expenditure（unit: $）

Construction subsidy Renewable energy Special Fund 50% of total investment One-time payment 2903

MW

60000 40000 20000 0

2010

2015

2020

Installa on of distributed photovoltaic power sta on

410

10000

27000

Installa on of Solar thermal power sta on

0

1000

3000

Installa on of photovoltaic power sta on

450

10000

23000

Fig. 7. Capacity installed layout in “solar power development ‘twelfth five-year’ plan”. Source [33].

At present, China's distributed PV is still in its infancy. With the improvement of solar power technology, the cost of solar power will be reduced continuously. Based on the learning curve of PV module prices, it can forecast that the price of PV modules will be 1.45 $/W by 2015 and 1.00 $/W by 2020 [49]. The unit installed costs of distributed PV has a significant impact on economic performance of distributed PV power generation. Thus the economic efficiency of distributed PV will improve considerably. The gradual expansion of domestic PV market size will lead to significant improvement of the market competitiveness. It is foreseeable that in the next 5e10 years, distributed PV industry will take off in China. China's distributed PV power generation will become the main stream of PV industry in the near future.

FIT Additional renewable energy tariff 0.0678$/kWh Total payment of 25 years 10244

VAT concession Tax Drawback 50% of the VAT 1826.75 (In condition of FIT)

efficiency of distributed PV has a geographical character. Government subsidy should focus regions with high power generation efficiency and centralized electricity load. Thus, subsidies could guide the investment direction. When distributed PV industry develops into a certain stage, the financial subsidies should be gradually reduced. The government should moderately reduce subsidy intensity and make the market play a pivotal role in allocation of resources. Through the price ladder leverage and some market forces the economic efficiency of distributed PV projects can also be great. With fully playing the role of market regulation, a government-guidance, market-driven and enterprise mutually-beneficial benign business model of distributed PV can be built. In addition to direct subsidies by government, more investment and financing channels need to be exploited. The government should encourage establishing the local financing platform for distributed PV projects to reduce the reliance on government expenditure. Then the monotonous financing form of distributed PV projects can be transformed. The government should allocate more funds to support the research and development of distributed PV technology. Especially in regions of abundant solar energy resources, natural resources need to be taken full advantage of through technical progress. Technological innovation and market regulation are required for further efficiency improvement and costs reduction. With the establishment of the multi-level technology innovation system, the overall advance of China's PV technology and applications could be realized. Then the economic performance will be further improved and the investment potential of the distributed PV project will be further explored.

5. Conclusion and recommendations Acknowledgement In this paper, economic performance of distributed PV system has been estimated in two scenarios under the current policy environment. Distributed PV system in areas with rich radiation resource and strong subsidy intensity has considerable economic performance and investment value. The economic performances of distributed PV projects vary from region to region. When choose the site for distributed PV project, investors should pay sufficient attention to the geographical factor. Distributed PV systems in both two scenarios have the greatest economic benefits under the selfconsumption electricity mode. Therefore, distributed PV projects located in load concentrated areas thus to adopt the selfconsumption operation model is economically viable. For government, the cost-effectiveness of policies is considerable. Because FIT is more efficient than the initial investment subsidy, FIT should be widely adopted for China's distributed PV currently. Considering the current policy environment and the development status of distributed PV, the following policy recommendations are proposed: The cost-effectiveness of policies is significant for the government to choose the policy instruments for distributed PV. FIT has a high efficiency among the current policy tools in China. The government should keep FIT as the main policy tool and other policies as supplements to improve the efficiency of policies. The generating

This paper is supported by “National Natural Science Foundation of China Project” (Grant No. 71273088, 71471058) and Science and technology project funding by State Grid Liaoning Electric Power Supply Limited Company Benxi Electric Power Supply Company (Grant No.FZJS1400824) Nomenclature PV NEA LEC NPV FIT NDRC VAT IRR

photovoltaic national energy administration levelized electricity costs net present value feed-in tariffs national development and reform commission value added tax internal rate of return

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