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Government planners are trying to set a benchmark price for solar power, but the industry is resisting. Will market forces prevail?

(Caijing Magazine) In a bid to drive down solar energy costs, the National Development and Reform Commission (NDRC) is preparing to set a lowball price benchmark for major solar power plants.

A source close to the NDRC, the government’s chief economic planning agency, told Caijing that a draft benchmark price plan for large, on-grid solar plants was completed in early October and would be discussed at the agency’s highest level soon.

Nevertheless, controversies in the industry over benchmark pricing could force additional changes before the plan is formally released.

Pricing is considered a crucial factor for this budding branch of the renewable energy industry as it helps potential investors calculate return expectations while driving power company and industry supplier decisions.

A 1.09 yuan per kilowatt hour price set by the government through a supplier-distributor bidding process in Gansu Province in March may have been too low for many solar power producers to match in the future ( 1 yuan = 0.14 USD)

But according to NDRC’s original plan, the 1.09 yuan price – the lowest in the young industry’s history — would be used to set the future industry benchmark. The price was set for the Dunhuang 10 megawatt photovoltaic (PV) power project. Approved prices for four, earlier solar projects averaged 4 yuan per kwh.

“Policy for on-grid electricity decides the fate of power generation companies,” said a source at a Dunhuang power company. “If 1.09 yuan per kilowatt hour is set as the benchmark price, the majority of photovoltaic enterprises will be unable to achieve profitability.”

Instead of using a lowest bid as a yardstick – a practice that’s proven successful for setting wind power prices — solar energy firms are advocating a system that sets prices according to costs.

NDRC’s latest thinking is that setting a benchmark price of 1.09 yuan would pressure upstream solar producers to cut costs of raw materials needed for a batch of new solar projects. This would work toward achieving the long-term goal of an on-grid solar power price that’s below 1 yuan per kwh, which in turn would affect the entire solar industry.

‘Proper’ Benchmark

Before the Gansu price was determined, NDRC’s Pricing Department was more inclined to set a benchmark based on cost analysis. According to the original department plan, the benchmark price for PV electricity initially would have been set at 1.20 yuan per kwh. Further discussions led to a call for prices between 1.10 and 1.20 yuan.

“The greatest point of controversy lies in how the benchmark price will be decided,” a source close to NDRC told Caijing.

Zhang Guobao, deputy director of NDRC and director of the National Energy Bureau, introduced in 2003 a system for setting wind power prices through competition. The government would pick a relatively large wind-power plant and compile area meteorological data for potential investors, which would then calculate and offer bids.

Earlier this year, Zhang re-emphasized the importance of this pricing mechanism, saying whether a product’s price is reasonable impacts development of the entire industry linked to the product.

“Practice proves that the wind power pricing mechanism we have been using is correct,” Zhang said. “Whether investors or grids, they all found a fair price.”

Zhang said most wind power is distributed at between 0.5 yuan and 0.6 yuan per kwh. And as the scale of wind power and turbine manufacturing increases, stand-alone costs are decreasing.

On the basis of wind power tenders, the NDRC set moderate prices through bidding in various regions and then set local benchmarks.

Yet in July, NDRC said wind power prices would no longer be set by tender pricing but through a fixed, regional benchmark system. Based on wind levels and construction requirements, NDRC divided the country into four wind energy resource areas with corresponding wind power benchmarks for on-grid pricing of 0.51 yuan, 0.54 yuan, 0.58 yuan and 0.61 yuan per kwh.

In early August, NDRC said measures were being promoted to reform on-grid, retail and other types of prices for electricity. Benchmark prices for renewable energy subsequently drew significant attention. Because of the correlation between wind and solar power, industry insiders sharpened their focus on solar benchmark prices.

“New policies for on-grid energy prices significantly impact the industry,” Han Xiaoping, director of China Energy Network Information, told Caijing. A fixed price for on-grid wind power fixes expectations for investors, Han explained, and PV companies are similarly affected.

Vying for Price Power

Wind power has been the renewable energy focus for major domestic power groups in China. Solar projects have been considered too expensive.

Internationally, government subsidies are being used to spur the solar industry. But Zhang supports the use of market forces to determine prices.

“In the initial stages of development of an industry, the government can use financial subsidies to offset the high price of renewable energy sources,” Zhang said. “But as the scale increases, subsidies are not the only option.

“Market forces should determine the proper price and guide development of the industry.”

China has not ignored the subsidy approach, however. Early this year, the government launched the Solar Roofs Plan, which offers subsidies for solar architecture demonstration projects. China is also considering two plans including the Golden Sun Project to support the use of PV technology.

But officials say China’s subsidy options are limited.

“China’s financial situation makes it difficult to introduce subsidies on a large scale,” said an expert at the China Electricity Council (CEC). “Reducing the cost of solar energy through market price competition may be a more realistic option.”

NDRC’s Pricing Division proposal to use cost analysis for benchmark pricing could be a way to adjust the industry to China’s unique circumstances. Solar power plants would not use the resource classification approach to set prices, but would develop a unified benchmark price in areas with the right resource levels.

An NDRC cost analysis of solar power generation components, design, construction and installation, ancillary facilities and maintenance pointed to a proper benchmark price of 1.20 yuan per kwh. But Bureau of Energy officials said the difference between cost-based electricity and tender prices were too great, prompting a scaling back to the proposed level between 1.10 yuan and 1.20 yuan per kwh.

A source at one of the five power generating groups participating in bidding for the Dunhuang project said the 1.09 yuan price is currently the bottom line for on-grid PV. For most businesses, though, this price is too low. As a result, most PV photovoltaic companies currently prefer cost-based price setting.

Many industry experts say on-grid solar prices are not the most important issue facing the industry. Behind the proposed 1.20 yuan on-grid electricity price is a hefty serving of government support related to a chess game being played between market forces and central planning.

“The government wants to control the pricing of PV power generation services, so they need to redefine pricing from a cost-based perspective,” a CEC expert said.

Source: Cajing, 29.10.2009 by staff reporter Li Qiyan

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