Analysis of the Functionality of the Chinese Wind Power Market

A Comparative Evaluation with Germany

Simeon Sarafow

, Guanwei Huang

1,2Sino-German School for Postgraduate Studies, Tongji University, Siping Road 1239, Shanghai 20092, China

*Corresponding author

Keywords: Wind Power, Renewable Energies Market Functionality, China, Germany

Abstract: This paper examines the functionality of the Chinese wind energy market. For this analysis, the indicators

market structure, market behaviour, and market result are used. For each indicator, several criteria, which

are based on literature research, are tested for both the Chinese and the German wind energy market and

then are evaluated in a comparative manner. Finally, on the basis of the most serious challenges in the

Chinese wind energy market, that are revealed by the comparative analysis, measures are deducted with

support from expert’s opinions. The measures are meant to provide potential solutions for the improvement

of the functionality of the Chinese wind power market.

1 INTRODUCTION

China is well aware of the importance of the

environment. China recently ratified the Paris

Agreement(Volvovici et al. 2016) and emphasized

the importance of the environment in its strategic

orientation, namely its Five Year Plans (FYP)(AHK

Greater China 2016). Furthermore, a change in the

energy sector towards cleaner energy generation is

planned. As a result, China is not only the country

that has the worldwide highest annual investments in

renewable energy technologies but also the

worldwide highest installed capacity, namely 129.34

GW in 2015. However, even though the US has only

half of China’s capacity of wind power plants, it

generates more electricity out of them(Davidson

2013; Zhang et al. 2016).

Thus, China does not utilize its available

resources - wind power and wind power plants - as

efficiently as it could. These are indices for a

malfunction in the wind power sector in China that

does not only have an effect on the Chinese air

quality in cities but also on global warming. This

study analyses the functionality of the Chinese wind

power market that seems not to provide sufficient

incentives. Germany’s wind power market is used as

a reference.

2 THEORETICAL

BACKGROUND

After the first Chinese wind power pilot project in

Rongcheng was installed in 1986, basically three

phases were run through. First, wind power projects

were dependent on foreign capital and credits and

feed-in tariffs were way below the actual costs.

Second, in the 90s there was still a significant, for

generators disadvantageous, difference between

costs and tariffs. However, the government already

intended to promote renewable energies. Finally,

after 2003 the plan for domestic manufacturing was

published to reduce production costs and promote

wind power(Yao, Herrerias 2014).

Nowadays China is the country that has the

highest newly installed capacity in 2015 with 48.5%

of the globally installed capacity and the largest

amount of cumulative capacity with 33.6%

worldwide. For 2016 30.83 GW newly installed

capacity was planned which is slightly less than

2015. An approximately steadily increase is

expected until 2017 when a decreasing growth is

predicted due to the decreasing feed-in tariff.

On the other side, offshore wind power is still

not very meaningful despite its increasing growth

rate and 306.5 MW newly installed capacity in

2015.The total installed capacity was about 1 GW

and therefore is not taken into further

account(GEWC 2016).

3 METHOD

The analysis of the Chinese wind power market

follows the pattern displayed in Figure 1.

Figure 1: Methodological approach (own representation).

The first step is the consideration of the

functionality in terms of excessive market power of

single generators. Therefore, three different areas are

taken into account, namely the market structure, the

market performance and the market results which

represent the standard classification of market

functionality tests(Ellersdorfer 2009; Peters 2000).

Based on a literature review, possible criteria that

serve as indicators for the functionality are taken

into account for each area. They are described first

before their usability for the purpose of this thesis is

checked based on the feasibility, i.e. the complexity,

the informative value, the applicability for the

Chinese circumstances and most importantly on the

availability of required data which is significantly

the limiting factor when it comes to research topics

that are that sensible. Data availability is checked

using literature review as depicted in the previous

parts plus using interviews with international and

Chinese experts.

The selected criteria are provided with necessary

data to conduct a statement about the single aspects.

However, since there is no standardized

classification of functionality and isolated statements

are hard to interpret by themselves, the German

wind power market is used as a reference, i.e. is

evaluated regarding the same criteria as China, so

that a comparative statement can be drawn. Since the

outcomes of the different areas cannot be considered

separately, the results of all criteria assessment are

evaluated holistically to determine the result and

statements about the market functionality in

comparison to Germany.

4 RESULTS

The table below shows an overview of the results of

the comparison between China and Germany

regarding all covered criteria. The status can have

the specifications “potential available”, “same” and

“lead” and describes the contribution of the

respective criteria to the functionality of the Chinese

wind power market in comparison to the German

one.

The column data quality specifies if the data

available is “medium”, “good” or “insufficient”.

Thereby the worse data quality out of the German

one and Chinese one is considered. For each

criterion, three specifications that are

straightforward to distinguish are chosen to allow a

result that is both easy to understand and clear.

The overview illustrates that the indicators for

the functionality of the Chinese market are fulfilled

in lower degree than in Germany in all aspects

except the concentration of OEMs and wind power

plant operators. Many aspects like the quality issues

or the innovation progress can be justified by the

fact that the wind power started to play an important

role in China only ten years ago. The improvement

of these factors may take some time. One reason

might be that the whole understanding of the

Chinese economy is undergoing a transformation

from the factory of the world towards an innovative

nation.

Other criteria show problems that are inherent in

the system like the pricing policy respectively the

not yet fully-developed market for electricity.

Another huge issue related to the market is the

powerful position of the grid companies that not

only act like monopolies but also have a huge

influence on the wind power plant operators as well

as on other aspects.

Another outcome of the overview is the fact that

the majority of the data available is not good. This is

not only the case for China but for Germany as well.

Especially trustworthy quantitative data is hard to

gather. Even several experts could not comment on

all aspects since they lack relevant information.

There are four main measures that can help to

improve the situation in China. Two of them are

physical aspects, namely the development of the

infrastructure and the elimination of overcapacities.

The development of an appropriate infrastructure

enables the transmission of renewable electricity

from the western generation to the eastern load

centers to increase the productivity. Therefore, an

integration of the existing grid systems is necessary.

Due to economic aspects, the development of the

fundamental grid should be preferred over high

voltage direct current lines and storage systems like

batteries. These additional measures are not required

until the share of renewable generated electricity

reaches 50%.

Table 1: Results of the functionality analysis(own

representation).

Criterion

Status of

China

compared to

Germany

Data

quality

Market structure

Market concentration and

propensity for concentration and

fusions

same medium

Degree of linkage

potential

available

medium

Market entry barriers

potential

available

medium

Analysis of Porter’s Five Forces

potential

available

medium

Threat of new entrants

potential

available

medium

Power of suppliers lead medium

Power of customers

potential

available

good

Threat of substitute products

potential

available

good

Market transparency

potential

available

medium

Product differentiation

potential

available

good

Market Performance Testing

Performance and result based

indices

not

applicable

insufficient

Optimization and Simulation

Models

not

applicable

insufficient

Sales and price policy

potential

available

good

Demand-related behavior

potential

available

medium

Product Improvement and

Innovation actions

potential

available

good

Risk orientation

potential

available

medium

Advertising and information

behavio

not

applicable

insufficient

Propensity for restriction of

competition

not

applicable

insufficient

Market Result Testing

Quality

potential

available

medium

Innovation and technological

progress

potential

available

good

Productivity and capacity

utilization

potential

available

good

Adaptation ability

potential

available

medium

Contribution to shortage and

surplus correction

not

applicable

insufficient

Even though coal fired power plants have full

load hours below 4000 hours new coal power plants

are planned. Thus, the threat of substitutes increases.

As shown in the previous part the overall capacity is

increasing faster than the economic growth

respectively the demand. To defuse the situation,

coal fired power plants have to be closed or at least

not newly build.

The third measure, an economic electricity

market that allows a more market oriented price

development is already planned and tested in pilot

areas but is not mature yet. It is important that

wholesale market prices can emerge freely so that

they help to find the most efficient allocations.

Furthermore, the market must be highly flexible

since renewable energies are volatile. One approach

can be flexible intraday markets that trade products

with a delivery period as short as 15 minutes and

late gate closures. Moreover, regulations for all

aspects of the market and especially the short term

market have to be specified.

The fourth measure, the unbundling of the grid

companies, might be the most difficult one due to

conflicting interests and their huge influence. Not

only the steps of the value chain transmission,

distribution and sale should be segregated but also a

variety of companies should be involved. Thus,

customers can choose their electricity provider and

competition is strengthened. As a further result, the

power of the grid companies will decrease and put

the wind power plant operators in a stronger

negotiation position.

4 CONCLUSIONS

The conducted analysis shows challenges regarding

the functionality of the Chinese wind power market,

which are mainly caused by the still immature

character of the developing electricity market and

the high power of grid companies. This results in a

relatively low grid connection of wind power plants

and high curtailment rates. Possible solutions –

unbundling, the introduction of more market

mechanisms and restructuring of the infrastructure

and power mix – are deducted based on the German

market. The dealing with the problems has a high

priority in China. The government introduces many

new regulations to deal with environmental

problems as mentioned in the current FYP and

China’s announced coal peak. China is currently

undergoing a transformation of its energy sector and

also continuing to open its markets to more market

power. Thus, the conducted research has a high

timeliness. Moreover, Germany functions as a role

model with regard to its energy transition. Especially

China has shown in the past that it is willing to

compare existing models of other energy markets

and adapt its own policies to the best fitting ones.

Germany with its EEG (renewable energy law) and

ARegV (incentive ordinance for grid operators) is of

high interest for Chinese officials like CNREC.

China’s political system allows the government

to implement reforms and changes in policies

relatively fast and with relatively few resistances.

The main requirement is the political willingness for

the considered change. According to expert’s and

published regulations and statements, China is

willing to change its energy system.

Another important factor is that the Chinese

population is favouring renewable energies. A

survey shows that over 90% of the interviewed

Chinese people are willing to pay more for

electricity generated by renewable energies.

However, the current Chinese power market does

not enable them to opt for such electricity.

Thus, the government and the population is

willing to change its energy system and the

population accepts that it could come at some

additional costs. The only missing part is missing

regulations to implement successful changes.

Therefore, deducted solutions could be of high

importance for Chinese think tanks that consult the

Chinese government regarding new policies.

However, due to the scope of this analysis

several data sets that would be necessary for an in-

depth analysis could not be gathered. Data

concerning the energy market are hard to acquire in

general. Since the market is highly regulated, market

actors have no interest to publish all of their data

that could be used for regulations limiting their

profits. Therefore, another analysis that is based on a

broader and deeper data fundament should be

conducted. To achieve the highest success,

cooperation with a Chinese research institute is

proposed. Thus, data gathering could be easier

because of the overcoming of language barriers.

Future research should also focus on the reform of

the Chinese energy market that had just begun when

this research was conducted and when only limited

information was available.

The planned reform of the energy market is a

further indicator that China is willing to reform its

energy system. An analysis like this one that depicts

current challenges and provides points of reference

for possible solutions might help China to overcome

its role as the global largest CO2 emitter.

ACKNOWLEDGEMENTS

I would like to show my gratitude especially to the

chair of Innovation Management & Information

Management at the Sino-German School for

Postgraduate Studies of Tongji University in

Shanghai for the support on both technical level and

organizational level.

Moreover, I would like to pay my regards to

everyone who helped to complete this paper,

especially the experts I interviewed.

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