Feed-in tariffs for renewable power and the role of auctions: the Chinese & global experience

Abstract

Global installed capacity of non-hydro renewable energy has grown dramatically in recent years, with an increase of ~3x from 2010 to 2018. The increase in China has been even more dramatic, with a ~ 8.8x rise over the same period. Furthermore, almost all of the increase has been in the form of wind and solar power. When governments decided to stimulate the massive increase in renewable energy capacity, the policy tool of choice was the non-competitive allocation of administered feed-in tariffs (FITs). The decision to subsidize new capacity through the use of this tool reflected the desire to quickly spur the development of a new industry which lacked experience and hard data. For many countries, the absolute cost of the subsidy associated with FiTs has increased significantly with the rapid expansion of renewable energy capacity and depressed prices for conventional fossil fuel. In 2014, it is estimated that China’s annual renewable energy subsidies were ~14 billion Yuan. They subsequently increased by roughly 10x to ~140 billion Yuan in 2018, and are estimated by Bloomberg New Energy Finance to have totaled almost 230 billion Yuan in 2019. This level and trend in renewable energy subsidies in China is arguably both fiscally untenable and economically unnecessary. Related to the dramatic increase in renewable energy capacity is a dramatic reduction in the cost of producing wind and solar power. Over the 2009–2019 period the global average Levelized Cost of Electricity fell 81% for solar PV, 46% for on-shore wind, and 45% for offshore wind. Policymakers are increasingly choosing to set FiTs through a competitive auction process. The key reasons for doing this are: (a) to reduce the subsidy burden on governments; (b) to facilitate the transfer of lower production costs to consumers; (c) to reduce the incentive to overinvest in new capacity; and (d) to avoid equity concerns associated with excessive profits for project developers. Over the past decade, there has been exponential growth in global auctioned renewable power capacity – rising from 3 GW in 2012 to 52 GW in 2017. However, auctions are only now starting to be deployed on a wide scale. As recently as 2018, they contributed to less than 10% of the global renewable energy capacity in any one year.