Laws and procedures to establish a project in China
As China works towards its carbon neutrality goals, wind power will account for an increasingly large share of the overall power mix, which means that offshore wind farms—particularly those in deep sea and far from the coastline—will be required. What are the opportunities for foreign entities as this market expands? What regulations need to be taken into account and what is the process for developing a Chinese offshore wind farm project? Jun Wei and Aldo Boni De Nobili of Hogan Lovells explain all.
Legal Framework
Laws and regulations
The Chinese legal framework governing offshore wind power projects comprises many national and local laws and regulations, often intertwined in ways that create a puzzling and incomplete picture.
The Renewable Energy Law provides the overall framework for the renewable energy sector. [1] A draft of the revised law, now called the Energy Law, was published on 3rd April 2020. When issued in its final form, it will serve as the overall framework legislation for the entire energy sector.
Supplementary lower-level legislation provides details for wind power projects, In particular:
a) the Interim Measures for the Administration of the Development and Construction of Wind Power Projects, which regulate the development and construction of both onshore and offshore projects;[2] and
b) the Measures for the Administration of the Development and Construction of Offshore Wind Power Projects, which provide a framework regulation on development plans, project approval, business licences, site selection, environmental protection standards, and construction and operation.[3]
Several other laws and regulations—which are not fully coordinated with each other—deal with other areas such as grid operation, grid connection, purchase of electricity by the grid, selection and awarding of projects, subsidies, and use and exploration of sea areas.
Authorities
Offshore wind power projects involve many different authorities at various levels, with the following being the main stakeholders:
a) The National Energy Administration (NEA), a bureau administered by the National Development and Reform Commission (NDRC), oversees the energy sector. It issues offshore wind power development and construction plans; administers the planning, development and construction of projects and the selection of developers; and issues the project approval and business licence for electricity generation.
b)The State Oceanic Administration (SOA) provides the Sea Areas Certificate (see Use of Sea Areas) approves the installation of submarine cables, and examines the navigation safety and environmental impact.
c) The NDRC determines the feed-in tariff, and the Ministry of Finance (MOF) deals with central-level subsidies.
d) The Ministry of Housing and Urban-rural Development (MOHURD) issues approvals and permits for onshore construction activities.
e) The State Administration for Market Regulation registers the project entity.
Foreign investment regime
Foreign entities are permitted to have 100 per cent ownership of wind power projects, and foreign investment in the renewable energy sector, including wind power, is encouraged.[4]
Selection of Projects and Developers
Since 2019, projects and developers are selected by local NEAs through a competitive procedure (Competitive Allocation Scheme) pursuant to the Administrative Guidance for Competitive Allocation of Wind Power Projects (Trial).[5]
Projects are broadly divided in two categories:
a) Projects for which a developer signed a wind power development agreement with the local government and completed the preliminary works. They are assigned to the entity that carried out the preliminary works, and are prioritised based on an NEA scoring system.
b) Projects for which the local NEA and local government themselves carried out the preliminary works. The developer is selected through a competitive tender.
Purchase of Electricity; Subsidies
The grid companies that operate the power grids to which offshore wind power plants (OWP) are connected must purchase the entire output of the plant.[6] The grid company pays an on-grid tariff the maximum amount of which is set and periodically adjusted by the NDRC to purchase the electricity.
The Renewable Energy Development Fund established by the MOF provides a central-level subsidy for projects which is built into the on-grid tariff as a premium.[7] The OWP receives the whole amount of the on-grid tariff (including the premium) from the grid company, which in turn applies for the reimbursement of the premium from the Renewable Energy Development Fund.
Central-level subsidies are being phased out. They are not available to projects not approved and not connected to the grid by 31st December 2021.[8] Local governments, however, may provide subsidies locally.
Project Construction
Deadline for commencement of construction
Before construction, the developer must obtain project approval from the local NEA and certain other permits (see below). The developer must commence construction within a specified period assigned by the local authorities (typically one or two years after obtaining project approval), otherwise the project approval and the Sea Areas Certificate may be revoked. Some provinces may grant extensions( typically a one-time one-year extensions). The construction of the foundations of the first wind turbine generator marks the commencement of construction.
Approvals and permits
A developer must obtain a large number of opinions, approvals and permits before it can commence construction. In particular, the following are needed, in sequence:
a) Prepare documentation (for and with the SOA, NEA and other authorities) such as: a feasibility study report; an environmental impact report; official opinions following review of submarine cables routing and use of land; a navigation safety report; safety pre-evaluation report; and official opinions following review of grid connection.
b) Obtain project approval from the local NEA.
c) Obtain from SOA a Sea Areas Certificate and a permit of construction of submarine cables, and from the MOHURD certain permits for onshore construction works.
After construction has been completed, the developer needs to attend to inspection and acceptance procedures on the construction works and environmental protection facilities of the OWP.
Thereafter, the project entity obtains a business licence for electricity generation, which is issued by local NEA and valid for a 20-year term (renewable). Projects with an installed capacity of less than 6 megawatts are exempted from such licence requirements.
Additional steps to connect the project to the grid include entry into a grid connection agreement, and an assessment on whether the basic conditions for grid connection have been met.
Different rules may apply locally, so it is important to verify the requirements and procedures with the local authorities.
Power Purchase Agreement
After the construction of the OWP, the grid company and the developer enter into a power purchase agreement (PPA). The purchase price is fixed during an initial period at the price set through the Competitive Allocation Scheme. If the province where the project is located sets a lower benchmark tariff, the tariff under the PPA is automatically reduced to match.
Use of Sea Areas
Sea Areas Certificate
The ownership of sea areas belongs to the state.[9] The developer of a project must obtain from the SOA the right (represented by the Sea Areas Certificate) to use the relevant sea areas, and the right to use any uninhabited islands (if necessary).
Fees
The developer must pay a fee to the local SOA to use the sea areas and any uninhabited islands. It may also need to pay compensation to the owners of any fishery facilities located at the project site.
Opportunities for Foreign Investors
No foreign investment restrictions apply to wind power projects in China. Foreign developers with a good track record on projects in deep water and far into the sea may have a significant competitive advantage compared to local players.
It is still very rare to see a foreign developer or equity investor involved in OWPs in China, but this may change as foreign participation in Chinese projects, from all levels, seems necessary for China to achieve its goal of developing more OWPs, and in a sustainable way. Foreign investors may acquire equity interests in existing projects, something that is being considered by several players who are engaging in discussions with local state-owned developers. Corporate structures can be set up in China for equity investment purposes.
Hogan Lovells is a leading global law firm with 50+ offices in six continents. Our global renewable power group supports clients on innovative and complex projects, including solar, wind (onshore and off), hydroelectric, geothermal, energy storage, biomass, biofuels, waste-to-energy, CHP plants, smart grid applications, and other advanced technologies. We are consistently recognised as having one of the premier offshore wind practices in the world, having structured many ‘first of its kind’ and precedent-setting transactions.
[1] Regulation (EU) 2018/1807 of the European Parliament and of the Council of 14 November 2018 on a framework for the free flow of non-personal data in the European Union, European Commission, 14th November 2018, viewed on 14th April 2022, <https://eur-lex.europa.eu/eli/reg/2018/1807/oj>
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have a leading full-service legal practice. We advise on inbound and outbound
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client through our domestic intellectual property agency.
[1] The latest version of which was issued by the National People’s Congress on 26th December 2009.
[2] Issued by the NEA on 25th August 2011.
[3] Issued by the NEA and the SOA on 29th December 2016.
[4] Pursuant to the Special Administrative Measures (Negative List) for Foreign Investment Market Access (2021 Version) and the Special Administrative Measures (Negative List) for Foreign Investment Market Access in Pilot Free Trade Zones (2021 Version) jointly released by the NDRC and the Ministry of Commerce on 27th December 2021 and effective on 1st January 2022, and the Encouraged Foreign Investment Industry Catalogue (2020 Version) jointly released by the NDRC and the Ministry of Commerce on 27th December 2020 and effective on 27th January 2021.
[5] Issued by the NEA on 18th May 2018.
[6] The State Grid Corporation of China, the China Southern Power Grid, and certain local independent grid companies.
[7] Calculated as follows: (on-grid tariff – benchmark tariff for coal-fired electricity) / (1 + applicable VAT rate).
[8] See the Several Opinions to Promote the Healthy Development of Non-Aqueous Renewable Energy Power Generation, and supplemental notice, issued in 2020.
[9] In accordance with the Law of the People’s Republic of China on the Administration of Sea Areas, issued by the National People’s Congress on 27th October 2001.
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