Energy Policy 70 (2014) 64–73

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Energy Policy
journal homepage: www.elsevier.com/locate/enpol

Levelized cost of electricity (LCOE) of renewable energies

and required subsidies in China
Xiaoling Ouyang c, Boqiang Lin a,b,n
a
Newhuadu Business School, Minjiang University, Fuzhou, Fujian 350108, China
b
Collaborative Innovation Center for Energy Economics and Energy Policy, Institute for Studies in Energy Policy, Xiamen University,
Xiamen, Fujian 361005, China
c
Energy Research School, College of Energy, Xiamen University, Xiamen, Fujian 361005, China

H I G H L I G H T S

Levelized cost of electricity (LCOE) of renewable energies is systemically studied.

Renewable power generation costs are estimated based on data of 17 power plants.

Required subsidies for renewable power generation are calculated.

Electricity price reform is the long-term strategy for solving problem of high cost.

art ic l e i nf o a b s t r a c t

Article history: The development and utilization of renewable energy (RE), a strategic choice for energy structural
Received 23 January 2014 adjustment, is an important measure of carbon emissions reduction in China. High cost is a main
Received in revised form restriction element for large-scale development of RE, and accurate cost estimation of renewable power
12 March 2014
generation is urgently necessary. This is the first systemic study on the levelized cost of electricity (LCOE)
Accepted 20 March 2014
Available online 13 April 2014
of RE in China. Results indicate that feed-in-tariff (FIT) of RE should be improved and dynamically
adjusted based on the LCOE to provide a better support of the development of RE. The current FIT in
Keywords: China can only cover the LCOE of wind (onshore) and solar photovoltaic energy (PV) at a discount rate of
Levelized cost of electricity 5%. Subsidies to renewables-based electricity generation, except biomass energy, still need to be
Renewable energy
increased at higher discount rates. Main conclusions are drawn as follows: (1) Government policy
Feed-in tariffs
should focus on solving the financing problem of RE projects because fixed capital investment exerts
considerable influence over the LCOE; and (2) the problem of high cost could be solved by providing
subsidies in the short term and more importantly, by reforming electricity price in the mid-and long-
term to make the RE competitive.
& 2014 Elsevier Ltd. All rights reserved.

1. Introduction economic growth is constrained by carbon emissions reduction.

1.1. Research background
China is currently experiencing rapid development of urbani-
zation, along with the requirement for adequate energy supply
(Jiang and Lin, 2012). The Chinese government proposed that both
energy intensity and carbon intensity would be reduced by 40–45%
in 2020 compared to the level in 2005, implying that China's
n
Corresponding author at: Newhuadu Business School, Minjiang University,
Fuzhou, Fujian 350108, China. Tel.: þ86 5922186076; fax: þ 86 5922186075.
E-mail addresses: ouyangxiaoling@gmail.com (X. Ouyang), bqlin@xmu.edu.cn,
bqlin2004@vip.sina.com (B. Lin).
Therefore, it is necessary for China to develop new technologies and
new energies to meet the growing energy demand, and simulta-
neously, to optimize energy consumption structure. Renewable
energy (RE) will play an increasingly important role in energy
diversification and the development of low-carbon economy (IEA,
2011; Li and Lin, 2013).
Supportive government policies have underpinned the rapid
development of RE industry in China (Qi et al., 2014). However, the
problem of high-cost is a main restriction for the large-scale
development of RE (Lin, 2012). On one hand, power generation
costs of RE are higher than that of traditional energy resources; on
the other, significant cost reductions cannot be achieved in the
short term. Environmental value is highly related to per capita

http://dx.doi.org/10.1016/j.enpol.2014.03.030
0301-4215/& 2014 Elsevier Ltd. All rights reserved.
 X. Ouyang, B. Lin / Energy Policy 70 (2014) 64–73
income (Flores and Carson, 1997). At present, the relatively low
level of per capita income in China results in the relatively low
evaluation and assessment of environmental quality by the gen-
eral public, and the low willingness as well as low ability to pay for
environment. Apparently, it is difficult for the Chinese government
to encourage the public to support clean energy development and
pay for the renewable energy cost. Therefore, support policies are
essential for the deployment of RE in China.
Financial subsidy is an important method in dealing with the
problem of high-cost of RE. The development of RE requires
large-scale investment in research and development (R&D),
which is characterized by high-risk, high-investment and
uncertain-return, thus market competition alone cannot meet
the substantial investment demand. The United States govern-
ment provides continued financial support for R&D of RE
(Congressional Budget Office, 2012). Presently, financial funds
are sufficient for the Chinese government to support the devel-
opment and utilization of RE, thereby to promote the develop-
ment of RE industry (Lin, 2012). The direct financial transfer,
including the feed-in-tariff (FIT) system, has been commonly
used by governments in subsidizing RE (IEA, 2011). Subsidies to
RE in China are mainly for power generation projects. An
accurate estimation of renewable power generation cost is the
basis of effective government subsidies, which determines the
future development of RE in China.
1.2. The LCOE of renewables and the FIT system
The LCOE method, which estimates the cost of lifetime-
generated energy, is used as a benchmarking tool to assess the
cost-effectiveness of different energy generation technologies
(OECD, NEA/IEA, 2010). The method of LCOE has been widely used
for the estimation of power generation cost (Wiser et al., 2009;
Singh and Singh, 2010; NREL, 2013). For example, IRENA (2012a,
2012b) estimated power generation costs of different technologies
around the world in 2010. OECD, NEA/IEA (2010) did a compre-
hensive research based on data of 190 power plants located in 21
countries. Roth and Ambs (2004) accessed the LCOE of 14
electricity generation technologies. Results indicated that incor-
porating externalities into the full cost approach has an enormous
impact on the LCOE and the relative attractiveness of electricity
generation options. Darling et al. (2011) calculated the LCOE for
photovoltaics based on input parameter distributions feeding a
Monte Carlo simulation.
Feed-in-tariff (FIT), a policy mechanism for subsidizing RE, is
more effective than alternative supportive schemes in promoting
renewable energy technologies, as it provides long-term financial
stability for investors (Lesser and Su, 2008). Recent experience
from countries around the world suggested that FIT was the most
effective policy that promoted the rapid and sustained deploy-
ment of RE (European Commission, 2008; Couture and Gagnon,
2010; Thiam, 2011). Degression of tariff rates could deliver renew-
able generation capacity at lower cost (Mabee et al., 2012). Unit
subsidy cost of renewables is expected to fall gradually over time
thanks to ongoing R&D and learning-by-doing, coupled with rising
fuel and wholesale electricity prices and higher CO2 prices (IEA,
2011). Klein et al. (2008) analyzed different FIT designs that were
applied in the Member States of the European Union, and
proposed that national FIT design should take local conditions
such as renewable electricity potentials, the cost of electricity grid
as well as social aspects into account. If not properly designed, FIT
could be economically inefficient. Lesser and Su (2008) put
forward an innovative two-part FIT, consisting of both a capacity
payment and a market-based energy payment. Moore et al. (2013)
indicated that FIT needed to meet industrial payback and industrial
targets. Jenner et al. (2013) assessed the strength and effectiveness
65
of renewable FIT in Europe, and showed that the interaction of
policy design, electricity price and electricity production cost was a
more important determinant of renewable electricity development
than policy enactment alone.
Studies showed that the RE policy in China still needed to be
improved. Wu and Xu (2013) reviewed the FIT policy as well as
subsidy policy of RE in China, and showed that the effects of policy
implementation were unsatisfactory. Zhang et al. (2009) analyzed
opportunities and challenges for RE policy in China, and pointed
out that government support was the key power for RE develop-
ment. Schuman and Lin (2012) indicated that China's Renewable
Energy Law, which regulated the FIT system and funding mechan-
isms, had led to rapid growth of RE in China. However, there are
still numerous problems for China's supportive policies for RE
development. Huo and Zhang (2012) pointed out that there was no
predetermined degression of the capital subsidy to push cost
reduction; moreover, insufficient R&D in China had impeded the
future development of RE.
To the best of our knowledge, there has been no study that
systematically estimates the LCOE of RE as well as the required
subsidies under the current FIT system in China. This paper fills a
much needed research gap. Undoubtedly, the problem of high-cost
is imperative for the development of RE. In this study, we
concentrate on evaluating the LCOE of renewables and required
subsidies under the existing FIT mechanism in China. Based on our
findings, we propose policy recommendations for decision makers
on shaping the short-term tactics and the long-term strategy for
RE development.
The remainder of this paper is organized as follows. Section 2
describes methodology. Section 3 presents results. Section 4
discusses required subsidies for renewable power generation.
Section 5 summarizes our findings and draws policy implications.
2. Methodology
Levelized cost of electricity (LCOE) is a convenient tool for
comparing the unit costs of different technologies over their
economic life (OECD, NEA/IEA, 2010). The LCOE methodology is
an abstraction from reality and is used as a benchmarking or
ranking tool to assess the cost-effectiveness of different energy
generation technologies (Branker et al., 2011). Estimation of the
LCOE of renewables is the basis of the appropriate FIT.
There are two models for calculating the LCOE: (1) the EGC
Spreadsheet model and (2) the System Advisor Model (SAM). The
former has been widely used in research reports by the OECD and
IEA/NEA in the cost estimation of power generation, while the
later is developed by National Renewable Energy Laboratory
(NREL). The advantage of the EGC Spreadsheet model is that it
can estimate the LCOE of different generation technologies under
the constraint of limited data. Therefore, we use this method to
predict the LCOE of renewables in China.
As shown in Fig. 1, there are four major components determin-
ing the LCOE of renewable power generation technologies –
resource quality, equipment cost and performance, the balance
of project cost and the capital cost. All of them can vary
significantly between individual projects and countries (IRENA,
2012a, 2012b). Khatib (2010) reviewed “Projected costs of gener-
ating electricity—2010 Edition” by OECD, NEA/IEA (2010), and
emphasized the key conclusion of the study “the LCOE is deter-
mined by country-specific circumstances”. Therefore, in order to
obtain more accurate results, the LCOE of RE should be studied
based on specific countries. Following the above principle, this
paper attempts to estimate the LCOE of renewable energies based
on the data of 17 power plants in China.
66 X. Ouyang, B. Lin / Energy Policy 70 (2014) 64–73
On site
Equipment
• Transport cost • Project development
• Site preparation
• Import levies
• Working capital
• Value-added taxes
• Auxiliary equipment
Factory gate • Contingency payments
Equipment
Fig. 1. Cost indicators of renewable power generation.
The LCOE is equal to the lifecycle cost divided by lifetime
energy production (Fig. 1). If the electricity prices were equal to
the levelized average lifetime costs of electricity generation by
different technologies, an investor would precisely break even on
an investment project. The above statement is based on two
important assumptions:
1) Interest rate: the interest rate “r” used for discounting costs and
benefits is stable and does not vary during the lifetime of the
project under consideration.
2) The electricity price: the electricity price is stable and does not
change during the lifetime of the electricity generation project.
The calculation of the LCOE starts from Eq. (1), which states
that income of power generation equals to the cost of power
generation (both of them are in present value terms).
T
T
solar power project in Gansu province, Jialonggou solar power
∑ Et P E ð1 þ rÞ  t ¼ ∑ ðI t þ Ot þ M t þ Dt Þð1 þ rÞ  t
t¼0 t¼0
where Et is the amount of electricity production in year t; Pe
denotes the constant price of electricity; (1 þr)  t indicates the
discount factor for year t; It is the investment cost in year t (e.g.,
the initial construction investment, interest payment, administra-
tion cost, taxes, etc.); Ot & Mt signifies the operations and
maintenance costs in year t; Dt stands for decommissioning cost
in year t; T represents the lifespan of a power plant; t represents
the t year life-cycle for a power plant. All variables are calculated
in nominal terms for the convenience of evaluating required
subsidies under the current FIT system in China in Section 5.
Eq. (1) is followed by
 T 
T


P e ¼ ∑ ðI t þ Ot þ M t þ Dt Þð1 þ rÞ  t = ∑ Et ð1 þrÞ  t ð2Þ
t¼0 t¼0
The Eq. (2) is equivalent to Eq. (3)
 T
T

LCOE ¼ P e ¼ ∑ ðI t þ Ot þM t þDt Þð1 þ rÞ  t = ∑ Et ð1 þrÞ  t
t¼0 t¼0
Using the discounted cashing flow (DCF) method, the calcula-
tions of LCOE of renewable energies in this paper are based on the
levelized average lifetime cost approach. In this paper, we use Eq.
(3) to estimate the LCOE of different renewables in China. The
most important assumptions are the utilization of fixed discount
rates, which are 5%, 8% and 10%. Due to limited data, the discount
rate could not be differentiated by renewable energy market and
the risk of different technologies (Khatib, 2010).
It should be noted that the estimation is based on data of
different power plants located in different regions of China, while
the impact of power plants on the entire power system is not
included (e.g., the cost of grid connection, dispatching costs due to
intermittence of wind and solar energy, etc.). In order to evaluate
• Financing Levelized costs
• Operation & Maintanance of electricity
• Taxes
• at 5% discount rate
• Capacity factor
• at 8% discount rate
• Lifetimes
• at 10% discount
• Costs of decommissioning rate
Project cost
the additional required subsidies for renewable power generation,
our estimation takes government interventions such as value-added
tax and favorable income tax into account. Furthermore, we do
not consider the price of CO2 (Lin and Li, 2011; Li and Zhang, 2012;
Li et al., 2013), the income from Clean Development Mechanism
(CDM) as well as the external benefits from reductions of environ-
mental pollution and carbon emissions. All data provided are
nominal which do not exclude the factor of inflation.
Data of wind (onshore) power plants in this paper are taken
from the Feasibility Study Reports of Halahaixiang wind power
project in Heilongjiang province, Ningdong wind power project in
Ningxia province, Qiaowan wind power project in Gansu province,
Azuoqi wind power project in Inner Mongolia, Laizhou wind power
project in Shandong province, and Turpan wind power project in
Xinjiang province. Data of solar power plants are taken from
Feasibility Study Reports of Maigaiti solar power project in Xinjiang
province, Gonghe solar power project in Qinghai province, Weiwu
ð1Þ
project in Tibet, Wuqia solar power project in Xinjiang province,
TianheYangguang solar power project in Qinghai province. Data of
biomass power plants are taken from the Feasibility Study Reports
of Houde biomass project in Hubei province, Dangyang biomass
project in Hubei province, Hailun biomass project in Heilongjiang
province, Baoquanling biomass project in Heilongjiang province,
and Huoqiu biomass project in Anhui province.
3. Results
3.1. Wind (onshore)1
Major influencing factors of the LCOE of wind (onshore) include
the construction costs, operations and maintenance (O&M) costs,
electricity generation amount and lifespan of a power plant.
 Among these factors, the construction cost is composed of equip-


ment cost, infrastructure and construction cost, and interest
payment during the construction period. According to Tegen
ð3Þ et al. (2012), O&M costs make up 10–15% of the LCOE in the first
several years of a turbine's lifecycle, and then increase to 20–35%
by the end of its lifetime. O&M costs consist of material costs,
repair costs, line maintenance costs, etc. Material costs may vary
from CNY 0.8 to 2 million per year according to the capacity of a
wind farm (Zhang, 2011). Repair costs will rise with the increase in
service life of a wind turbine. In this paper, we assume that the
1
Based on estimates from China Meteorological Administration (2009), China's
potential capacity of onshore wind is about 2380 GW at 50-meter hub height; and
China's potential capacity of offshore wind is about 200 GW, taking account of hub
heights of 50 m and water depth of 5–25 m in the offshore area. In late 2010, China
surpassed the U.S. as the country with the largest installed capacity of wind power.
The total installed capacity of wind power grew at the rate of 20.8% annually, and
reached 75324.2 MW in 2012 (CWEA, 2012).
 X. Ouyang, B. Lin / Energy Policy 70 (2014) 64–73 67

Table 1
Investment costs of wind (onshore) power plants in China.

Plant name Capacity Estimated Overnight Construction Equivalent Interest payment Decommissioning Average O&M
(MW) electricity construction costs duration (year) hours (million CNY/year) costs (CNY/kW) costs (CNY/kWh)b
generation (million CNY)a
(GWh/year)

Laizhou 32  1.5 95.22 450.14 1 1984 22.11 444.29 0.090

Halahaixiang 33  1.5 106.70 444.21 1 2155 21.82 424.86 0.080
Ningdong 33  1.5 103.50 434.03 1 2091 21.32 415.12 0.080
Turpan 33  1.5 102.45 424.81 1 2049 20.87 406.31 0.079
Azuoqi 80  2.5 376.22 1598.05 2 1811 65.20 365.41 0.060
GuazhouQiaowan 134  1.5 422.58 1894.28 2 2102 77.29 431.26 0.063

a
Overnight construction costs include owner's construction costs, contingency costs and interest payment.
b
Average O&M costs are the discounted values.

Table 2
The LCOE of wind (onshore) power in China.

Plant name Location Category of wind Tax-exclusive FIT The LCOE (CNY/kWh)
resource area (CNY/kWh)a
At 5% discount rate At 8% discount rate At 10% discount rate

Laizhou Shandong Class IV 0.562 0.624 0.745 0.827

HalaHaixiang Heilongjiang Class IV 0.562 0.552 0.656 0.729
Ningdong Ningxia Class III 0.535 0.560 0.665 0.738
Turpan Xinjiang Class III 0.535 0.540 0.640 0.709
Azuoqi Inner Mongolia Class I 0.470 0.473 0.572 0.640
Qiaowan Gansu Class II 0.498 0.497 0.609 0.680

a
Rate of value-added tax for wind power projects in China is 8.5%. The initial value of FIT multiplied by 1.085 is tax-exclusive FIT.

material cost is CNY 6.0 per MWh based on the feasibility study
report (FSR). There is no repair cost in the first two years of a wind
turbine's lifetime under warranty. According to FSR, the rate of
repair cost is assumed to be 1% of the total fixed capital cost in the
third operating year of a wind turbine's lifetime, which rises to 4%
after the fourth year. The discount rates in this paper are set as 5%,
8% and 10% under three scenarios. According to OECD, NEA/IEA
(2010), expected lifespan of a wind plant is 20 years.
Other influencing factors of the LCOE of wind (onshore) are as
follows: financial expenses, administrative expenses, taxes and
decommissioning costs. Financing costs are mainly interest pay-
ments involved with borrowing money for the construction of
wind farms. For most of the wind power projects in China, about
70–80% of the investments are supported by bank loans. Basically,
the loan terms are about 10–16 years and the interest rates range
from 6% to 8% accordingly. Labor cost takes the largest proportion
in the administrative expenses. In order to simplify calculation, we
assume that there is no difference in the unit labor costs among
different wind farms. The average annual salary per worker is set
as CNY 60,000. In addition, employees' benefits, compensation
insurance and housing funds are assumed to account for 14% and
43% of total administrative expenses, respectively. Taxes consist of
value-added tax (VAT), additional tax and income tax. The pre-
ferential VAT rate for wind power projects in China is 8.5%. The
rate of city maintenance and construction tax is 5%, the rate of
education surtax is 3%, and the income tax rate is 25%. For wind
power projects in China, enterprises could enjoy income tax
exemption in the first three years and half reduction of income
tax in the subsequent three years. Moreover, we assume that fixed
assets depreciate at a rate of 5% during twenty-year depreciation
period. The residual value of fixed assets accounts for 30% of the
initial investment value, which is consistent with the data from
OECD, NEA/IEA (2010). Lastly, decommissioning cost is assumed to
account for about 5% of the construction cost.
Table 1 presents the costs of wind power plants located in
different regions of China.
Based on Table 1 and Eq. (3), the estimated LCOE of wind
(onshore) in China is reported in Table 2.
From Table 2, the levelized cost of wind (onshore) power
ranges from 0.473 to 0.624 CNY/kWh at 5% discount rate, and
ranges from 0.640 to 0.827 CNY/kWh at 10% discount rate. The
LCOE of wind power exhibits an increasing trend with the decline
in the quality of wind resources. The levelized cost of wind
(onshore) electricity of Azuoqi in Inner Mongolia is 0.473 CNY/
kWh at 5% discount rate, which is the lowest among the above
wind (onshore) power plants. Moreover, it is close to the current
value of tax-exclusive FIT (0.470 CNY/kWh), implying that the
feed-in tariffs (excluding tax) in China could only cover the LCOE
of wind (onshore) at the lowest discount rate. Averagely, the LCOE
of wind (onshore) at 8% discount rate is about 0.1 CNY/kWh,
higher than that at 5% discount rate, and the LCOE of wind
(onshore) at 10% discount rate is about 0.07 CNY/kWh, higher
than that at 8% discount rate.
3.2. Solar photovoltaics2
The cost of electricity generated by a photovoltaic (PV) system
is determined by the capital cost, the discount rate, the variable
costs, the level of solar irradiation and the efficiency of solar cells
(IRENA, 2012a, 2012b). Cost of financing and efficiency is sub-
stantial, implying the huge potential of cost reduction. Specifically,
construction cost is composed of the PV system (photovoltaic
arrays, solar inverters, electrical substations) cost, infrastructure
construction cost, installation cost, interest payment and contin-
gency cost. Cost of PV modules makes up over half of the total
equipment cost in the PV system, which fluctuates with market
prices. The discount rates in this paper are set as 5%, 8% and 10%.
2
According to Wang and Zheng (2012), the average solar radiation in China is
about 1500 kWh/m2 annually, and the annual solar radiation is above 1000 kWh/
m2 for 98% of China's total land area, and 2000 kWh/m2 for 3% of China's total land
area. In 2007, China became the world's major producer of solar photovoltaic cells.
68 X. Ouyang, B. Lin / Energy Policy 70 (2014) 64–73

Table 3
Investment costs of solar PV power plants in China.

Plant name Capacity Estimated electricity Overnight Construction Equivalent Interest payment Decommissioning Average O&M
(MW) generation construction duration (year) hours (h) (million CNY/year) costs (CNY/kW) costs (CNY/kWh)b
(GWh/year) cost (million CNY)a

Jialonggou 10 17.2 224.79 1 1720 10.25 1085.11 0.073

Wuqia 20 36.79 238.24 1 1839 22.64 595.6 0.044
Gonghe 25 43.81 465 1 1752 15.28 898.83 0.098
Weiwu 30 49.99 405.95 1 1667 19.94 642.55 0.066
TianhuaYangguang 50 79.5 591 0.25 1590 28.08 562.62 0.060
Maigaiti 100 179.38 1281.01 1 1794 55.06 636.64 0.061

a
Overnight construction costs include owner's construction costs, contingency costs and interest payment.
b
Average O&M costs are values after discounting.

Table 4 0.1 CNY/kWh lower than the exiting FIT (excluding tax). The
The LCOE of solar PV in China. current feed-in tariffs (excluding tax) in most regions are higher
than the LCOE of solar PV projects at 5% discount rate, except those
Plant name Tax-exclusive FIT The LCOE (CNY/kWh)
(CNY/kWh)a in Qinghai province (TianheYangguang project) and Tibet (Jialong-
At 5% At 8% At 10% gou project). The LCOE of solar PV at 8% discount rate is about
discount discount discount 0.2 CNY/kWh, higher than that at 5% discount rate; and the LCOE
rate rate rate at 10% discount rate is about 0.14 CNY/kWh, higher than that at 8%
Gonghe, Qinghai 0.922 0.818 0.978 1.085
discount rate.
Maigaiti, Xinjiang 0.922 0.839 1.012 1.133
Wuqia, Xinjiang 0.922 0.897 1.084 1.212 3.3. Biomass3
Weiwu, Gansu 0.922 0.965 1.147 1.270
TianheYangguang, 1.060 1.168 1.426 1.605
Qianghai Most of China's biomass power plants adopt direct combustion
Jialonggou, Tibet 1.060 1.337 1.616 1.800 technologies that use agro-forestry wastes as raw materials. There
are three determinant factors for the LCOE of biomass: construc-
a
The value-added tax rate for solar PV projects is 8.5%, and the initial value of
tion costs, fuel costs and discount rates. Construction costs are
FIT multiplied by 1.085 is tax-exclusive FIT.
composed of costs of generator sets and boilers, electric power
construction and installation and interest payment during the
construction period. Among all expenses, costs of generator sets
According to the feasibility study report (FSR) of photovoltaic and boilers make up about 60–80% of the total construction
power plants in China, we assume that the O&M cost of a solar investments. Fuel costs denote the charges of straw as well as
plant accounts for 0.2% of the total construction cost in the first other agricultural and forestry wastes, which make up about 60–
five years, and rises to 0.5% in the subsequent seven years and then 70% of the LCOE of biomass energy. In this article, we assume that
reaches 1% in the last thirteen years. Based on the above assump- the prices of straw and other agricultural and forestry wastes
tions, the O&M cost makes up 10–12% of the LCOE of solar PV, range from CNY 200 to 400 per ton. Discount rates are set in three
which is in line with the data of OECD, NEA/IEA (2010). Besides, scenarios: 5%, 8% and 10%. Moreover, we assume that the auxiliary
the attenuation of the PV system will lead to the decline in power rate is 12% based on the Feasibility Study Reports (FSR) of
electricity generation. Systematic efficiency of a solar PV is usually biomass power plants in China.
assumed to be about 80% of the initial value by the end of its Other factors influencing costs of biomass power generation
lifecycle. In this article, we assume that the electricity generation are O&M costs, financial expenses, administrative expenses and
amount decreases at the rate of 0.8%. taxes. In this article, we assume that the O&M costs are CNY
Other factors that influence the cost of solar PV power genera- 350 per kW. Financial costs mainly come from interest payments.
tion are as follows: financial costs, administrative expenses, taxes For most of biomass power plants in China, about 70–80% of the
and decommissioning costs. Specifically, assumptions in this part investments are supported by bank loans. The interest rates range
are almost the same as assumptions in the estimation of the LCOE from 6% to 7% and the loan terms are usually 10 years. Labor costs
of wind (onshore) power in China; the only difference is that make up the largest proportion in administrative expenses. Com-
required laborers for the solar PV system are much fewer. In pared with other RE technologies, biomass power projects are
general, only 3–4 workers are needed for a solar PV plant with the labor-intensive. Generally, a biomass power plant with the capa-
capacity of 10 MW. Expected lifespan of a solar PV power plant is city of 30 MW needs about 150 workers in China. Based on the FSR
25 years in this article. of biomass power plants in China, we assume that annual income
Table 3 presents the cost of solar PV power plants located in per labor is CNY 40,000; the employees' welfare and insurances
different regions of China. are assumed to account for 14% and 43% of their total salaries,
Based on Table 3 and Eq. (3), we estimate the LCOE of solar PV respectively. Taxes of solar PV power plants consist of value-added
in China. tax (VAT), additional tax and income tax. The preferential VAT rate
From Table 4, the levelized cost of solar PV power generation for biomass power projects is 8.5%; the rate of city maintenance
ranges from 0.818 to 1.337 CNY/kWh at 5% discount rate, and from and construction tax is 5%, and the rate of education surtax is 3%.
1.085 to 1.800 CNY/kWh at 10% discount rate. Most of China's solar
PV power plants are located in the resource-rich regions such as
3
Qinghai, Xinjiang and Gansu provinces in Northwest China. The National Energy Administration (2012) estimated that China's available
biomass resource is about 0.46 billion tons of coal equivalent (TCE) per year, of
levelized cost of solar PV power generation of Gonghe project in which the utilization rate is less than 5%. According to China's 12th Five-Year Plan
Qinghai province is 0.818 CNY/kWh at 5% discount rate, which is (FYP) for biomass energy, utilization of biomass will exceed 50 Mtce per year, and
the lowest among the above solar PV power plants. It is about the installed capacity of biomass will reach 13 GW in 2015.
 X. Ouyang, B. Lin / Energy Policy 70 (2014) 64–73 69

Table 5
Investment costs of biomass power plants in China.

Plant name Capacity (MW) Estimated electricity Overnight construction Equivalent Interest payment Fuel costs Average O&M costs
generation (GWh/year) costs (million CNY) hours (h) (million CNY/year) (Million CNY/year) (CNY/kWh)

Houde 30 195 297.41 1950 9.83 60 0.061

Dangyang 25 160 204.94 1600 8.52 55 0.062
Hailun 24 164 260.89 1640 9.82 52.8 0.058
Baoquanling 30 195 287.68 1950 11.52 55 0.061
Huoqiu 30 225 310 2250 16.24 66 0.053

Table 6 renewable power generation projects is highly urgent and

The LCOE of biomass in China. necessary.
Plant name Tax-exclusive FIT The LCOE (CNY/kWh)
(CNY/kWh)
At 5% At 8% At 10% 4. Discussion
discount rate discount rate discount rate

Houde 0.691 0.627 0.672 0.703
Dangyang 0.691 0.648 0.686 0.713
Hailun 0.691 0.651 0.698 0.731
Baoquanling 0.691 0.585 0.628 0.658
Huoqiu 0.691 0.611 0.683 0.712
The income tax rate is 25%. For biomass power projects in China,
power generation companies could enjoy income tax exemptions
in the first three years and the reduction of income tax by half for
the subsequent three years. The electricity generation costs of
biomass power plants in China are presented in Table 5.
Based on Table 5 and Eq. (3), estimates of the LCOE of biomass
in China are presented in Table 6.
From Table 6, the levelized cost of biomass electricity ranges
from 0.585 to 0.651 CNY/kWh at 5% discount rate, and from 0.658
to 0.731 CNY/kWh at 10% discount rate. The levelized cost of
biomass electricity of Baoquanling project in Heilongjiang pro-
vince is the lowest among the above biomass power plants, which
is 0.585 CNY/kWh at 5% discount rate, about 0.1 CNY/kWh lower
than the FIT (excluding tax). More importantly, the existing feed-in
tariffs (excluding tax) can cover the LCOE of biomass power plants
at 8% discount rate. The LCOE of biomass power plants at 8%
discount rate is about 0.05 CNY/kWh, higher than that at 5%
discount rate; and the LCOE at 10% discount rate is about
0.03 CNY/kWh, higher than that at 8% discount rate.
A clear understanding of the relative cost-effectiveness and
feasibility of different energy technologies is imperative in deter-
mining energy management policies for any country (Branker et
al., 2011). Results in this paper show that, the LCOE of wind
(onshore) and biomass are lower than that of solar PV. Results in
this paper are consistent with the previous studies such as OECD,
NEA/IEA (2010) and Elliston et al. (2013). Hence, the development
of wind (onshore) and biomass in China has a comparative cost
advantage over the solar PV. Under three scenarios of discount
rates, the LCOE of solar PV ranges between 0.818 and 1.800 CNY/
kWh, the LCOE of wind (onshore) ranges between 0.473 and
0.827 CNY/kWh, and the LCOE of biomass ranges between 0.585
and 0.731 CNY/kWh. Even so, solar energy still plays an important
role in China's green innovation adoption (Li et al. 2011; Chung-
Ling Chien and Lior, 2011), and China is under pressure to prosper
the photovoltaic (PV) solar energy industry (Chen et al., 2014). It is
worth noting that renewable technologies have high learning rates
that could yield significant cost declines. Rapid cost reductions in
some renewable power generation technologies require up-to-
date data for the evaluation of supportive policies for RE and a
dynamic cost analysis for policy amendment (IRENA, 2012a,
2012b). Therefore, establishing a timely data collection system of
4.1. Mechanisms of electricity pricing and subsidies to RE in China
4.1.1. Renewable electricity pricing
4.1.1.1. Wind (onshore). In 1994, the former Ministry of Electric
Power issued a regulation on grid-connected wind farms named
“Regulations on Management of the Integration of Wind Power Into
Power Systems”. This regulation required provincial electric power
authorities to give priority to wind-generated electricity in the
purchase of electricity. In 1999, the National Development and
Reform Commission (NDRC) and the Ministry of Science &
Technology (MST) issued an official notification to further support
the development of RE, including a rule to set wind power price at a
level that could repay interest-included capital cost plus a reasonable
profit margin (NREL, 2004). In 2009, the NDRC issued a notice named
“Notice on Perfection of Policy Regarding Feed-in Tariff of Power
Generated by Wind”, which set four different FIT levels for wind
power in China based on conditions of wind resources and
construction (NDRC, 2009).
4.1.1.2. Solar PV. Before the first nationwide FIT for solar projects
was announced, the Chinese government had sponsored two
rounds of public tender for solar power projects since 2009.
Most energy power companies were discouraged from investing
in China's solar PV market due to the low bid price in auctions
(ACORE, 2011). In 2011, the NDRC issued “Notice on Perfection of
Policy Regarding FIT of Power Generated by Solar PV” to provide
greater incentives for investors (NDRC, 2011). FIT of solar PV has
been divided into two categories: (1) For those projects that have
obtained the official approval before July 1, 2011 or have
completed and have been put into commercial operation before
December 31, 2011, the FIT would be CNY 1.15 per kWh (including
tax); (2) for those projects that were approved after July 1, 2011 (or
were approved before July 1, 2011 but did not complete the
construction before the end of 2011), the FIT would be CNY 1 per
kWh, expect that in Tibet (the FIT of solar PV projects located in
Tibet is 1.15 per kWh). Afterwards, “Notice on Improving the
Development of Solar PV Industry by Utilizing the Price Leverage
Effect” was announced by the NDRC, and the new FITs were
differentiated for solar PV projects in different regions of China.
The FIT of solar PV would be 0.90 CNY/kWh for Class-I areas,
0.95 CNY/kWh for Class-II areas, and 1.00 CNY/kWh for Class-III
areas. In terms of academic research concerning this subject,
Zhang and He (2013) conducted an analysis on China's solar PV
incentive policies, particularly on the national FIT scheme. Zhang
et al. (2013) reviewed the setting of categorized on-grid price of
renewable power. Zhang et al. (2014) examined four stages of
China's solar PV policy.
70 X. Ouyang, B. Lin / Energy Policy 70 (2014) 64–73

The development of distributed solar PV power generation
system has also enjoyed strong support from the Chinese govern-
ment. The State Council issued a regulation named “Opinion about
Improving the Healthy Development of Solar PV Industry” in July
2013, and illustrated the general preferential policy for the
distributed solar PV power generation system. The detailed sup-
port policies were then promulgated by relevant departments of
the central government. Specifically, the Ministry of Finance issued
the “Notice Regarding Subsidies to the Distributed Solar PV Power
Generation According to the Quantity of Power” in July 2013; in
August 2013, the National Energy Administration (NEA) issued the
“Notice on the Establishment of Demonstration Areas for Distributed
Solar PV Power Generation”, and the NEA and China Development
Bank announced the “Notice on Financial Services Support to the
Distributed Solar PV Power Generation”.
4.1.1.3. Biomass. The previous FITs for biomass, which were
established under the “Renewable Energy Law” in 2005, took
effect in 2006. The law stipulated a premium of CNY 0.25 per
kWh above the provincial average coal tariffs. As a result, standard
FIT of biomass reaches CNY 0.55–0.60 per kWh, which was
considered sufficient to attract private investments (Martinot,
2010). In 2010, NDRC issued “Notice on Perfection of Policy
Regarding Feed-in-tariff of Power Generated by Biomass” (NDRC,
2010). The notice stipulated that the FIT for projects without
identified investors by bidding would be CNY 0.75 per kWh
(including tax); and for projects that have identified investors by
tender, the FIT equals to the bid price, which would be lower than
CNY 0.75 per kWh.
Ming et al. (2013) provided an overview of feed-in tariff policy
for renewable energy and analyzed the problems of feed-in tariff
in China. In general, renewable electricity pricing mechanism in
China has been improved. However, the reform process is too slow,
and the existing mechanism still has problems such as slow
adjustment of price and the undifferentiated FIT for regions with
different resource endowments (Table 7). For instance, the FIT
mechanism of solar PV power generation has not been implemen-
ted until 2011. Under the price mechanism of franchise bidding,
bidding firms competed with each other for better solar energy
resources instead of ensuring the profitability of investment in
solar PV power projects (Lin, 2012). The vicious price competition
in solar energy industry has resulted in the slow development of
solar PV in China. What's worse, the existing FITs for solar PV
power generation in regions at different resource endowment
levels are undifferentiated. Before 2010, biomass power companies
had to overuse fossil fuels to ensure the break-even investments
due to the relative low FITs of biomass.
4.1.2. Subsidies to renewables through the FIT system
“Renewable Energy Law” regulated subsidies to renewable
energies in China through the FIT mechanism in 2005 (The
Renewable Energy Law, 2005). In Chapter 5 of the Law, Article
19 stipulates the principle of FIT for electricity generation by
renewable energy; Article 20 stipulates the mechanism of full-
acquisition and cost sharing. “Renewable Energy Law (Amendment
Act)” in 2009 (The Renewable Energy Law, 2009) further improves
the subsidy mechanism through the FIT, including clauses con-
cerning full-acquisition, cost sharing and fund management of
renewable energy (Fig. 2).
The national surcharges on the sale price of electricity (Article
20 in Renewable Energy Law) failed to cover expenditures of
renewable power projects. A renewable energy fund including

Table 7
Renewable electricity pricing in China.

Renewable energy Price of approved projects Bid price Bid price plus the price Feed-in tariffs
by type of approved projects

Wind power (onshore) 0.3–1.2 CNY/kWh (1996–2003) 0.38–0.8 CNY/kWh (2003–2005) 0.4–0.65 CNY/kWh (2006–2009) 0.51–0.61 CNY/kWh (2009)
Solar PV power 4 CNY/kWh, 1.15 CNY/kWh 1.09 CNY/kWh (2009) 0.73–1.09 CNY/kWh (2009–2010) 1.15 CNY/kWh and 1
(2008–2009) CNY/kWh (early 2011);
0.90 CNY/kWh, 0.95
CNY/kWh, 1.00 CNY/kWh
(late 2011)
Biomass power Based on the project approval (2003); a 0.63 CNY/kWh (2006–2010) 0.55–0.65 CNY/kWh (before 2010) 0.75 CNY/kWh (2010)
premium of CNY 0.25 per kWh added to
the provincial average coal tariffs (2005)

Full acquisition + cost-sharing Full acquisition + cost-sharing

+ fund management

• Aticle 20: Power grid • Aticle 20 (amendment): The

companies are obliged to obey excess purchaing costs due to
the Aticle 19 to connect all higher renewable power
licensed renewable energy gernerartion costs than those
projects to the grid and of the conventional power will
purchase all electricity be retrieved via "power price
generated by renewable surcharges" on the sale price
energies. The Excess of electricity.
purchasing costs due to higher • Aticle 24 (new): A Renewable
renewable power generation development fund will be
costs than those of the established, which is
conventinal power will be composed of the annual
shared via the sale price. special funds from national
finance and surcharges on
electricity rates.

Fig. 2. Subsidy mechanism through the FIT of renewables in China.

 X. Ouyang, B. Lin / Energy Policy 70 (2014) 64–73 71

surcharges on electricity rates and annual special funds under the Table 9
Ministry of Finance was established under the “Renewable Energy Additional required subsidies of solar PV through the FIT system in 2011.
Law (Amendment Act)” in 2009. Therefore, the subsidy mechanism
Regions in China Electricity Additional required subsidies (billion CNY)
through the FIT has been improved by the combination of cost generation
sharing and fund management. In short, the FIT system subsidizes (thousand At 5% At 8% At 10%
renewable power generators by paying a fixed, additional amount GWh) discount rate discount rate discount rate
of money for per unit electricity generation, above the on-grid
Other 0.81 0 0.108 0.206
electricity price for desulfurized coal-fired power. Tibet 0.1 0.028 0.056 0.074
Total in 2011 0.91 0.028 0.164 0.280

4.2. Estimates of required subsidies through the FIT system

Although the FIT system of renewables in China has been

improved significantly, several deficiencies still exist. Firstly,
feed-in tariffs (FITs) of solar PV and biomass energy are not
differentiated for regions at different resource endowment levels.
Secondly, the current FITs of solar PV are based on high quality
resources in China, which do not take the relatively much higher
costs of low quality resources into account. Thirdly, FITs of renew-
ables need to be classified by resource conditions and be dynami-
cally adjusted to reflect the adjustment of LCOE of renewable
energies. In conclusion, the FIT system of renewables need to play
a more effective role in supporting the deployment of RE in China.
In order to evaluate the support level of the current subsidy
mechanism, we estimate the additional required subsidies to
renewables through the FIT system.
4.2.1. Wind (onshore)
In Section 3, we estimated the LCOE of wind (onshore) at
different discount rates. The additional required subsidies to wind
power (onshore) are equal to the amount of generated electricity
multiplied by the difference between the LCOE and the FIT
(excluding tax). In this paper, provincial power generation data
are taken from the “Annual Report of Electricity Regulation” in
2011 issued by the State Electricity Regulatory Commission (SERC)
(SERC, 2011). The amounts of wind power generation (onshore)
are calculated by the authors. Table 8 presents the additional
required subsidies of wind (shore) in 2011.
The total additional required subsidies of wind (onshore) in
2011 were 1.05, 9.23 and 14.76 billion CNY at the discount rates of
5%, 8% and 10%, respectively. Additional required subsidies in four
areas at different wind resource endowment levels show an
increasing trend with the decline in quality of wind resource.
The additional required subsidies of wind (onshore) (Class IV) in
2011 were the highest, which were predicted to be 0.81 billion
CNY at 5% discount rate, accounting for 77% of the total additional
required subsidies of wind power in China; and 6.72 billion CNY at
10% discount rate, accounting for 35% of the total additional
required subsidies of wind power at 10% discount rate. The above
data imply that the levelized cost of wind (onshore) electricity not
only increases with the increase in discount rate, but also increases
with the decline in wind resource quality. With the development
Table 8
Additional required subsidies of wind (onshore) through the FIT system in 2011.
Category of wind Electricity generation The additional required subsidies
resource area (thousand GWh) (billion CNY)
At 5% At 8%
discount discount
rate rate
Table 10
Additional required subsidies of biomass through the FIT system in 2011.
Location Electricity Additional required subsidies (billion CNY)
generation
(thousand At 5% At 8% At 10%
GWh) discount rate discount rate discount rate
Nationwide 0.086 0 0 0.001
of wind electricity in China, wind power plants located in regions
with low quality resources will face higher generation costs, and
more subsidies are thus needed.
4.2.2. Solar photovoltaics
The installed capacity of solar PV in China reached 3300 MW in
2011. According to the data from SERC, grid-connected solar power
generation amounted to 0.914 billion kWh. Based on its proportion
in China's total installed capacity, we estimate the grid-connected
solar power generation of Tibet was 0.1 billion kWh in 2011.
Table 9 shows the additional required subsidies of solar PV for
China in 2011.
With a discount rate of 5%, there were no additional required
subsidies of solar PV in China except Tibet in 2011. The additional
required subsidies increased when the LCOE was discounted at a
higher rate. Moreover, the additional required subsidies of solar PV
in Tibet were relatively much fewer due to the smaller amount of
electricity generation. To summarize, the additional required
subsidies of solar PV in 2011 were 0.028, 0.164 and 0.280 billion
CNY with discount rates of 5%, 8% and 10%, respectively.
4.2.3. Biomass
The current FITs of biomass are not differentiated in accordance
with resource endowments. Biomass power technology confronts
the problem of resource collection (e.g., the collection of agricul-
tural wastes), which is costly and transport-intensive (Martinot,
2010). Under the previous FIT system, biomass power plants have
to overuse fossil fuels to ensure the break-even investment. The
pricing mechanism for biomass has been improved since 2011.
Table 10 shows that the current FIT of biomass effectively satisfied
the development needs for biomass, and the additional required
subsidies were only 0.001 billion CNY in 2011 at 10% discount rate.
Currently, the installed capacity as well as the amount of
electricity generation of biomass is small in China. As shown in
Table 10, the FITs can cover the LCOE of biomass with discount
rates of 5% and 8%. The additional required subsidies of biomass
were predicted to be 0.001 billion CNY at 10% discount rate in 2011,
At 10%
discount
implying that the current FIT of biomass is reasonable.
rate

Class I 16.76 0.05 1.71 2.85 5. Conclusions and policy implications

Class II 16.15 0 1.80 2.94
Class III 11.92 0.19 1.40 2.25 Renewable energy is mainly deployed in the field of power
Class IV 31.18 0.81 4.31 6.72
Total in 2011 76.01 1.05 9.23 14.76
generation in China. An accurate cost estimation of renewable
electricity generation is the basis of making effective support
72 X. Ouyang, B. Lin / Energy Policy 70 (2014) 64–73
policies in China. This paper adopts the EGC Spreadsheet model to
estimate the LCOE of renewables based on the data of 17 power
plants located in different regions of China. Results indicate that
the LCOE of wind power (onshore) in China ranges from 0.473 to
0.827 CNY/kWh at 5% to 10% discount rates and the additional
required subsidies are predicted to be 1.05–14.76 billion CNY in
2011. The LCOE of solar PV in China ranges from 0.818 to
1.800 CNY/kWh at 5–10% discount rates, and the additional
required subsidies are predicted to be 0.028  0.280 billion CNY
in 2011. The LCOE of biomass in China ranges from 0.585 to
0.731 CNY/kWh at 5–10% discount rates and additional required
subsidies were only 0.001 billion CNY in 2011 at 10% discount rate.
The fixed capital investment is an important factor affecting the
LCOE of renewables. However, due to the uncertainty of invest-
ment profit margin, financial institutions have little motivation to
invest in the capital-intensive RE projects. Therefore, supportive
government policies, including policy-related loans, subsidized
loans, tax deductions and exemptions and direct subsidies, are
necessary and crucial. In conclusion, in order to solve the problem
of high cost of RE, the Chinese government should provide
subsidies in the short term; and more importantly, reform the
electricity pricing mechanism in the mid-and long term to make
RE competitive in energy market.
Subsidies to renewable power generation in the short-term are
mainly implemented through the feed-in-tariff (FIT) system.
Hence, it is of great importance to estimate the LCOE of RE based
on the data of different power plants in different regions of China.
The United States experience sets a good example for China in
establishing a comprehensive database of RE power plants and in
estimating the LCOE by different technologies. Plant-based infor-
mation system has not been established in China, resulting in the
backwardness of FIT system of RE. Although the Chinese govern-
ment has gradually increased FIT to ensure the stable income of
renewable power companies, foreign and private investors still
lack confidence due to the relatively low or even negative profit
margins. We must consider the unique characteristics in the
pricing of RE power in China. On one hand, due to the technolo-
gical limitations, RE generation costs are much higher than those
of the conventional energies, if the environmental costs of fossil
fuels are not taken into account. Therefore, RE is unable to
compete with traditional fossil fuels in electricity market. On the
other, environmental impacts of the development and utilization
of RE are much smaller than those of fossil fuels. The above-
mentioned characteristics should be reflected in the FIT to effec-
tively support the development of RE.
In the long run, the Chinese government must rationalize the
electricity pricing mechanism, otherwise the development of RE
would be subject to the constraints of power tariffs (Lin and Li,
2012). Most well developed renewable projects in China are
located in areas with superior resources. However, the subsequent
development of RE will inevitably face two awkward situations:
first, lower quality of resource endowments; and second, decreased
subsidies from the government. Dinica (2011) argued that national-
contextual factors such as geographic, infrastructural and resource
factors also have a strong influence on renewable electricity
production costs. Even if the cost of RE can be reduced through
the localization of equipment production, the overall energy costs
will be pushed up by the large-scale development of RE. Further-
more, it is impossible for the Chinese government to provide long-
term subsidies to RE. If the electricity price in China could not be
rationalized, or the government kept subsidizing the electricity
generated from fossil fuels, the development of RE in China would
be constrained by electricity price.
Although the development of RE is inevitable for China, we
should promote it at the minimum cost. The standard of minimum
cost requires the government to take corresponding measures and
make timely policies to promote the sound development of
renewable industry on the basis of rational distribution of
resources. In particular, the development of RE in China must be
undertaken in order. The construction of long-distance and large-
capacity power transmission based on ultra high voltage (UHV)
technology in China must be launched as soon as possible.
Otherwise, the large-scale development of RE would not only
bring about a heavy financial burden, but also lead to the waste of
money and resources. Network difficulties have existed in China
for many years. China's power grid construction has lagged behind
the investment in conventional power generation projects. The
rapid expansion of installed capacity of renewable energy has not
been matched by grid connection (Zhang and Li, 2012). As a result,
the grid connection of renewable power has formed a significant
barrier for the large-scale renewables electricity deployment. Due
to the failure of grid connection, the scale of “abandoned wind”
has showed an increasing trend in recent years, and a large
amount of solar energy in Western China has also been wasted.
Considering the characteristics of intermittent power generation
from clean energy, the construction of smart grid is the prerequi-
site for the large-scale development of RE in China. Therefore,
supportive policy for the development of RE in China should be
adapted and targeted.
Acknowledgments
The paper is supported by Newhuadu Business School Research
Fund, the China Sustainable Energy Program (G-1305-18257),
National Social Science Foundation of China (Grant No. 12&ZD059),
and Ministry of Education (Grant No. 10 JBG 013). The authors
appreciate Shiying Pan and Yanan Ma for the help of English
language editing.
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