Alternative Energy & Power 2020

Last Updated July 22, 2020

China

Law and Practice

Authors



Dechert LLP is a leading global law firm with 26 offices around the world. Dechert advises on matters and transactions of the greatest complexity, bringing energy, creativity and efficient management of legal issues to deliver practical commercial advice for its clients. The firm's network of cross-practice energy lawyers spans Asia, Europe, the Middle East and North America. Dechert’s China-based energy team is highly experienced in the China market, with extensive legal expertise in different forms of energy and natural resources. The team is known for handling complex multi-jurisdictional matters, with members having advised Chinese clients since the 1990s. Recently, the team has handled numerous significant matters, including the formation of the joint venture between TerraPower LLC and China National Nuclear Corporation. The firm would like to acknowledge Ms Tian Huiwen's contribution to this chapter.

The power industry in China can be divided into four segments: generation, transmission, distribution, and consumption. It remains predominantly state-owned but ongoing reform initiatives target increased liberalisation and a longer-term shift to renewable sources and market-based pricing. Various state agencies regulate different elements of the power industry, including National Development and Reform Commission (NDRC), National Energy Administration (NEA), Ministry of Natural Resources (MNR), Ministry of Ecology and Environment (MEE), National Nuclear Safety Administration, State Administration of Work Safety (SAWS), and State-owned Assets Supervision and Administration Commission (SASAC).

Plant-Grid Separation Reform in 2002 separated power generation and transmission, distribution and supply, thereby disaggregating the vertically-integrated state monopoly (State Power Corporation) into two state-owned grid companies, five major state-owned generation groups, and a number of secondary power companies. While power generation and transmission segments have been separated, transmission and distribution largely remain controlled by state-owned grid companies. 

Historically, China’s power industry was administered by the State Electricity Regulatory Commission (SERC). In 2008, NEA was established under NDRC, and in 2013 SERC was dissolved and its functions assumed by NEA. In 2015, major reforms to the Chinese power industry were announced with Several Opinions of the Central Committee and the State Council on Further Deepening the Reform of the Electric Power System (2015) (“Policy No 9”), targeting substantial liberalisation. Numerous implementing guidelines and measures have followed Policy No 9 and a new overarching Energy Law of the People's Republic of China is expected to be adopted as part of the 14th Five-year Plan later in 2020.

Primary Laws

The main laws governing the Chinese power industry include:

Generally speaking, provisions issued by the Central Government provide broad guidance, while secondary guidance and regulations issued by administrative authorities provide more detailed measures which drive reform and policy implementation. In the alternative energy and power sectors, NEA/NDRC, set pricing and administer energy markets, while SASAC oversees state-owned power corporations. Other relevant regulations such as environmental policy, water and land use are developed by authorities at the central, provincial, and local levels.

The power industry in China is dominated by state-owned enterprises, although there are a small number of private (local and foreign) enterprises and investors in the market (more notably at the provincial level). The principal entities that sell electricity to end-user consumers are the grid companies described below. Many private companies have also established electricity sales operations (eg, Shenzhen Kelu Electricity Sales Company and Shandong Sunvim Power Sales Company). Following the electricity distribution reforms of 2015, private electricity sales entities have been increasingly established and are able to trade via electricity trading centres, direct trading, and under various provincial level and pilot programs.

Grid Companies

State Grid Corporation and China Southern Power Grid Company operate grid systems at regional levels (across multiple provinces), while several local grid companies (eg, Inner Mongolia Power Group) operate within a single province or autonomous region. All of these companies are state-owned, although private grid companies operate in certain Special Administrative Regions. Collectively, they carry out investment, construction and operation of power grids and provide power transmission, distribution and supply services to the entire country.

Power Generators

Principal power generators in China include five major entities: China Huaneng Group, China Datang Corporation, China Huadian Corporation, China Guodian Corporation, and China Power Investment Corporation. All of these entities are state-owned. Smaller generators operate at the local level.

Secondary Power Companies

In addition to the primary power companies described above, there are a number of smaller and more specialised entities operating in the power sector (eg, China Three Gorges, China Energy Conservation & Environmental Protection Corp, Anhui Energy, Shanghai Energy, Guangdong Energy Group, Zhejiang Energy Group, SDIC Power Holdings Co Ltd, China Resources Power, Guohua Power, and China General Nuclear Power Group). These entities often specialise in alternative energy and boast stronger financial performance.

Service/Ancillary Companies

The Chinese electricity market is supported by an established corps of engineering, manufacturing, procurement, construction and operating services companies (eg, China Energy Engineering Corporation, Hydrochina Corporation, Sinohydro Group and China Gezhouba Group, all of which are state-owned). These entities not only support the domestic power industry but increasingly service projects outside of China, often under the framework of the Belt and Road Initiative (BRI).

The principal law regulating foreign investment is the Foreign Investment Law of the PRC (FIL). The FIL works alongside its implementing measures, including the PRC Foreign Investment Law Implementation Regulations, 2019 Special Administrative Measures for Foreign Investment  (commonly referred to as the “Negative List”), and the Catalogue of Encouraged Industries for Foreign Investment ("Encouraged Industries Catalogue"). This regime (effective since January 2020) is widely viewed as being more investor-friendly than its predecessor, and opens up a number of sectors and opportunities to foreign investment (including in the power sector).

The regime covers foreign-invested enterprises, foreign acquisitions of equity, property or similar rights in a Chinese enterprise, and joint investment projects. 

The specific foreign investment review process will depend on the characteristics of each power project. Provided that a project falls under a non-prohibited investment sector, the investment will need to comply with the requirements of the Foreign Investor Information Reporting Measures, jointly issued by the Ministry of Commerce (MOFCOM) and the State Administration for Market Regulation (SAMR), and the Notice Regarding Foreign Investor Information Reporting Related Matters. These measures provide for a simplified foreign investment registration system administered by SAMR.

Power Industry Investments

Power industry investments will also require permission from applicable authorities such as NDRC. Moreover, foreign-funded projects require confirmation or filing/recording by NDRC under the Administrative Measures for the Confirmation and Recordation of Foreign-Funded Projects as follows:

  • projects with a total investment of less than USD300 million require confirmation by the relevant provincial-level authorities;
  • projects with a total investment of USD300 million or more require confirmation by the investment administrative department of the State Council; and
  • projects with a total investment of USD2 billion or more must be reported to the State Council.

Confirmation requires submission of a project application to NDRC and any relevant “project confirmation authority” as indicated in the Catalogue of Investment Projects Subject to Government Confirmation (2016).

Foreign Investment

Foreign investment is promoted and protected under the FIL, including by limiting expropriation, permitting capital transfers in and out of the country, and protecting intellectual property rights. Moreover, the FIL requires national treatment of foreign-invested enterprises in respect of tax exemptions, licensing, land supply, government procurement contracts, government funding, and requires authorities to establish and maintain transparency in rule-making and administration including through receiving comments from and giving guidance to foreign-invested enterprises.

Under the Civil Procedure Law of the PRC and the Law of the PRC on Choice of Law for Foreign-related Civil Relationships, foreign-invested entities may elect to use foreign law as governing law as well as arbitration for dispute resolution.

As the majority of power industry assets are state-owned, the sale and transfer of such assets are governed by laws regarding state-owned assets as well as by the Company Law of the PRC. Under the Company Law, changes to registered capital, assignments, divestments, change of company legal form, and dissolution or liquidation must all be approved by a company’s shareholders. For state-owned companies, the foregoing as well as the issuance of corporate bonds must also be approved by SASAC.

Under the Enterprise State-owned Assets Law of the PRC, decisions on mergers, divestments, and increases or reductions in the registered capital of a wholly state-owned company are made by state organs that perform the duties of an investor; and any merger, division, or restructuring of a state-owned company (or company controlled by state-owned capital) must be reported by such organs to the government for approval (eg, from the State Council and/or relevant local authorities).

Under the Measures for the Supervision and Administration of the Transactions of State-Owned Assets of Enterprises, SASAC is responsible for reviewing any transfer of property rights held by state-funded companies. Any transfer that would lead to the loss of state control of an asset must be submitted for government approval. Where the transferee is an overseas investor, it must satisfy the requirements of the FIL regime as well as relevant merger control and national security review provisions such as the Provisions on the Merger and Acquisition of Domestic Enterprises by Foreign Investors, Measures for the Administration of Strategic Investment in Listed Companies by Foreign Investors, and Administrative Measures for the Material Assets Reorganization of Listed Companies. There is no definitive guidance setting forth minimum requirements such as financial metrics or industry experience that must be satisfied by a purchaser of assets in the power industry.

Transfer of State-Owned Assets

SASAC also reviews the transfer of state-owned assets subject to non-public agreements, including information of the transferee, audit reports, assets evaluation reports, corporate approvals, transfer agreement and state-funded enterprise property registration forms (certificates), legal opinions and other documents. If a sale constitutes a material asset restructuring of a listed company, SASAC will in turn report to the China Securities Regulatory Commission for confirmation (see Measures for the Administration of the Material Asset Restructurings of Listed Companies).

The primary authority administering electricity supply and the development of transmission facilities is NEA operating under NDRC (including its local branches). While NDRC and NEA are the central authorities governing the power industry, in practice, provincial governments (in co-ordination with local NDRC and NEA branches) hold primary responsibility over the electricity system.

Pursuant to the Electric Power Law, the “electric power administration department” under the State Council is responsible for the supervision and control of the electric power industry throughout the country. These powers were formerly held by SERC, which was subsumed by NEA in 2013. Its main duties include:

  • industrial policy and standards;
  • nuclear power management, development plans, access conditions, technical standards and implementation;
  • operation and standardisation of the electricity market, supervision of electricity prices, pricing for power auxiliary services, power service policy and supervision; and
  • reliability and emergency management as well as construction, quality and operation safety.

In addition, the China Electricity Council (CEC) is a voluntary non-profit and self-disciplinary national trade association constituted of Chinese power enterprises and institutions. Its key functions include:

  • undertaking research and making suggestions on power policy, legislation, planning and market access criteria;
  • formulating and overseeing implementation of rules and regulations;
  • lobbying the government on behalf of members and providing legal services to members; and
  • research and consultancy on environmental protection and resource conservation for promoting green development of the power industry.

The most substantial changes to the regulatory and policy framework of the power industry are ongoing measures being implemented under the 2015 reform framework, including:

  • The Implementing Opinions on Promoting Independent Operation of Electricity Trading Institutions (2020), that provide implementing measures and guidance on the long-term reform aim of introducing market pricing through trading institutions/centres; and
  • The Regulations on Supply and Use of Electric Power (2019), that provide additional guidance and regulations on power supply services, power supply facilities, supply of electric power, use of electric power, contracts for supply and use of electricity, legal liabilities and supplementary provisions.

In addition, on 10 May 2019, NDRC and NEA issued the Circular on Establishing and Improving the Mechanism for Guaranteeing the Consumption of Electricity from Renewable Energy Sources, highlighting the increased importance of renewables and the need to address issues such as power limitation and abandonment at the provincial level and requiring satisfaction of consumption responsibilities (including inter-regional purchases of renewable output or the purchase of green power certificates in lieu of such purchase).

Lastly, on 30 October 2019, NDRC issued Order No 29 announcing the Guiding Catalogue for Industry Restructuring: Part IV (Electric Power) Category I Encouragement and listing 28 encouraged project areas, including new energy items in Part V such as technology for solar photovoltaic power generation, hydrogen energy, wind power, biogas generation, offshore wind farm construction and equipment, and submarine cable manufacturing.

Since 2017, NDRC and NEA have utilised expert and special working groups to further revise and improve the draft Energy Law of the PRC for final adoption. The draft law has been open to public comment on several occasions (most recently until 9 May 2020). It is expected to be adopted during the 14th Five-year Plan in 2020.

Policymakers have also announced plans for a carbon trading program aimed at increasing the percentage of renewables in the energy supply mix to 20% by 2030 and the intent to accomplish grid parity for renewable sources. The country has also announced plans to create transcontinental “super grids” and is continuing to implement market mechanisms for electricity pricing.

Chinese regulators often incrementally implement laws and introduce draft laws in general terms to be further refined and tested through follow-up measures and guidance. Following 2015 reform announcements, policy goals continue to be fine-tuned in provincial pilot programs and ancillary measures. Measures adopted in certain regional and pilot programs may or may not be selected for wider expansion.

In addition, given that power industry assets in China are largely state-owned, most transactions in the power industry will be subject to laws covering state-owned assets (in addition to the general corporate and foreign investment regimes). These laws will impose additional obligations, including relating to information disclosure, capital increases, and asset assessment.

The disruption to supply chains and the enormous downturn in energy demand as a result of COVID-19 lockdowns worldwide will likely lead to increased costs and reduced revenue for alternative energy companies while delaying investment and current and pending projects. Challenges to the supply chain will further delay alternative energy projects, both within China and in markets to which China supplies goods and services.

However, there is also a growing recognition in Chinese policy circles that the economic reboot necessary in a post-COVID-19 environment may also be a once-in-a-generation opportunity to supercharge a meaningful move towards new energy technologies and in turn substantially lower emissions. This aligns with China’s highest levels of reform policies aimed at increasing power generation based on renewables and mastering high-technologies and sophisticated manufacturing across industries.

China’s state-owned grid operators have historically controlled power transmission, distribution and sales by purchasing power from generators based on provincially-allocated generation quotas (tradable since 2011) at regulated feed-in tariffs and selling at prices set by regulators. Currently, grid companies can procure power at regulated benchmark prices set by NEA or individually negotiated wholesale prices and sell on at regulated and market-based rates (subject to local rules). Generally, regulated final prices paid to generators are set by NEA/NDRC (in co-ordination with provincial branches) (see 2020 Catalogue of Pricing by the Central Government).

China’s wholesale electricity market is now mainly composed of a mid-to-long-term market and a spot trading market. Regulators have issued guiding opinions and basic market rules, most notably the 2015 Implementation Opinions on Accelerating the Building of an Electricity Market and the 2015 Basic Rules of Electricity Market Operation (Draft for Public Comments). Although not formally promulgated, its fundamental rules have been reflected in the market designs and trading rules subsequently implemented at the local level, in particular in various pilot programs. In addition, on 22 January 2020, NEA released for public comment a draft version of the 2020 Opinions on Improving the Work of Electricity Spot Market Pilot Programs.

Dispatching

Dispatching generally still follows a “fair dispatch” rule whereby generators are allocated annual generation quotas by provincial governments based on demand projections which are then used by the grid companies to calculate dispatch. Provincial authorities determine benchmark feed-in tariffs (varying by generation type) for the quotas allocated to generators. Since 2002, larger consumers have been allowed to enter into forward contracts within the same province. Ongoing reforms aim to realise a transition from fair to economic based dispatching in order to lower operational costs and further integrate renewable sources.

Transmission and Distribution

Transmission and distribution tariff reforms have also been implemented in a number of regional pilot programs under a principle of “cost plus reasonable profit”. These pilot programs have seen the successful implementation of expanded direct trading and the growth of longer-term markets based on contracting between generators and large industrial and retail entities. Regulators have indicated intention to further introduce spot markets as well as cross-provincial trading.

The import and export of energy is permitted into and from China, although there are no specific measures governing cross-border energy transmission or pricing outside of the general framework for the domestic power industry and China’s general international trade policies. China has a number of transnational interconnections, including those with Russia, Myanmar, North Korea, Laos, Vietnam and Mongolia; it also supplies electricity to the Special Administrative Regions of Hong Kong and Macau. In line with ongoing development and reform, as well as the BRI, most participants expect further initiatives for cross-borders sales and grid co-operation.

State Grid Corporation has built a number of cross-border transmission lines (eg, Mongolia and Russia) while China Southern Power Grid has its own transmission lines (eg, Laos, Myanmar and Vietnam). Both companies continue to pursue cross-border electricity grids through renewable energy projects. This falls under the General Energy Interconnection Plan, aimed at linking renewable power generation across borders. China’s Global Energy Interconnection Development and Cooperation Organization has signed a number of international MOUs for such projects (generally under the BRI), with the aim of achieving intercontinental grid connectivity and countrywide “super grids” with a focus on renewables, although many ongoing and proposed projects target countries primarily utilising fossil-fuel plants.

The electricity supply mix in the Chinese market has continued its impressive rate of diversification in recent years, with a focus on the development of clean energy sources and grid parity for renewables. The current supply mix includes nuclear, oil and gas, wind, tidal, solar thermal, geothermal, biomass, photovoltaic and hydropower generation. China’s power generation remains dominated by thermal power generation (mainly coal-fired) with an electricity mix, as of the first quarter of 2020, consisting of coal power (64%), renewables (28%), nuclear (5%) and natural gas (3%).

There are no formal concentration limits regarding the percentage of electricity supply that is controlled in the market by any one entity. As discussed, the power industry and electricity market remain largely state-owned. However, as the industry continues to liberalise, it is expected that power industry participants will increasingly become subject to competition laws. Principal laws governing market concentration limits include:

  • Antimonopoly Law of the People’s Republic of China (2008) (AML);
  • Anti-unfair Competition Law of the People's Republic of China;
  • Measures for Undertaking Concentration Declaration;
  • Interim Provisions on Assessing the Impact of Concentration of Business Operators on Competition; and
  • Guiding Opinions of the Antimonopoly Bureau of the State Administration for Market Regulation on Declaration Documents and Materials regarding the Concentration of Business Operators.

Large-scale reforms to China’s ministries in 2018 included the creation of the SAMR, subsuming and consolidating antitrust enforcement roles previously held by NDRC, MOFCOM, the State Administration for Industry and Commerce, and the anti-monopoly commission created by the AML itself. SAMR is responsible for (amongst other things) organising, co-ordinating and guiding anti-monopoly work, drafting relevant competition policies and guidelines, organising investigation and assessment, and co-ordinating the anti-monopoly administrative law enforcement. SAMR’s enforcement arm is the Antimonopoly Bureau.

There are numerous measures aimed at increased efficiency and the adoption of clean technologies and renewable energy sources. Principal amongst these are Policy No 9 and other 2015 reforms, which largely align with overarching announcements under China’s 13th Five-year Plan (2016-2020).

Specific Measures Addressing Environmental Issues

Specific Measures Aimed at Limiting Carbon Emissions

Further Rules and Regulations

In addition to the above measures, NDRC oversees environmental pricing for coal-fired generators, including via price setting and environmental premiums. Local implementing rules have also been developed, and local MEE bureaus audit data on a daily basis while provincial authorities conduct regular inspections to ensure data reliability and emissions limits.

There are also measures to encourage competitive renewable energy electricity prices such as Measures for the Administration of Additional Funds for Renewable Energy Electricity Prices jointly issued by the Ministry of Finance, NDRC and NEA in 2020.

Finally, under the FIL regime and the Catalogue of Industries for Encouraging Foreign Investment (2019), encouraged sectors open to foreign investment include manufacturing of new energy power generation equipment for photovoltaic, solar, thermal power, geothermal, tidal, waste, and biogas and wind power generation.

In addition to those laws and policies focused on energy saving and environmental protection more generally (see 3.1 Principal Climate Change Laws and/or Policies), current laws and policies encouraging the early retirement of carbon-based generation (notably coal power) are listed below.

Regulators also encourage local governments to design and implement their own incentives and compensation measures to support early retirement.

The Central Government prioritised environmental policy in both the 12th and (current) 13th Five-year Plans. As a recent example, “green bonds” will be issued to qualifying enterprises under the Notice on Issuance of the Catalogue of Projects Eligible for Support with Green Bonds (2020 Edition) (Draft for Comment) (including for pollution prevention, renewable energy, infrastructure, hydropower, geothermal, solar, nuclear, heat pump, wind and biomass generators, and energy storage facilities).

Principal laws and policies encouraging the development of alternative energy sources include:

  • Environmental Protection Law of the PRC, that requires enterprises to prioritise the use of clean energy;
  • Electric Power Law of the PRC, that encourages the generation of electricity through renewable and clean energy resources;
  • Renewable Energy Law of the PRC, that promotes the development and utilisation of renewable energy through increased supply, including through subsidies, preferential tax and other compensation mechanisms;
  • Energy Conservation Law of the PRC, that encourages development and adoption of new and renewable energy resources;
  • Atmospheric Pollution Prevention and Control Law of the PRC, that requires coal-fired generators to adopt clean production techniques;
  • Notice on Works Related to Review of the List of Renewable Energy Power Generation Subsidies, that details renewable energy power generation project subsidies; and
  • Measures for the Administration of the Guaranteed Buyout of Electricity Generated by Renewable Energy Resources, that requires grid enterprises to purchase on-grid electricity of renewable energy power generation projects. A similar principle is reflected in the Basic Operating Rules for the Electricity Market, that states that power transmission enterprises must give priority to signing contracts with renewable energy generators and purchase their on-grid electricity in full.

Renewable Portfolio Standard

In May 2019, NEA circulated a policy paper on China’s renewable portfolio standard (RPS). The RPS is a benchmark standard effective from 2020 to 2025 aimed at increasing the share of non-fossil fuels to 20% of primary energy consumption by 2030 (from around 14% in 2018). China’s target under the 13th Five-year Plan is 15% by 2020. The RPS sets target levels of consumption from renewables at the provincial level.

The development of renewables has historically been incentivised through feed-in tariffs set by NDRC. Increasingly, subsidy-free renewables projects have been encouraged and anticipated for priority permitting by authorities. Direct purchase contracts are also becoming available in certain provinces, allowing for the direct purchase of wind and solar generated energy. Under the RPS regime, industry players are increasingly looking to cooperate with authorities and grid companies on direct power purchase agreements at the provincial level through a voluntary market.

Encouraging Alternative Energy Development

In addition to the above, regulators encourage alternative energy development by way of subsidies and other financial incentives (eg, Additional Subsidy Fund Management Measures for Renewable Energy Electricity Price (2020) issued jointly by the Ministry of Finance, NDRC, and NEA). Policymakers are also working to accomplish grid parity for renewables. In January 2019, NDRC and NEA issued the Notification on Promoting Solar and Wind Power Tariff Without Subsidies, pursuant to which there will be a feed-in tariff (without subsidies for solar and wind power) in order to sell power generated from these renewables at the same price as coal-fired power generation. Likewise, in May 2019, the Notification on Matters Regarding the Construction of Wind and Solar Power Projects was promulgated to further promote parity pricing of on-grid power generated by solar and wind.

The regulatory and policy framework governing power plant construction and operation is complex, with numerous requirements varying by project type, policy aims, and location. These include technical codes for construction and transportation, and safety requirements for power generation facilities and construction sites. There are also numerous approvals at state and local levels regarding construction and environmental protection.

The Provisions on the Administration of Electric Power Business Licensing require enterprises to obtain an Electric Power Business License for Power Generation from NEA. Relevant enterprises include public power plants, power plants incorporated into a power network (grid), and other enterprises as prescribed by NEA guidelines. In general, the construction of a power generation project must pass the examination and approval or verification of the relevant administrative department of NEA; and the project must show proven power generation capability and comply with relevant environmental protection requirements.

Other laws that impact construction and operation of generation facilities include:

  • Electric Power Law of the PRC;
  • Conditions for Applying for Licenses for Installation, Maintenance and Testing of Power Facilities;
  • Urban and Rural Planning Law of the People's Republic of China (Revised in 2019), that lists various permitting requirements and approval procedures applicable to competent urban or rural planning authorities);
  • Land Administration Law of the People's Republic of China (Revised in 2019), that lists approval requirements for the conversion of agricultural land for a construction project;
  • Construction Law of the People's Republic of China (Revised in 2019); and
  • Administrative Regulations on Work Safety of Construction Projects (2003).

Process and Stages

The regulatory process for obtaining approvals to construct and operate a power plant is complex. As discussed, there are numerous state and local level authorities governing the power industry and its related aspects. In practice, the applicable requirements for different types of power generation may vary significantly. As a benchmark, the following stages and approvals would ordinarily be required.

Preparation

Registration of the project company; clarification of project investment model and government subsidy policy; finalisation of project location; and identification of investment entity, business name pre-check, organisation code, registration of capital.

NDRC Approval

Preparation of project proposal; application submission to local NDRC (including environmental, contracting and funding materials); report to provincial NDRC; and issuance of approval opinion.

Construction Authorities Approval (MNR)

Project approval or confirmation (requiring site-selection opinions from the urban-rural planning authority including land re-zoning); and application to local urban-rural planning authority for construction permits.

Environmental Protection Approval (MEE)

Approval of environmental impact assessment (EIA) by provincial environmental protection authority (including water and soil conservation plans, demolition plans, etc).

Other

Other approvals may relate to use of forest land (from provincial forestry department) or use of water (from provincial water conservation authority or water resources authority), and applicable SAWS approvals.

Public Hearing

Public hearings may be held for certain projects and are often driven by environmental considerations. While EIAs are usually required for project approvals, the public hearing process is not definitively outlined under PRC law for such circumstances. Generally, under the Administrative License Law of the People’s Republic of China (Revised in 2019), a hearing is required for approving any administrative license required under any law, regulation, rule or for any other licensing matters of great importance to the public interest for which the relevant administrative organ considers it necessary to hold a hearing.

An applicant or interested party may apply for a public hearing and the government is required to respond. Public hearings/participation may also be triggered by EIAs in accordance with the Measures on Public Participation in Environmental Impact Assessment. Further, under the Administrative Regulations on Power Business Licenses, a hearing may be required in respect of a regulatory authority’s decision on licensing of an electric power business (following the procedures of the Administrative License Law (above)).

It is not possible to identify with any precision “typical” terms and conditions imposed in approvals to construct and operate a generation facility. As discussed, the construction and operation of power generation facilities is complex and while the regulatory framework is commonly applied, the specific nature of a project and its location will largely dictate terms and conditions imposed by relevant authorities at the completion of the regulatory exercise.

A starting point for any consideration of potential rights to expropriate or “requisition” land for a generation facility is that, in principle, all land in China is owned by the State (or rural collectives). Generally speaking, real property rights are limited to transferrable land-use rights for a number of years under the Property Law of the PRC (2007).

The construction of a generation facility may involve requisition of land. However, only the Central Government has the power to expropriate land and may do so if it is in the public interest – language that is left intentionally vague.

Requisition

The process by which expropriation or “requisition” occurs will vary depending on how the land is classified (eg, rural, urban or agricultural). The process is generally overseen by the newly formed MNR, which subsumed responsibilities of the former Ministry of Land and Resources. However, the process is not standardised. The Land Administration Law only generally provides that a proposed land requisition be announced and organised by the local government at or above the county level after approval in accordance with legal procedures.

The Land Administration Law further provides that land intended for major energy, communications, water conservancy and other infrastructure projects supported by the State may be allocated at the county level or higher.

In urban areas, pursuant to the Land Administrative Law Procedure, land use rights may be requisitioned for public interest. In rural areas, compensation for requisitioned land rights may include compensation payments, resettlement subsidies, compensation for crops (eg, six to ten times annual average output of prior three years), and payments for attachments such as homes and facilities. Compensation will vary by location, size of the city or village, and whether it is governed by a local, provincial or state-level authority.

Decommissioning is the final stage of the life cycle of a generation facility and an important part of its life cycle management. Due to the unique characteristics of each power generation project, applicable decommissioning requirements will vary.

Outside of nuclear power, there is no unified administration system, corresponding technical guidance, acceptance or overarching approval procedures for decommissioning. In practice, relevant companies in different provinces must carry out decommissioning according to applicable laws and policies. In addition, detailed technical requirements will likely be set out in the approved schematics, plans and application materials submitted to central and local authorities for project and construction approvals. See 3.2 Principal Laws and/or Policies Relating to the Early Retirement of Carbon-Based Generation regarding requirements under the Measures for Administration of the Entry and Exit of Generating Sets into Commercial Operation. 

Nuclear Safety Law

The Nuclear Safety Law (2017) requires a nuclear facility to conduct shutdown management in a safe manner, maintain safety during the shutdown period, and ensure the basic functions, technical personnel, and documentation necessary for decommissioning. Prior to the decommissioning of a nuclear facility, the operator of the nuclear facility must file a decommissioning application with the nuclear safety regulatory authority under the State Council and submit:

  • a nuclear facility decommissioning application;
  • a safety analysis report;
  • environmental impact assessment;
  • quality assurance documentation; and
  • other materials specified in laws and administrative regulations.

Further to the Nuclear Safety Law, the Interim Measures for the Administration of Collection and Use of Spent Fuel Disposal Funds of Nuclear Power Plants stipulates a levy per KWh to be contributed to a national fund to finance reprocessing and disposal of spent fuel from nuclear power plants. Funds shall be collected from nuclear power units which have been in commercial operation for over five years.

The state-owned grid companies (operating through regional and provincial branches) control transmission and distribution and are generally governed by NDRC. The principal laws that govern the construction and operation of transmission lines and associated facilities are detailed below.

  • Electric Power Law of the PRC, under which construction plans for power networks in urban areas must be included in applicable urban development plans of the local government; and urban area governments must arrange to provide land for transformation facilities and transmission line corridors and cable passages.
  • Provisions on the Administration of Electric Power Business Licensing requires enterprises engaging in the operation of power distribution to obtain an Electric Power Business License for Power Distribution.
  • Regulations on the Protection of Power Facilities establishes power transmission line and facilities zoning.
  • Rules on Operation of Power Grids provides rules for power grid planning, design and construction, grid-connection and interconnection, and operation.
  • Management Regulations for the Implementation of Mandatory Provisions for Construction Standards of Transmission and Transformation Projects (issued by State Grid) lists numerous technical requirements.
  • Overhead Transmission Line Management Code (issued by State Grid) is notable as it provides specific technical standards.

The regulatory process governing the construction and operation of transmission facilities is complex and not standardised. Local authorities will implement their own detailed requirements following the guidance of national laws and policies. Due to the varying capacity and scale of grid projects, specific requirements and approval processes will differ.

In addition to ensuring project consistency with the unified plans of the entire power grid (as incorporated into applicable local government and grid company plans), applicable requirements and likely approvals necessary to progress a transmission facility or line project will typically include:

  • AC power projects with a voltage of 500 KV, 750 KV or 1000 KV involving power transmission crossing provinces (regions and cities) are subject to confirmation by the investment administrative department of the State Council;
  • DC power projects with a voltage of ±500 KV or more and AC power projects with a voltage of 500 KV, 750 KV or 1,000 KV not involving power transmission crossing borders, provinces (regions and cities) are subject to confirmation by provincial-level governments according to the relevant planning developed by the Central Government;
  • all other projects are subject to confirmation by local governments according to relevant planning developed by the Central Government;
  • local NDRC approval of preliminary feasibility study report before submission to provincial and state level NDRC authorities;
  • written opinion regarding site-selection and line-selection from local urban-rural planning authority (MNR);
  • land pre-examination opinions from the land and resources authority (MNR);
  • approval of relevant environmental impact assessment report from environmental protection bureau (MEE);
  • safety evaluations for transmission line routes;
  • cross-road approval, approval for forest land use, and/or the soil and water conservation approval from relevant authorities;
  • construction permit or project filing for recording;
  • electric Power Business License for Power Distribution (from NEA); and
  • other approvals as may be applicable to project specifics.

The principles of public participation and input and whether projects are subjected to a detailed environmental review or assessment process for transmission facilities is substantively similar to the process described in 4.2 Regulatory Process for Obtaining All Approvals to Construct and Operate Generation Facilities.

The specific terms and conditions imposed in relevant approvals will vary by project specifics and location. See 5.1.2 Regulatory Process for Obtaining Approvals to Construct or Operate Transmission Facilities. In addition, local governments may stipulate their own regulations to simplify or streamline the approval process. For example, certain reviews may be done in parallel and certain requirements and fees waived or reduced.

The construction and operation of a transmission facility may involve requisition of land in the same manner outlined in 4.4 Proponent's Eminent Domain, Condemnation or Expropriation Rights. In practice, requirements will vary depending on land type and location. Since only the State has the power to requisition land, different provinces or cities may stipulate their own rules following the general guidance of the Central Government.

The process may include, for example, the local NDRC branch leading land requisition and compensation, and the project company coordinating with the local level (eg, county) government on establishing a demolition compensation agency and formulating compensation rules.

Given that transmission and distribution remain controlled by the two major state-owned grid companies (operating through their regional and provincial branches), there is an effective monopoly over transmission services in China. However, the broader policy move towards competition and deregulation in the energy market more generally is expected to carry through to transmission services over time.

The principal laws that govern transmission services and charges include:

  • Measures for the Supervision and Administration of Electric Power Supply, that provides measures for the supervision and administration of the power supply and market under NEA;
  • Regulations on Supply and Use of Electric Power;
  • Regulations on Electric Power Supervision, that requires electric power markets be open to entities engaged in electric power transactions on a fair and non-discriminatory basis;
  • Regulation on the Administration of Power Grid Dispatching, that governs the dispatching system (including planning, regulation, and rule-setting);
  • Pricing Methods for Provincial Grid Power Transmission and Distribution Prices, that details pricing reforms and regulates the prices charged to users at the provincial level;
  • Pricing Methods for Regional Grid Transmission Price, that provides principles, calculation methods, and adjustment mechanisms for regional power grid transmission; and
  • Measures for Supervision and Examination of Transmission and Distribution Pricing Costs, that provides principles for supervision of pricing of transmission and distribution lines, pricing cost structure, cost audit, and other obligations of grid enterprises.

The state-owned grid companies control transmission and distribution while NDRC oversees pricing (setting guidance and principles). Through ongoing reform, market pricing mechanisms have been increasingly introduced in provinces and regions throughout China. Historically, grid companies purchased power from generators at regulated feed-in tariffs and sold at state-set prices.

Increasingly, generators may now negotiate prices with end-user consumers with transmission tariffs set by the State on an approved cost plus reasonable profits basis. Policy No 9 aims to separate transmission, distribution and retail and differentiates prices based on voltage. It is also intended that grid companies shift from electricity trading bodies to transmission providers over the longer-term, only deriving profits through fees in exchange for services.

Pricing Methods

There are several pricing methods for regional and provincial power grid transmission. According to the Pricing Methods for Regional Grid Transmission Pricing (2020) issued by NRDC:

  • transmission tariffs should be based on a “permitted costs plus reasonable income” basis;
  • tariffs should be reasonably allocated to ensure safe grid operation and ensure transmission services;
  • marketisation of transactions in the electricity market and optimal allocation of clean energy is encouraged;
  • pricing should be standardised, pricing rules clarified, and legalisation, rule-making and transparency of pricing enhanced;
  • calculating methods of transmission pricing is complicated and takes into consideration depreciation, labour, operation, maintenance, load capacity, percentages of interprovincial/regional transmission, etc. A transmission price adjustment mechanism is also included (providing an income balance adjustment based on income exceeding permitted amounts in the previous regulatory period due to investment and growth); and
  • taxes are imposed in accordance with national tax laws (including income tax, city maintenance and construction taxes).

The Measures for Supervision and Examination of Transmission and Distribution Pricing Costs further stipulate pricing principles covering cost structure along with the obligations of operators. Grid companies are required to report relevant information to the NDRC.

Transmission services are intended to be provided in a fair and non-discriminatory basis. NDRC and NEA regulate transmission services and access in co-ordination with the grid companies. According to the Basic Operating Rules for the Electric Power Market, power distribution enterprises are required to open power grids in a fair manner and provide safe, high-quality and economical services to market participants and strictly implement power transmission pricing as prescribed by the State.

Grid companies must disclose certain information to generators, including grid and line layout, number of transformation facilities, total capacity, power transmission capacity, tariffs and prices for interprovincial/regional transactions.

In practice, the power industry is dominated by state-owned grid companies and generators, with transmission enterprises subject to the supervision of central, provincial, and local authorities. Consequently, access to transmission rights is largely co-ordinated by regulatory bodies in accordance with local and national energy and economic policies.

The principal laws governing the construction and operation of electric distribution facilities largely overlap with those for transmission facilities (see 5.1 Regulation of Construction and Operation of Transmission Lines and Associated Facilities), including:

  • Electric Power Law of the PRC;
  • Measures for the Supervision and Administration of Electric Power Supply, that provides technical specifications for distribution transformers and substation monitoring;
  • Regulations on Supply and Use of Electric Power, that requires local governments to make arrangements for power line corridors, cable channels, regional substations, regional distribution stations and operation centres according to the overall planning for urban and rural construction;
  • Rules on Operation of Power Grids, that stipulates rules for power grid planning, design and construction, grid-connection and interconnection; and
  • Guiding Opinions on Accelerating the Construction and Transformation of Distribution Networks, that includes guidance, basic principles and targets for further strengthening the construction and transformation of distribution networks.

There are numerous additional technical guides and local rules. In practice, local governments at various levels stipulate specific rules for the construction and operation of distribution facilities which often vary by project. 

The regulatory process for approval of distribution facility construction will vary by region, local rules, land type, and project type. Generally speaking, if a distribution facility is to be installed as part of an industrial/commercial project (such as a factory), the project proposal will include plans for distribution facilities and reserve designated land accordingly. The project company will obtain approval for the transmission facility as part of the entire project.

If a distribution facility will be constructed on public land (either by state-owned grid companies or private enterprises), relevant approvals for grid construction must be obtained. These are very similar to those needed for transmission facilities, including approvals from NDRC, local land planning authorities, land resource authorities, environmental impact assessment approval by MEE, and a safety evaluation of the relevant area. Requirements and approval times will vary and may even be curtailed or waived (by local authorities) for smaller projects (eg, substations).

Distribution facilities may also be supervised by the Safety Supervision Bureau (operation and maintenance of power distribution) and fire department. Distribution facilities will also need to abide by all rules and standards stipulated by the local government, competent authorities, and grid company.

Terms and conditions imposed in project approvals for the construction and operation of distribution facilities will vary on a project-by-project basis, largely as a reflection of the complexity of the relevant project. In addition, there are different requirements depending on local rules, land type, project type, and similar factors.

Rights of a developer to eminent domain, condemnation and expropriation in the context of distribution facilities are substantively the same as for transmission facilities. See 5.1.4 Proponent's Eminent Domain, Condemnation or Expropriation Rights.

Transmission and distribution services largely remain under the control of the two major state-owned grid companies which essentially hold monopolies in the industry. However, under current reform efforts, the industry has increasingly liberalised in large part to increase access to power in certain areas and in general to increase efficiency and decrease prices.

Transmission and distribution are controlled by the major state-owned grid companies and are similarly governed (see 5.2 Regulation of Transmission Service, Charges and Terms of Service). Additional laws governing the provision of electric distribution services include:

  • Administrative Measures for the Orderly Opening of Distribution Networks, that provides principles and rules regarding distribution network management and operation along with the rights and obligations of operators; and
  • Implementation Measures for Division of Distribution Areas for Incremental Distribution Businesses (Trial), that provides principles of division of distribution areas and other regulations.

With respect to pricing, relevant policies include:

  • Pricing Methods for Provincial Grid Power Transmission and Distribution Prices;
  • Notice of Regulations on Pricing of Regional Power Grid Transmission Prices;
  • Guiding Opinions on Formulating Distribution Prices for Local Power Grids and Incremental Distribution Networks, that sets out pricing methods, regulations, adjustment mechanisms and settlement systems; and
  • Measures for Supervision and Examination of Transmission and Distribution Pricing Costs, that provides principles on the pricing of transmission and distribution lines as well as the auditing of grid enterprises.

Distribution charges are typically determined with transmission charges because both are largely controlled by the state-owned grid monopolies. However, through ongoing reforms, grid companies are expected to increasingly adhere to market mechanisms with transmission and distribution prices based on cost and service. Distribution pricing will vary by province or region, with direct contracting between consumers and generators allowed pursuant to applicable local rules.

In general, electricity fees are charged according to four types of electricity usage:

  • residential;
  • agricultural;
  • general commercial and industrial; and
  • large-scale industrial.

Moreover, certain types of consumers are excluded from market pricing (eg, agriculture, hospitals, water and gas suppliers, public transportation, and residential sectors).

In addition to state-owned grid companies, smaller local and private distribution entities are increasingly entering the market. With respect to distribution prices, according to relevant NDRC policies, for these smaller entities, prices may be determined by bid pricing or otherwise through three pricing methods:

Permitted Income Method

Provincial price authority verifies permitted costs, income, and taxes according to the Pricing Methods for Provincial Grid Power Transmission and Distribution Prices to determine the independent distribution price.

Maximum Price Method

Provincial price authority first determines the maximum distribution price, then the distribution enterprise will formulate a specific distribution price plan and report it to the provincial price authority for filing.

Scale Competition Method

Provincial price authority first calculates the distribution price of a given distribution network, then determines the distribution price according to the weighted average against the distribution price of other distribution networks in the province.

The total aggregate cost of transmission and distribution charged by these smaller distribution entities may not be higher than current provincial grid transmission and distribution pricing for the same voltage level.

Dechert LLP

31/F Jardine House
One Connaught Place
Central, Hong Kong

+852 3518 4705

+852 3518 4777

xiao.yong@dechert.com www.dechert.com
Author Business Card

Law and Practice

Authors



Dechert LLP is a leading global law firm with 26 offices around the world. Dechert advises on matters and transactions of the greatest complexity, bringing energy, creativity and efficient management of legal issues to deliver practical commercial advice for its clients. The firm's network of cross-practice energy lawyers spans Asia, Europe, the Middle East and North America. Dechert’s China-based energy team is highly experienced in the China market, with extensive legal expertise in different forms of energy and natural resources. The team is known for handling complex multi-jurisdictional matters, with members having advised Chinese clients since the 1990s. Recently, the team has handled numerous significant matters, including the formation of the joint venture between TerraPower LLC and China National Nuclear Corporation. The firm would like to acknowledge Ms Tian Huiwen's contribution to this chapter.

Compare law and practice by selecting locations and topic(s)

{{searchBoxHeader}}

Select Topic(s)

loading ...
{{topic.title}}

Please select at least one chapter and one topic to use the compare functionality.