Energy Policy 70 (2014) 6473

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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

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
b

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:
Received 23 January 2014
Received in revised form
12 March 2014
Accepted 20 March 2014
Available online 13 April 2014

The development and utilization of renewable energy (RE), a strategic choice for energy structural
adjustment, is an important measure of carbon emissions reduction in China. High cost is a main
restriction element for large-scale development of RE, and accurate cost estimation of renewable power
generation is urgently necessary. This is the rst systemic study on the levelized cost of electricity (LCOE)
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
China can only cover the LCOE of wind (onshore) and solar photovoltaic energy (PV) at a discount rate of
5%. Subsidies to renewables-based electricity generation, except biomass energy, still need to be
increased at higher discount rates. Main conclusions are drawn as follows: (1) Government policy
should focus on solving the nancing problem of RE projects because xed capital investment exerts
considerable inuence 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 longterm to make the RE competitive.
& 2014 Elsevier Ltd. All rights reserved.

Keywords:
Levelized cost of electricity
Renewable energy
Feed-in tariffs

1. Introduction
1.1. Research background
China is currently experiencing rapid development of urbanization, 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 4045%
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.: 86 5922186076; fax: 86 5922186075.
E-mail addresses: ouyangxiaoling@gmail.com (X. Ouyang), bqlin@xmu.edu.cn,
bqlin2004@vip.sina.com (B. Lin).

http://dx.doi.org/10.1016/j.enpol.2014.03.030
0301-4215/& 2014 Elsevier Ltd. All rights reserved.

economic growth is constrained by carbon emissions reduction.

Therefore, it is necessary for China to develop new technologies and
new energies to meet the growing energy demand, and simultaneously, to optimize energy consumption structure. Renewable
energy (RE) will play an increasingly important role in energy
diversication 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, signicant cost reductions cannot be achieved in the
short term. Environmental value is highly related to per capita

X. Ouyang, B. Lin / Energy Policy 70 (2014) 6473

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 general public, and the low willingness as well as low ability to pay for
environment. Apparently, it is difcult 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 government provides continued nancial support for R&D of RE
(Congressional Budget Ofce, 2012). Presently, nancial funds
are sufcient for the Chinese government to support the development and utilization of RE, thereby to promote the development of RE industry (Lin, 2012). The direct nancial 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 lifetimegenerated 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 comprehensive 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 incorporating 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 nancial
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 deployment of RE (European Commission, 2008; Couture and Gagnon,
2010; Thiam, 2011). Degression of tariff rates could deliver renewable 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 inefcient. 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 development. Schuman and Lin (2012) indicated that China's Renewable
Energy Law, which regulated the FIT system and funding mechanisms, 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, insufcient 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 lls 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
ndings, 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 ndings 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 determining 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
signicantly between individual projects and countries (IRENA,
2012a, 2012b). Khatib (2010) reviewed Projected costs of generating electricity2010 Edition by OECD, NEA/IEA (2010), and
emphasized the key conclusion of the study the LCOE is determined by country-specic circumstances. Therefore, in order to
obtain more accurate results, the LCOE of RE should be studied
based on specic 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) 6473

Financing
Operation & Maintanance
Taxes
Capacity factor
Lifetimes
Costs of decommissioning

On site
Equipment
Transport cost
Import levies
Value-added taxes

Factory gate
Equipment

Project development
Site preparation
Working capital
Auxiliary equipment
Contingency payments

Levelized costs
of electricity
at 5% discount rate
at 8% discount rate
at 10% discount
rate

Project cost

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
benets 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

t0

T


Et P E 1 r  t

t0

I t Ot M t Dt 1 r  t

where Et is the amount of electricity production in year t; Pe

denotes the constant price of electricity; (1 r)  t indicates the
discount factor for year t; It is the investment cost in year t (e.g.,
the initial construction investment, interest payment, administration cost, taxes, etc.); Ot & Mt signies 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 I t Ot M t Dt 1 r  t = Et 1 r  t
2
t0

t0

The Eq. (2) is equivalent to Eq. (3)

T

LCOE P e

t0

 T


I t Ot M t Dt 1 r  t =

t0

Et 1 r  t


3

Using the discounted cashing ow (DCF) method, the calculations 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 xed 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

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 benets from reductions of environmental pollution and carbon emissions. All data provided are
nominal which do not exclude the factor of ination.
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
solar power project in Gansu province, Jialonggou solar power
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 inuencing 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 equipment cost, infrastructure and construction cost, and interest
payment during the construction period. According to Tegen
et al. (2012), O&M costs make up 1015% of the LCOE in the rst
several years of a turbine's lifecycle, and then increase to 2035%
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 525 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) 6473

67

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

Capacity
(MW)

Estimated
electricity
generation
(GWh/year)

Overnight
construction costs
(million CNY)a

Construction
Equivalent Interest payment
duration (year) hours
(million CNY/year)

Decommissioning
costs (CNY/kW)

Average O&M
costs (CNY/kWh)b

Laizhou
Halahaixiang
Ningdong
Turpan
Azuoqi
GuazhouQiaowan

32  1.5
33  1.5
33  1.5
33  1.5
80  2.5
134  1.5

95.22
106.70
103.50
102.45
376.22
422.58

450.14
444.21
434.03
424.81
1598.05
1894.28

1
1
1
1
2
2

444.29
424.86
415.12
406.31
365.41
431.26

0.090
0.080
0.080
0.079
0.060
0.063

a
b

1984
2155
2091
2049
1811
2102

22.11
21.82
21.32
20.87
65.20
77.29

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

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

Laizhou
HalaHaixiang
Ningdong
Turpan
Azuoqi
Qiaowan
a

Location

Shandong
Heilongjiang
Ningxia
Xinjiang
Inner Mongolia
Gansu

Category of wind
resource area

Class
Class
Class
Class
Class
Class

IV
IV
III
III
I
II

Tax-exclusive FIT
(CNY/kWh)a

0.562
0.562
0.535
0.535
0.470
0.498

The LCOE (CNY/kWh)

At 5% discount rate

At 8% discount rate

At 10% discount rate

0.624
0.552
0.560
0.540
0.473
0.497

0.745
0.656
0.665
0.640
0.572
0.609

0.827
0.729
0.738
0.709
0.640
0.680

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 rst 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 xed 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 inuencing factors of the LCOE of wind (onshore) are as
follows: nancial expenses, administrative expenses, taxes and
decommissioning costs. Financing costs are mainly interest payments involved with borrowing money for the construction of
wind farms. For most of the wind power projects in China, about
7080% of the investments are supported by bank loans. Basically,
the loan terms are about 1016 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' benets, 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 preferential 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 rst three years and half reduction of income
tax in the subsequent three years. Moreover, we assume that xed
assets depreciate at a rate of 5% during twenty-year depreciation
period. The residual value of xed 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 efciency of solar cells
(IRENA, 2012a, 2012b). Cost of nancing and efciency is substantial, implying the huge potential of cost reduction. Specically,
construction cost is composed of the PV system (photovoltaic
arrays, solar inverters, electrical substations) cost, infrastructure
construction cost, installation cost, interest payment and contingency cost. Cost of PV modules makes up over half of the total
equipment cost in the PV system, which uctuates 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) 6473

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

Capacity
(MW)

Estimated electricity
generation
(GWh/year)

Overnight
construction
cost (million CNY)a

Construction
Equivalent Interest payment
duration (year) hours (h) (million CNY/year)

Decommissioning
costs (CNY/kW)

Average O&M
costs (CNY/kWh)b

Jialonggou
Wuqia
Gonghe
Weiwu
TianhuaYangguang
Maigaiti

10
20
25
30
50
100

17.2
36.79
43.81
49.99
79.5
179.38

224.79
238.24
465
405.95
591
1281.01

1
1
1
1
0.25
1

1085.11
595.6
898.83
642.55
562.62
636.64

0.073
0.044
0.098
0.066
0.060
0.061

a
b

1720
1839
1752
1667
1590
1794

10.25
22.64
15.28
19.94
28.08
55.06

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

Table 4
The LCOE of solar PV in China.
Plant name

Gonghe, Qinghai
Maigaiti, Xinjiang
Wuqia, Xinjiang
Weiwu, Gansu
TianheYangguang,
Qianghai
Jialonggou, Tibet

Tax-exclusive FIT
(CNY/kWh)a

The LCOE (CNY/kWh)

At 5%
discount
rate

At 8%
discount
rate

At 10%
discount
rate

0.922
0.922
0.922
0.922
1.060

0.818
0.839
0.897
0.965
1.168

0.978
1.012
1.084
1.147
1.426

1.085
1.133
1.212
1.270
1.605

1.060

1.337

1.616

1.800

a
The value-added tax rate for solar PV projects is 8.5%, and the initial value of
FIT multiplied by 1.085 is tax-exclusive FIT.

According to the feasibility study report (FSR) of photovoltaic

power plants in China, we assume that the O&M cost of a solar
plant accounts for 0.2% of the total construction cost in the rst
ve years, and rises to 0.5% in the subsequent seven years and then
reaches 1% in the last thirteen years. Based on the above assumptions, the O&M cost makes up 1012% of the LCOE of solar PV,
which is in line with the data of OECD, NEA/IEA (2010). Besides,
the attenuation of the PV system will lead to the decline in
electricity generation. Systematic efciency of a solar PV is usually
assumed to be about 80% of the initial value by the end of its
lifecycle. In this article, we assume that the electricity generation
amount decreases at the rate of 0.8%.
Other factors that inuence the cost of solar PV power generation are as follows: nancial costs, administrative expenses, taxes
and decommissioning costs. Specically, assumptions in this part
are almost the same as assumptions in the estimation of the LCOE
of wind (onshore) power in China; the only difference is that
required laborers for the solar PV system are much fewer. In
general, only 34 workers are needed for a solar PV plant with the
capacity of 10 MW. Expected lifespan of a solar PV power plant is
25 years in this article.
Table 3 presents the cost of solar PV power plants located in
different regions of China.
Based on Table 3 and Eq. (3), we estimate the LCOE of solar PV
in China.
From Table 4, the levelized cost of solar PV power generation
ranges from 0.818 to 1.337 CNY/kWh at 5% discount rate, and from
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
Qinghai, Xinjiang and Gansu provinces in Northwest China. The
levelized cost of solar PV power generation of Gonghe project in
Qinghai province is 0.818 CNY/kWh at 5% discount rate, which is
the lowest among the above solar PV power plants. It is about

0.1 CNY/kWh lower than the exiting FIT (excluding tax). The
current feed-in tariffs (excluding tax) in most regions are higher
than the LCOE of solar PV projects at 5% discount rate, except those
in Qinghai province (TianheYangguang project) and Tibet (Jialonggou project). The LCOE of solar PV at 8% discount rate is about
0.2 CNY/kWh, higher than that at 5% discount rate; and the LCOE
at 10% discount rate is about 0.14 CNY/kWh, higher than that at 8%
discount rate.
3.3. Biomass3
Most of China's biomass power plants adopt direct combustion
technologies that use agro-forestry wastes as raw materials. There
are three determinant factors for the LCOE of biomass: construction costs, fuel costs and discount rates. Construction costs are
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
and boilers make up about 6080% of the total construction
investments. Fuel costs denote the charges of straw as well as
other agricultural and forestry wastes, which make up about 60
70% of the LCOE of biomass energy. In this article, we assume that
the prices of straw and other agricultural and forestry wastes
range from CNY 200 to 400 per ton. Discount rates are set in three
scenarios: 5%, 8% and 10%. Moreover, we assume that the auxiliary
power rate is 12% based on the Feasibility Study Reports (FSR) of
biomass power plants in China.
Other factors inuencing costs of biomass power generation
are O&M costs, nancial expenses, administrative expenses and
taxes. In this article, we assume that the O&M costs are CNY
350 per kW. Financial costs mainly come from interest payments.
For most of biomass power plants in China, about 7080% of the
investments are supported by bank loans. The interest rates range
from 6% to 7% and the loan terms are usually 10 years. Labor costs
make up the largest proportion in administrative expenses. Compared with other RE technologies, biomass power projects are
labor-intensive. Generally, a biomass power plant with the capacity of 30 MW needs about 150 workers in China. Based on the FSR
of biomass power plants in China, we assume that annual income
per labor is CNY 40,000; the employees' welfare and insurances
are assumed to account for 14% and 43% of their total salaries,
respectively. Taxes of solar PV power plants consist of value-added
tax (VAT), additional tax and income tax. The preferential VAT rate
for biomass power projects is 8.5%; the rate of city maintenance
and construction tax is 5%, and the rate of education surtax is 3%.
3
National Energy Administration (2012) estimated that China's available
biomass resource is about 0.46 billion tons of coal equivalent (TCE) per year, of
which the utilization rate is less than 5%. According to China's 12th Five-Year Plan
(FYP) for biomass energy, utilization of biomass will exceed 50 Mtce per year, and
the installed capacity of biomass will reach 13 GW in 2015.

X. Ouyang, B. Lin / Energy Policy 70 (2014) 6473

69

Table 5
Investment costs of biomass power plants in China.
Plant name

Capacity (MW)

Estimated electricity
generation (GWh/year)

Overnight construction
costs (million CNY)

Equivalent
hours (h)

Interest payment
(million CNY/year)

Fuel costs
(Million CNY/year)

Average O&M costs

(CNY/kWh)

Houde
Dangyang
Hailun
Baoquanling
Huoqiu

30
25
24
30
30

195
160
164
195
225

297.41
204.94
260.89
287.68
310

1950
1600
1640
1950
2250

9.83
8.52
9.82
11.52
16.24

60
55
52.8
55
66

0.061
0.062
0.058
0.061
0.053

renewable power generation projects is highly urgent and

necessary.

Table 6
The LCOE of biomass in China.
Plant name

Tax-exclusive FIT
(CNY/kWh)

The LCOE (CNY/kWh)

At 5%
At 8%
At 10%
discount rate discount rate discount rate

Houde
Dangyang
Hailun
Baoquanling
Huoqiu

0.691
0.691
0.691
0.691
0.691

0.627
0.648
0.651
0.585
0.611

0.672
0.686
0.698
0.628
0.683

0.703
0.713
0.731
0.658
0.712

The income tax rate is 25%. For biomass power projects in China,
power generation companies could enjoy income tax exemptions
in the rst 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 province 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 determining 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; ChungLing 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 signicant cost declines. Rapid cost reductions in
some renewable power generation technologies require up-todate 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. Discussion
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 ofcial notication 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
prot 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 rst 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 ofcial 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) 6473

The development of distributed solar PV power generation

system has also enjoyed strong support from the Chinese government. 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 support policies were then promulgated by relevant departments of
the central government. Specically, 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 0.550.60 per kWh, which was
considered sufcient 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
identied investors by bidding would be CNY 0.75 per kWh
(including tax); and for projects that have identied 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 implemented until 2011. Under the price mechanism of franchise bidding,
bidding rms competed with each other for better solar energy
resources instead of ensuring the protability 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 fullacquisition 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 concerning 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
by type

Price of approved projects

Bid price

Bid price plus the price

of approved projects

Feed-in tariffs

Wind power (onshore)

Solar PV power

0.31.2 CNY/kWh (19962003)

4 CNY/kWh, 1.15 CNY/kWh
(20082009)

0.380.8 CNY/kWh (20032005)

1.09 CNY/kWh (2009)

0.40.65 CNY/kWh (20062009)

0.731.09 CNY/kWh (20092010)

Biomass power

Based on the project approval (2003); a 0.63 CNY/kWh (20062010)

premium of CNY 0.25 per kWh added to
the provincial average coal tariffs (2005)

0.510.61 CNY/kWh (2009)

1.15 CNY/kWh and 1
CNY/kWh (early 2011);
0.90 CNY/kWh, 0.95
CNY/kWh, 1.00 CNY/kWh
(late 2011)
0.75 CNY/kWh (2010)

Full acquisition + cost-sharing

Aticle 20: Power grid

companies are obliged to obey
the Aticle 19 to connect all
licensed renewable energy
projects to the grid and
purchase all electricity
generated by renewable
energies. The Excess
purchasing costs due to higher
renewable power generation
costs than those of the
conventinal power will be
shared via the sale price.

0.550.65 CNY/kWh (before 2010)

Full acquisition + cost-sharing

+ fund management
Aticle 20 (amendment): The
excess purchaing costs due to
higher renewable power
gernerartion costs than those
of the conventional power will
be retrieved via "power price
surcharges" on the sale price
of electricity.
Aticle 24 (new): A Renewable
development fund will be
established, which is
composed of the annual
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) 6473

surcharges on electricity rates and annual special funds under the

Ministry of Finance was established under the Renewable Energy
Law (Amendment Act) in 2009. Therefore, the subsidy mechanism
through the FIT has been improved by the combination of cost
sharing and fund management. In short, the FIT system subsidizes
renewable power generators by paying a xed, additional amount
of money for per unit electricity generation, above the on-grid
electricity price for desulfurized coal-red power.

71

Table 9
Additional required subsidies of solar PV through the FIT system in 2011.
Regions in China Electricity
generation
(thousand
GWh)

Additional required subsidies (billion CNY)

At 5%
discount rate

At 8%
discount rate

At 10%
discount rate

Other
Tibet
Total in 2011

0
0.028
0.028

0.108
0.056
0.164

0.206
0.074
0.280

0.81
0.1
0.91

4.2. Estimates of required subsidies through the FIT system

Although the FIT system of renewables in China has been
improved signicantly, several deciencies 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 renewables need to be classied by resource conditions and be dynamically adjusted to reect 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
resource area
(thousand GWh)

Class I
Class II
Class III
Class IV
Total in 2011

16.76
16.15
11.92
31.18
76.01

The additional required subsidies

(billion CNY)
At 5%
discount
rate

At 8%
discount
rate

At 10%
discount
rate

0.05
0
0.19
0.81
1.05

1.71
1.80
1.40
4.31
9.23

2.85
2.94
2.25
6.72
14.76

Table 10
Additional required subsidies of biomass through the FIT system in 2011.
Location

Nationwide

Electricity
generation
(thousand
GWh)

Additional required subsidies (billion CNY)

At 5%
discount rate

At 8%
discount rate

At 10%
discount rate

0.086

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 agricultural 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 satised
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,
implying that the current FIT of biomass is reasonable.

5. Conclusions and policy implications

Renewable energy is mainly deployed in the eld of power
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) 6473

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 1.0514.76 billion CNY in
2011. The LCOE of solar PV in China ranges from 0.818 to
1.800 CNY/kWh at 510% 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 510% discount rates and additional required
subsidies were only 0.001 billion CNY in 2011 at 10% discount rate.
The xed capital investment is an important factor affecting the
LCOE of renewables. However, due to the uncertainty of investment prot margin, nancial 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 information system has not been established in China, resulting in the
backwardness of FIT system of RE. Although the Chinese government has gradually increased FIT to ensure the stable income of
renewable power companies, foreign and private investors still
lack condence due to the relatively low or even negative prot
margins. We must consider the unique characteristics in the
pricing of RE power in China. On one hand, due to the technological 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 abovementioned characteristics should be reected in the FIT to effectively 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:
rst, lower quality of resource endowments; and second, decreased
subsidies from the government. Dinica (2011) argued that nationalcontextual factors such as geographic, infrastructural and resource
factors also have a strong inuence 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. Furthermore, it is impossible for the Chinese government to provide longterm 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 largecapacity 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 nancial burden, but also lead to the waste of
money and resources. Network difculties 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 signicant
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 prerequisite 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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