Abstract

Tibet and the Sichuan-Yunnan Tibetan area have enormous potential for hydropower development. Therefore, accelerating hydropower development in these areas can contribute to water resource utilisation and help relieve the poverty, which has also become a necessary choice of national strategic importance to comply with energy-saving, emission reduction, and ‘power transmission from west to east’ policies. Under existing policies, research has shown that the basic costs of electricity from the typical plants in Tibet and the Sichuan-Yunnan Tibetan area are high and uncompetitive, so that investment enthusiasm for hydropower companies will wane and water resource utilisation will be affected. In this study, we suggest policies to improve the competitiveness and sustainability of the hydropower development in the Tibet and Sichuan-Yunnan Tibetan areas; eventually, the water resources therein can be more effectively utilised. Research has indicated that drafted preferential policies can effectively decrease the cost price. Additionally, the hydropower industry in these areas should be incorporated into the national primary energy balance, forming a government-dominated market mechanism. This would consist of a mandatory market share of the hydropower transmitted from Tibet and the Sichuan-Yunnan Tibetan area and hydropower–carbon trade mechanism – the aim being to promote the consumption of hydropower across the nation.

Introduction

Tibet and the four-province Tibetan areas (the Tibetan autonomous areas of Qinghai, Sichuan, Yunnan and Gansu) are the most impoverished areas in China and have the worst poverty levels of 14 concentrated and extremely poor areas of the country, where the main factors leading to poverty are adverse natural conditions, limited power industry, weak infrastructure and underdeveloped social institutions (Hu, 2009). Maintaining the stability and development of Tibet and the four-province Tibetan areas is of great strategic importance to China. Among these areas, Tibet and the Sichuan-Yunnan Tibetan area are extremely rich in hydropower resources. Indeed, the capacity of the water resources that are technically exploitable in Tibet corresponds to 1.74 × 1011 W (Wang, 2016), meaning it ranks first in China: however, the installed capacity of the built hydropower plants is around 2.3 × 109 W, i.e., just 1.3% of the exploitable amount (Wang, 2016). Moreover, the potential water resources remaining to be developed in the Sichuan-Yunnan Tibetan area correspond to 8.7 × 1010 W (China Society for Hydropower Engineering, Development and Research Centre of the State Council, 2015). The development of hydropower in Sichuan and Yunnan will also extend to the upper reaches in the Tibetan area of the rivers (Journal of China Energy, 2015). Thus, promoting hydropower development can be seen as a major step in the development of the necessary industry and the alleviation of poverty in Tibet and other Tibetan areas. Besides this, hydropower development in Tibet and the Tibetan areas is a requirement of the ‘power transmission from west to east’ and energy-saving and emission reduction policies (Zhang et al., 2014; Journal of China Energy, 2015; National Energy Administration, National Development and Reform Commission, 2016).

The distribution of natural runoff in China is characterised by large differences between the two different periods of flood and drought, and the variation of precipitation over the years is large. The natural characteristics of water resources has led to the coexistence and frequent occurrence of floods and droughts in China. The United Nations World Water Resources Report in 2006 pointed out that water resources management, system construction and infrastructure construction are all inadequate, where inadequate infrastructure construction refers to the lack of water conservancy infrastructure. The construction of infrastructure (the development of hydropower and the construction of reservoir power stations) will inevitably change the ecological function of some areas, which is also an environmental loss that must be borne to some extent; however, the impact of hydropower on the environment is dialectical and unscientific. Disordered development will certainly destroy the environment, but scientific development can reduce the negative impacts and produce favourable impacts, such as flood control and disaster reduction, guaranteed water resources, the substitution of coal generation to reduce pollution, and so on. Therefore, developing hydropower, especially constructing reservoir power stations to control flood during floods periods and provide water resources during dry periods, is an effective way in which to resolve the paradox in water resources management in Tibet and the Sichuan-Yunnan Tibetan area.

The construction of hydropower plants in Tibet and the Sichuan-Yunnan Tibetan area generally costs more than in other provinces (Hu et al., 2015), especially for large plants with regulating capacity. Higher prices lead, in turn, to the reduced competitiveness of the hydropower generated in the Tibet and Tibetan areas and are introduced to remote eastern regions (based on existing pricing mechanisms and policies). Programmes for which benefit and cost streams are uncertain or risky are less attractive than those that produce equivalent expected values of benefits and costs but with less risk or uncertainty (Ward, 2012). Naturally, if the price of the electricity generated cannot be ensured, then the investment activity of hydropower enterprises will be significantly undermined.

Tibet and the Sichuan-Yunnan Tibetan area are rich in water resources, but huge investment in hydropower construction and the reduced competitiveness of the hydropower not only impedes the further development and utilisation of water resources in Tibet and the Sichuan-Yunnan Tibetan area, but also obstructs the implementation of ‘building a well-off society in an all-round way’ and ‘power transmission from west to east’ policies. Pricing is the most attractive management instrument and often lies at the centre of policy reform (Shen & Reddy, 2016). Therefore, developing appropriate preferential policies for hydropower development in Tibet and the Sichuan-Yunnan Tibetan area aimed at reducing the cost price of hydropower, promoting the development of hydropower and utilisation of the water resources is highly significant in guiding political decisions that will realise investment in power-generating enterprises in these areas.

Existing studies on this subject are concentrated on the following aspects. Some focus on evaluating the potential energy resources available in Tibet (Luo & Zhang, 2012). Other scholars have focused on the ecological effects of hydropower construction (Zhang et al., 2014, 2016; Li et al., 2015). Another aspect of interest is the technological difficulty associated with construction and innovation (Huang et al., 2013); however, few studies have focused on the cost price of hydropower development (Hu et al., 2015) and corresponding policies for price reduction in Tibet. Similarly, very little research has been done on the application of special preferential policies aimed at promoting hydropower development in Tibet to the Sichuan-Yunnan Tibetan area.

In this study, typical hydropower plants in Tibet and the Sichuan-Yunnan Tibetan area are selected according to key hydropower bases and projects of China. Cost price and price competitiveness are calculated under existing policies. This is followed by systematic, quantitative research into preferential policies relating to hydropower development aimed at reducing cost price and promoting the development of hydropower and utilising the water resource. In this way, we analyse the effects and feasibility of various policies and provide corresponding policy guidance to governmental departments for future reference. Finally, prospective policy suggestions and research directions are proposed (including suggestions for the mandatory market share of the hydropower transmitted out and hydropower–carbon trade mechanism) to promote a nationwide consumption of the hydropower generated in Tibet and the Sichuan-Yunnan Tibetan area. The general framework of this research is illustrated in Figure 1.

Fig. 1.

The general framework of this research.

Fig. 1.

The general framework of this research.

Methods

Current preferential policies for hydropower in Tibet

In the current period, the preferential policies for hydropower development in Tibet can be divided into three classes, the features of which are shown in Table 1.

Table 1.

The features of current preferential policies for hydropower in Tibet.

Preferential policy Plant
 
Concrete measure Remarks 
Governmental subsidies Zhikong Received central funds amounting to 80% of the total investment Source of capital: Central financial funds 
Laohuzui Received central funds amounting to 53% of the total investment 
Pangduo Received central funds amounting to 72.2% of the total investment 
Zangmu Received central funds amounting to 30.5% of the total investment 
Duobu Received central funds amounting to 41.7% of the total investment 
Preferential policy Policy enactment date Policy target Concrete measure Remarks 
Financial preferences 2004 Sub-branches of each commercial bank in Tibet A preferential loan annual interest rate which is 1.98 per cent less than national average The People's Bank of China subsidises the loss. 
2015 The margin was adjusted from 1.98% to 2% 
Tax preferences 2014 Hydropower plants (above 1 × 106 kW) From 1 January, 2013 to 31 December, 2015, the part of the actual burden of VAT exceeding 8% will be refunded after payment Tax refund 
From 1 January, 2016 to 31 December, 2017, the part exceeding 12% will be refunded after payment 
2008 Projects in Tibet whose income accounts for more than 70% of the total enterprise income Be free of income tax for 7 years Exemption from tax 
2011 Enterprises set in Tibet A 15% income tax rate is applied from 2011 to 2020 Low tax rate 
2014 All enterprises in Tibet Income tax is levied at a tax rate of 15%. From 1 January, 2015 to 31 December, 2017, the enterprises in Tibet are free of any local share of income tax Low tax rate 
Preferential policy Plant
 
Concrete measure Remarks 
Governmental subsidies Zhikong Received central funds amounting to 80% of the total investment Source of capital: Central financial funds 
Laohuzui Received central funds amounting to 53% of the total investment 
Pangduo Received central funds amounting to 72.2% of the total investment 
Zangmu Received central funds amounting to 30.5% of the total investment 
Duobu Received central funds amounting to 41.7% of the total investment 
Preferential policy Policy enactment date Policy target Concrete measure Remarks 
Financial preferences 2004 Sub-branches of each commercial bank in Tibet A preferential loan annual interest rate which is 1.98 per cent less than national average The People's Bank of China subsidises the loss. 
2015 The margin was adjusted from 1.98% to 2% 
Tax preferences 2014 Hydropower plants (above 1 × 106 kW) From 1 January, 2013 to 31 December, 2015, the part of the actual burden of VAT exceeding 8% will be refunded after payment Tax refund 
From 1 January, 2016 to 31 December, 2017, the part exceeding 12% will be refunded after payment 
2008 Projects in Tibet whose income accounts for more than 70% of the total enterprise income Be free of income tax for 7 years Exemption from tax 
2011 Enterprises set in Tibet A 15% income tax rate is applied from 2011 to 2020 Low tax rate 
2014 All enterprises in Tibet Income tax is levied at a tax rate of 15%. From 1 January, 2015 to 31 December, 2017, the enterprises in Tibet are free of any local share of income tax Low tax rate 

Government subsidies

Nowadays, 85% of the hydropower plants in Tibet are constructed using governmental investment. Fund collection from built or hydropower plants being built (with the participation of enterprises) indicates that the government allocates central financial funds to different degrees, accounting for 30–80% of the total investment. The Zhikong plant received central funds amounting to 80% of the total investment required while the Laohuzui plant received 53% (6.5 × 108 CNY). For the Pangduo plant, 72.2% (3.3 × 109 CNY) of the total investment was assigned and the corresponding figures for the Zangmu and Duobu plants are 30.5% (3 × 109 CNY) and 41.7% (1.21 × 109 CNY), respectively. The locations of the five hydropower stations (Zhikong, Laohuzui, Pangduo, Zangmu and Duobu) are shown in Figure 2.

Fig. 2.

The locations of the five hydropower stations (Zhikong, Laohuzui, Pangduo, Zangmu and Duobu plants).

Fig. 2.

The locations of the five hydropower stations (Zhikong, Laohuzui, Pangduo, Zangmu and Duobu plants).

Financial preferences

In 2004, a document (Lhasa Central Sub-branch of the People's Bank of China Transmitting ‘Notice of the People's Bank of China on adjusting deposit and loan rates of financial institutions’) regulated that sub-branches of the commercial banks in Tibet should adopt a uniform preferential annual loan interest rate that is 1.98% less than the average national level (Lhasa Central Sub-branch of the People's Bank of China, 2004). This policy has been in effect in Tibet for about ten years. In August 2015, the preferential margin of the prime rate was adjusted from the original value of 1.98% to 2% (The People's Bank of China, 2015).

Tax preferences

The Chinese Government has put forward a Western Development Policy, which includes a succession of tax preferences, mainly relating to value added tax (VAT) and income tax.

In terms of VAT, for hydropower plants above 109W (including pumped-storage schemes) selling self-produced power products, the part of the actual VAT burden exceeding 8% will be refunded immediately after payment from 1 January, 2013 to 31 December, 2015. Furthermore, from 1 January, 2016 to 31 December, 2017, that part exceeding 12% would be refunded immediately after payment (Ministry of Finance, State Administration of Taxation, 2014).

In terms of income tax, the income of the projects accounting for more than 70% of the total enterprise income will be free of income tax for seven years beginning from the year in which the taxes should be paid for the production income of the project (including water conservancy) (The State Tax Bureau of Tibet Autonomous Region, 2008). For enterprises based in Tibet (plus Tibetan enterprises based outside Tibet), a 15% tax rate is to be applied to corporate income tax from 2011 to 2020 (People's Government of Tibet Autonomous Region, 2011). Later, a document (People's Government of Tibet Autonomous Region, 2014) stated that the income tax rate applied to all enterprises in Tibet will be levied at 15%. From 1 January, 2015 to 31 December, 2017, the enterprises in Tibet were to be free of their local share of income tax. Despite this, the tax-free preferential policy directly related to water conservancy and hydropower projects vanished.

The operating-period price method

The operating-period price method was employed to calculate the electricity price in this study (State Development Planning Commission in China, 2001). That is, the price is uniformly fixed according to the social cost and earnings of the project during the operating period. We thus investigated the annual cash flows in the projects over their economic life-periods (the operating period of a hydropower project is 30 years after being put into production). The net cash flow of the funds owned by the projects over this period needs to satisfy a certain financial ‘internal rate of return’ (IRR). During the estimation process, the electricity price is constantly adjusted until the IRR satisfies the level required, i.e., until the following equality holds: 
formula
In this expression, refers to the cash inflow (including sales revenue, fixed asset withdrawals, circulating fund withdrawal, and other cash inflows), is the cash outflow (including long-term capital fund investment, funds owned in circulating funds, operating costs – i.e., the cost of electricity generation excluding depreciation costs, capital repayment of long-term debts, interest repayments, VAT, VAT additional tax, income tax, and other expenses), and both relate to the ith hydropower station in the tth year. In addition, n is the number of cascade hydropower stations in the watershed and T denotes the operating period (so t is an integer ranging from 1 to T) (Chen & Ma, 2010).

Notice of State Development Planning Commission on standardising electricity price management stipulates that the IRR of the capital funds during the operating period is slightly higher than the domestic bank's five-year loan interest rate when the electricity price is approved by the operating-period price method. For price estimation, the five-year loan interest rate used in this paper is 5.65%, so the IRR of the capital funds during the operating period is taken to be 6%.

Basic cost price estimation

We selected four typical plants for estimation in this study. Other parameters required to estimate the cost price of the plants were determined (Table 2). Among the hydropower stations considered here, only the Rumei plant in Tibet enjoys a preferential interest rate on its loan (reduced by 1.98%). Furthermore, to help propose targeted and effective preferential policies, the constituents of the total cost and cash outflow of the Lianghekou plant (as a case) during the operating period were analysed.

  • The Lianghekou plant: this has an installed capacity of 3 × 109 W, is located in the middle reaches of the main stream of the Yalong River, and is a controlling reservoir with multi-year regulating capacity.

  • The Shuangjiangkou plant: this has an installed capacity of 2 × 109 W, is located in the upper reaches of the Dadu River, and is a controlling reservoir with annual regulating capacity.

  • The Lawa plant: this has an installed capacity of 2 × 109 W, is located in the upper reaches of the Jinsha River (a fifth cascade hydropower station on the Sichuan-Tibet border), and exhibits incomplete annual regulating capacity.

  • The Rumei plant: with an annual regulating capacity of 2.1 × 109 W, this is the leading and controlling hydropower station in the Tibet section of the upper reaches of the Lancang River.

Table 2.

Parameters used to estimate the cost prices of the four plants.

Parameter Lianghekou Shuangjiangkou Lawa Rumei 
Location Yajiang County Maerkang County, Jinchuan County Batang County Mangkang County 
Total investment (108 CNY) 689.96 383.66 406.83 556.50 
Investment per kilowatt (CNY/kW) 22,999 19,183 20,341 26,499 
On-grid energy (108 kWh) 121.49 72.45 84.43 105.71 
Loan rate (%) 5.65 5.65 5.65 3.67 
Loan term (years) 20 20 20 20 
Depreciation rate (%) 3.33 3.33 3.33 3.33 
Withheld repair expenses (%) 0.5 0.5 
Material costs (CNY/kW) 
Number of plant staff 150 128 150 210 
Staff salary ratio (104 CNY/year-person) 10 
Staff care fundsa (%) 63 63 63 75 
Water resource tariff (CNY/kWh) 0.005 0.005 0.005 0.005 
Reservoir funds (CNY/kWh) 0.008 0.008 0.008 0.008 
Premium rate (%) 0.25 0.25 0.25 0.25 
Other costs (CNY/kWh) 25 25 25 25 
Operating electricity price (CNY/kWh) 0.5565 0.5303 0.5358 0.5803 
Parameter Lianghekou Shuangjiangkou Lawa Rumei 
Location Yajiang County Maerkang County, Jinchuan County Batang County Mangkang County 
Total investment (108 CNY) 689.96 383.66 406.83 556.50 
Investment per kilowatt (CNY/kW) 22,999 19,183 20,341 26,499 
On-grid energy (108 kWh) 121.49 72.45 84.43 105.71 
Loan rate (%) 5.65 5.65 5.65 3.67 
Loan term (years) 20 20 20 20 
Depreciation rate (%) 3.33 3.33 3.33 3.33 
Withheld repair expenses (%) 0.5 0.5 
Material costs (CNY/kW) 
Number of plant staff 150 128 150 210 
Staff salary ratio (104 CNY/year-person) 10 
Staff care fundsa (%) 63 63 63 75 
Water resource tariff (CNY/kWh) 0.005 0.005 0.005 0.005 
Reservoir funds (CNY/kWh) 0.008 0.008 0.008 0.008 
Premium rate (%) 0.25 0.25 0.25 0.25 
Other costs (CNY/kWh) 25 25 25 25 
Operating electricity price (CNY/kWh) 0.5565 0.5303 0.5358 0.5803 

Source: Yalong River Hydropower Development Co., Ltd, Dadu River Hydropower Development Co., Ltd, Huadian Jinsha River Upstream Hydropower Development Co., Ltd and Huaneng Lancang River Hydropower Co., Ltd.

aStaff welfare, union operating funds, staff education funds and social insurance.

Analysis of the competitiveness of electricity prices

Tibet's hydropower plants will mainly supply electricity to eastern China (Shanghai and Jiangsu, Zhejiang, Anhui and Fujian Provinces), central China (Hubei, Hunan, Jiangxi and Henan Provinces) and the south of China (Guangdong, Guangxi, Yunnan, Guizhou and Hainan Provinces). The Lianghekou and Shuangjiangkou plants will be first used to satisfy load demand from Sichuan Province (Chen, 2007; Tu, 2015). In view of this, the competitiveness of the electricity prices of the Lawa and Rumei plants compared with that of central China, eastern China and south of China was analysed as well as that of the Lianghekou and Shuangjiangkou plants in Sichuan Province.

Thermal power and hydropower currently remain the main forms of power generation in China. Furthermore, the typical plants studied will essentially be put into production after 2020, when they will need to compete with existing, and newly constructed power plants that will be put into production in the receiving areas. Therefore, based on the electricity price, the competitiveness of the typical plants, existing power plants (thermal power and hydropower) and potential new power plants in the receiving areas was analysed.

Analysis of the implementation effects of the policies

On these bases, targeted preferential policies are then proposed for hydropower development in Tibet and the Sichuan-Yunnan Tibetan area and the implementation effects (mainly the electricity price) are analysed with reference to the preferential policies that already exist in Tibet.

Growing a hydropower development fund for the Tibetan areas

In 2009, the Three Gorges Project Construction Fund was transformed into the National Major Water Conservancy Project Construction Fund. This fund aims to support the South–North Water Transfer Project (Berkoff, 2003), solve any subsequent problems with the Three Gorges Project and strengthen the construction of major water conservancy projects in the central and western regions of China (National Ministry of Finance, National Development and Reform Commission, Ministry of Water Resources, 2009). However, the Major Water Conservancy Project Construction Fund will come to an end by 31 December, 2019. Many water conservancy and hydropower projects in Tibet and the Sichuan-Yunnan Tibetan area will be built or put into service after 2020, and cannot be supported by this fund. It is suggested to grow a fund to support water conservancy and hydropower projects in Tibet and the Sichuan-Yunnan Tibetan area by following the example set by the Three Gorges Project Construction Fund and the Major Water Conservancy Project Construction Fund.

Introduction of preferential loan rates in the Sichuan-Yunnan Tibetan area

The Sichuan-Yunnan Tibetan regions that are at high altitude should put the same level of investment into hydropower projects and therefore face the same difficulties as Tibet: however, the former do not enjoy preferential interest rates on their loans due to administrative divisions. It is suggested that an equivalent preferential policy can apply to the interest rates of loans in the Tibetan area. However, widening the implementation of such a preferential policy would probably aggravate the financial burden on the government; reduced interest rates on loans taken out via the programme should still be implemented (and levied at 1.98%).

Central financial discounts

The document named Notice on Releasing Management Method of Central Finance Discount in Basic Construction Loan (National Ministry of Finance, 2012) stipulated that key water conservancy projects in western China (excluding electricity-generating projects) can receive a central financial discount for up to five years during their construction periods. A discount rate of not more than 3% in principle was also stipulated. These projects should have a construction period longer than three years (except for ‘mega’ projects).

Although power stations under construction in Tibet and the Sichuan-Yunnan Tibetan area generally focus on electricity generation, hydropower in these areas has important developmental significance. It is suggested that the major hydropower projects in Tibet and the Sichuan-Yunnan Tibetan area should be incorporated into the implementation range of the financial discount policy.

Prolonging the repayment period

To lower the generation price of hydropower in Tibet and the Sichuan-Yunnan Tibetan area, increase competitiveness and enable plants to survive and develop, it is advised that the repayment period of loans is extended from 20 to 30 years.

National free allocation

The overall thinking in China, with respect to power source construction in Tibet, is to reduce (gradually) that proportion of the total consumed by free allocation of China's finances. That is, the aim is to gradually promote the marketisation of power source construction. Despite this, central government is still expected to appropriate funds for constructing hydropower projects in Tibet and the Sichuan-Yunnan Tibetan area for some time to come, considering the particularity of hydropower development in these areas. This is because the hydropower stations in these areas face significant pressure to sustain normal operations and repay bank loans. Thus, they cannot achieve a completely marketised state in such a short time. To support the hydropower projects while reducing the burden on central finances, it is suggested that the proportion of appropriation be allowed to take up 30% of the total amount invested.

Tax preferences

The overall national plan for the development of the western regions of China is long-term and involves a significant, and arduous, amount of system engineering. It is likely, therefore, that implementation of tax preferences in Tibet and the Sichuan-Yunnan Tibetan area will form a part of the preferential policies formulated for western development. Preferential policies are drafted into the schemes, including policies for refunding VAT in excess of 8% immediately after expropriation, income tax exemptions lasting seven years from when the first operating income is realised and the application of a 15% income tax rate are drafted into such schemes.

Electricity price subsidy

To promote the development of renewable energy, the state has introduced many preferential policies (Schuman & Lin, 2012; Hu et al., 2016; Zhang et al., 2017). Hydroelectric, solar, wind and biomass energy are classed as renewable energies, but the policies relating to hydroelectric generation are not clearly regulated in the Renewable Energy Law. Except for hydropower in its current state, other types of generation projects involving renewable energy enjoy electricity price subsidies from renewable energy development funds (Schuman & Lin, 2012; Lo, 2014; Zhi et al., 2014; Hu et al., 2016).

Although hydropower is classified as a conventional energy source and mature technologies have been developed, including other renewable energies, hydropower in Tibet and the Sichuan-Yunnan Tibetan area is faced with the difficulties associated with costs. In light of these issues, the state can be expected to develop policies to implement electricity price subsidies for hydropower enterprises in Tibet and the Sichuan-Yunnan Tibetan area according to the total amount of electricity generated.

The subsidy standard here is to offer an allowance for electricity-generation prices that exceed the local coal-fired benchmark price during their operating period. There are two suggested ways of funding the subsidies: first, the state can decree hydropower to be a clean, renewable source of energy and incorporate hydropower in Tibet and the Sichuan-Yunnan Tibetan area into the scope of the subsidies available for renewable energy prices; and second, the state can establish a fund for hydropower development in the Tibetan areas.

Results

Basic cost price

The estimated results for the prices of the generated electricity during the operating period are shown in Table 2. It can be seen that the electricity prices are all above 0.5 CNY/kWh (the Rumei plant has the highest price, and the Shuangjiangkou plant the lowest – 0.5803 and 0.5303 CNY/kWh, respectively).

Figure 3 shows that the total costs of the four typical hydropower stations are composed mainly of expenses due to depreciation, financial costs and repairs. Our analysis reveals that the total amount of investment, the interest on the loan and the repayment period are factors directly influencing the total costs of the hydropower stations. Furthermore, the cash outflow from the four typical hydropower stations during their operating periods consists mainly of the repayment of principal and interest, and payment of taxes (VAT, VAT additional tax and income tax). Our analysis reveals that the total investment amount, the interest on the loan, the repayment period, VAT, additional tax rate and income tax rate are the factors directly influencing the cash outflow condition of the hydropower stations.

Fig. 3.

A breakdown of the total production costs and the cash outflow structure of the Lianghekou plant.

Fig. 3.

A breakdown of the total production costs and the cash outflow structure of the Lianghekou plant.

Competitiveness of electricity prices

Lawa and Rumei plants

Figure 4 illustrates the average prices of generated electricity in the possible receiving provinces in China for 2015. As can be seen, the coal-based prices in the various provinces and cities of China in 2015 are generally in the range 0.4–0.5 CNY/kWh (Guangdong Province had the highest price, 0.5048 CNY/kWh). The average generation prices of the hydropower enterprises in most of the provinces and cities are all lower than 0.5 CNY/kWh (the exception being Zhejiang Province where the price is 0.5523 CNY/kWh).

Fig. 4.

The average prices of generated electricity (17% VAT included) in possible receiving provinces in China in 2015. Source: The National Energy Administration of PRC.

Fig. 4.

The average prices of generated electricity (17% VAT included) in possible receiving provinces in China in 2015. Source: The National Energy Administration of PRC.

The average electricity-generation prices of the possible new power plants in central China and eastern China during 2016–2025 will be 0.5254 and 0.5485 CNY/kWh, respectively. The average electricity prices of the possible new power plants in the south of China during 2016–2030 will be 0.5646 CNY/kWh (China Society for Hydropower Engineering, Development and Research Centre of the State Council, 2015).

If we add the generation cost price of 0.5358 CNY/kWh (given above) to the typical transmission cost which lies in the range 0.1–0.2 CNY/kWh (Journal of China Energy, 2015), we can see that the Lawa and Rumei plants are less competitive than existing, and possible new, power plants in the receiving regions in central China, eastern China and the south of China.

Lianghekou and Shuangjiangkou plants

The average electricity-generation prices for coal-burning and hydropower plants in Sichuan Province in 2015 are 0.4644 (Figure 4). At present, the highest approved hydropower electricity price is 0.49 CNY/kWh. The current benchmark electricity-generation price (including desulphuration, denitration and de-dusting costs) of coal-burning units is 0.4012 CNY/kWh. The benchmark electricity-generation price of seasonally regulated hydropower stations (incomplete annual regulation and 17% VAT included) is 0.35 CNY/kWh and that (17% VAT included) of annually and multi-yearly regulated hydropower stations is 0.39 CNY/kWh. In contrast, the electricity-generation prices of the Shuangjiangkou and Lianghekou plants during the operating period are somewhat higher.

According to the 13th Five-Year Plan of electric power development in Sichuan province (National Energy Administration, National Development and Reform Commission, 2015; Sichuan Energy Administration, Sichuan Development and Reform Commission, 2017), the Shuangjiangkou and Lianghekou plants will be able to compete mainly with the potential new hydropower and thermal power stations. The benchmark electricity-generation price is adopted as the current electricity-generation price for hydropower and coal-burning power plants. The basic cost prices of the Shuangjiangkou and Lianghekou plants are greater than the benchmark generation price of hydropower. Sichuan Province implemented a coal–electricity price linkage mechanism in 2005. That is, the benchmark electricity-generation price of coal-burning plants is mainly adjusted according to the change in price of coal for electricity generation: however, to avoid having too great an impact on the sale of power price, the adjustment amplitude was strictly controlled from then on. The benchmark electricity-generation price of coal-burning power plants is essentially in a state of dynamic balance and increased by 0.1087 CNY/kWh from 2005 to 2011 in total (Figure 5). It is foreseeable that the generation price of any possible new thermal power plants will be lower than the basic cost prices of the Shuangjiangkou and Lianghekou plants. Clearly, these plants are less competitive with respect to electricity-generation prices in the Sichuan power grid.

Fig. 5.

Adjustment amplitudes of the benchmark generation prices of coal-burning power plants in Sichuan Province in previous years. Source: National Development and Reform Commission, Sichuan Development and Reform Commission.

Fig. 5.

Adjustment amplitudes of the benchmark generation prices of coal-burning power plants in Sichuan Province in previous years. Source: National Development and Reform Commission, Sichuan Development and Reform Commission.

Implementation effects of the policies

The effects of implementing the preferential loan rate policy, the central financial discount policy during the construction period and the national free allocation policy are shown in Table 3 and compared with the basic scheme. The effects of prolonging the repayment period from 20 to 30 years and the effect of implementing the combined VAT/income tax policy are displayed in Tables 4 and 5, respectively.

Table 3.

The effects of implementing preferential policies.

Project Basic scheme Implementation effects
 
Value
 
Percentage reduction
 
Ia IIb IVc Ia IIb IVc 
Lianghekou Annual average financial cost (108 CNY) 19.17 10.69 16.41 13.42 44.2% 14.4% 30.0% 
Electricity price (CNY/kWh) 0.5565 0.4585 0.4828 0.3869 17.6% 13.2% 30.5% 
Shuangjiangkou Annual average financial cost (108 CNY) 10.66 6.07 9.43 7.46 43.0% 11.5% 30.0% 
Electricity price (CNY/kWh) 0.5303 0.4456 0.4740 0.3698 16.0% 10.6% 30.3% 
Lawa Annual average financial cost (108 CNY) 11.3 6.41 9.94 7.91 43.3% 12.0% 30.0% 
Electricity price (CNY/kWh) 0.5358 0.4524 0.4757 0.3728 15.6% 11.2% 30.4% 
Rumei Annual average financial cost (108 CNY) 9.55 – 7.99 6.68 – 16.3% 30.0% 
Electricity price (CNY/kWh) 0.5803 – 0.4938 0.3951 – 14.9% 31.9% 
Project Basic scheme Implementation effects
 
Value
 
Percentage reduction
 
Ia IIb IVc Ia IIb IVc 
Lianghekou Annual average financial cost (108 CNY) 19.17 10.69 16.41 13.42 44.2% 14.4% 30.0% 
Electricity price (CNY/kWh) 0.5565 0.4585 0.4828 0.3869 17.6% 13.2% 30.5% 
Shuangjiangkou Annual average financial cost (108 CNY) 10.66 6.07 9.43 7.46 43.0% 11.5% 30.0% 
Electricity price (CNY/kWh) 0.5303 0.4456 0.4740 0.3698 16.0% 10.6% 30.3% 
Lawa Annual average financial cost (108 CNY) 11.3 6.41 9.94 7.91 43.3% 12.0% 30.0% 
Electricity price (CNY/kWh) 0.5358 0.4524 0.4757 0.3728 15.6% 11.2% 30.4% 
Rumei Annual average financial cost (108 CNY) 9.55 – 7.99 6.68 – 16.3% 30.0% 
Electricity price (CNY/kWh) 0.5803 – 0.4938 0.3951 – 14.9% 31.9% 

aPreferential loan rate policy.

bCentral financial discount policy.

cNational free allocation policy.

Table 4.

The effect of extending the loan repayment period from 20 to 30 years.

Project
 
Basic scheme With prolonged loan term Percentage reduction 
Lianghekou Annual loan repayment (108 CNY) 46.76 38.61 17.4% 
Electricity price (CNY/kWh) 0.5565 0.5406 2.9% 
Shuangjiangkou Annual loan repayment (108 CNY) 26.00 21.47 17.4% 
Electricity price (CNY/kWh) 0.5303 0.5144 3.0% 
Lawa Annual loan repayment (108 CNY) 27.57 22.76 17.4% 
Electricity price (CNY/kWh) 0.5358 0.5189 3.2% 
Rumei Annual loan repayment (108 CNY) 31.81 24.72 22.3% 
Electricity price (CNY/kWh) 0.5803 0.5430 6.4% 
Project
 
Basic scheme With prolonged loan term Percentage reduction 
Lianghekou Annual loan repayment (108 CNY) 46.76 38.61 17.4% 
Electricity price (CNY/kWh) 0.5565 0.5406 2.9% 
Shuangjiangkou Annual loan repayment (108 CNY) 26.00 21.47 17.4% 
Electricity price (CNY/kWh) 0.5303 0.5144 3.0% 
Lawa Annual loan repayment (108 CNY) 27.57 22.76 17.4% 
Electricity price (CNY/kWh) 0.5358 0.5189 3.2% 
Rumei Annual loan repayment (108 CNY) 31.81 24.72 22.3% 
Electricity price (CNY/kWh) 0.5803 0.5430 6.4% 
Table 5.

The effect of a preferential combined VAT and income tax policy.

Project
 
Basic scheme With combined VAT/income tax scheme Percentage reduction 
Lianghekou Average annual amount of tax (108 CNY) 13.00 5.97 54.0% 
Electricity price (CNY/kWh) 0.5565 0.4927 11.5% 
Shuangjiangkou Average annual amount of tax (108 CNY) 7.29 3.40 53.4% 
Electricity price (CNY/kWh) 0.5303 0.4707 11.2% 
Lawa Average annual amount of tax (108 CNY) 8.75 4.14 52.7% 
Electricity price (CNY/kWh) 0.5358 0.4766 11.0% 
Rumei Average annual amount of tax (108 CNY) 13.20 5.98 54.7% 
Electricity price (CNY/kWh) 0.5803 0.5076 12.5% 
Project
 
Basic scheme With combined VAT/income tax scheme Percentage reduction 
Lianghekou Average annual amount of tax (108 CNY) 13.00 5.97 54.0% 
Electricity price (CNY/kWh) 0.5565 0.4927 11.5% 
Shuangjiangkou Average annual amount of tax (108 CNY) 7.29 3.40 53.4% 
Electricity price (CNY/kWh) 0.5303 0.4707 11.2% 
Lawa Average annual amount of tax (108 CNY) 8.75 4.14 52.7% 
Electricity price (CNY/kWh) 0.5358 0.4766 11.0% 
Rumei Average annual amount of tax (108 CNY) 13.20 5.98 54.7% 
Electricity price (CNY/kWh) 0.5803 0.5076 12.5% 

The results (Table 3) show that after implementing preferential policy annual loan interest rate is 1.98% lower than the national average level, the annual average financial cost decreases by 43%–44.2%. As a result, the electricity price decreases by about 15.6%–17.6%.

As shown in Table 3, after implementing the central financial discount policy, the annual average financial cost of the three plants in the Sichuan-Yunnan Tibetan areas and Rumei plant is 11.5%–14.4% and 16.3%, respectively. Finally, the electricity price of the Lianghekou, Shuangjiangkou and Lawa plants decreases by 10.6%–13.2% and that of the Rumei plant in Tibet is decreased by about 14.9%.

As shown in Table 3, the results show that, after implementing national free allocation policy, the annual average financial cost is decreased by 30%. This decreases the prices of electricity in the Lianghekou, Shuangjiangkou, and Lawa plants in the Sichuan-Yunnan Tibetan areas by 30.3%–30.5%, while the decrease in electricity price in the Rumei plant, Tibet is 31.9%.

As shown in Table 4, the annual loan repayment of Lianghekou, Shuangjiangkou and Lawa plants in the Sichuan-Yunnan Tibetan areas decreases by 17.4% as the loan repayment period is extended from 20 years to 30 years in typical plants, while that at the Rumei plant in Tibet decreases by 22.3%. Finally, the reduction amplitudes of electricity price are 2.9%–3.2% and 6.4%, respectively.

As shown in Table 5, after implementing a preferential combined VAT and income tax policy in typical plants, the average annual amount of tax on the Lianghekou, Shuangjiangkou and Lawa plants in the Sichuan-Yunnan Tibetan areas is 52.7%–54%. That on the Rumei plant in Tibet is 54.7%. Furthermore, the electricity price from the Lianghekou, Shuangjiangkou and Lawa plants in the Tibetan area decreases by 11%–11.5%, while that from the Rumei plant in Tibet decreases by 12.5%.

Intuitively, it can be seen from Figure 6 that extending the loan repayment period, implementing preferential VAT and income tax rates, providing a central financial discount, introducing a preferential loan rate and providing a national free allocation are ranked from low to high according to their implementation effect.

Fig. 6.

Comparison of the effect of different policies on electricity price.

Fig. 6.

Comparison of the effect of different policies on electricity price.

Taking into account multiple factors (including practical experience, policy orientation and financial burden), the policies can thus be ordered according to their likelihood of implementation. In descending order (i.e., from most likely to be implemented to least likely), the policies are: extending the repayment period, tax preferences, preferential loan rate policy, central financial discount, national free allocation, subsidising electricity prices, and setting up a hydropower development fund for the Tibetan area.

Conclusions and suggestions

Conclusions

The basic cost price of electricity from typical plants in Tibet and the Sichuan-Yunnan Tibetan area has been estimated as part of this study and analysed in terms of competitiveness. On this basis, preferential policies are proposed for hydropower development and the effect of implementing these policies analysed and compared. The main conclusions are as follows:

  • The cost price of electricity from the four typical plants in Tibet and the Sichuan-Yunnan Tibetan area is high and uncompetitive based on existing policies.

  • The preferential policies suggested can effectively decrease the cost price of electricity. The sizes of their effects, from favourable to poor, are as follows: the state allocating 30% of the total investment of the project, 1.98% preferential loan rate, 3% central financial discount in the construction period, tax preferences and an extended repayment period (from 20 to 30 years).

Policy suggestions

Considering the high cost price and low competitiveness of hydropower in Tibet and the Sichuan-Yunnan Tibetan area, the following measures and suggestions are proposed for government sectors to use as a reference when analysing and calculating their planned preferential policies.

Preferential policies

National fiscal appropriation policy

The government is advised to continue with fiscal appropriation to support hydropower development in both Tibet and the Sichuan-Yunnan Tibetan area. Considering multiple factors, including investments and competitiveness of such plants, the national appropriation proportion should not be less than 30%.

Preferential loan rate policy

It is suggested that the government implement policies so that the Sichuan-Yunnan Tibetan area is able to enjoy the same preferential loan rates available in the Tibet Autonomous Region. The loan rate should be 1.98% smaller than the national prevailing rate.

Tax preference policy

The current preferential policy for hydropower projects should be applied as a long-term policy in China to support hydropower development in Tibet and the Sichuan-Yunnan Tibetan area. No limitations should be placed on installed capacity. The current tax preferences are: a refund of VAT in excess of 8% immediately after expropriation during the 30-year operating period, an income tax exemption for seven years and adoption of an income tax rate of 15%. Moreover, to guarantee local financial revenue, it is recommended that the VAT and income taxes contributed by local areas should remain local (those contributed by central finance should be returned to the hydropower enterprises).

Extending the repayment period

It is advised that the repayment period applied to hydropower enterprises in Tibet and Sichuan-Yunnan Tibetan area should be extended (from 18–20 to 30 years).

Central financial discount

The original preferential policy must be expected to be extended to major water conservancy and hydropower projects in Tibet and the Sichuan-Yunnan Tibetan area. By doing so, projects with construction periods longer than three years will be able to enjoy a central financial discount during the construction period for up to five years at a rate of 3%.

Electricity price subsidy

It is recommended that the government explicitly, and legally, defines hydropower as a renewable energy source so that it can enjoy the price subsidies available to such sources of energy.

Setting up a hydropower development fund for the Tibetan area

The government is recommended to establish a hydropower development fund for the Tibetan areas or transfer funds from the Major Water Conservancy Engineering Construction Fund into this fund. The aim is to provide a source of sustainable and cyclically used funds for some of the preferential policies.

What needs to be emphasised is that it is necessary at the moment to clarify and emphasise the nature of hydropower as a renewable energy source which is thus subject to the corresponding preferential policies. This is the ultimate solution for facilitating full and efficient utilisation of hydropower and achieving sustainable and green development of China's energy resources.

Other measures

In the subsequent development process, hydropower development in Tibet and the Sichuan-Yunnan Tibetan area is faced with another barrier that affects its market consumption (due to various influencing factors including their own limits, institutions, and economic background); however, this barrier cannot be overcome by simply implementing preferential policies. Rather, it is necessary to carry out a major revision of the system so as to resolve contradictions arising from the perspective of the system and underlying mechanisms therein.

Thus, hydropower in Tibet and the Sichuan-Yunnan Tibetan area should be incorporated into the national primary-energy balance, to form a government-dominated market mechanism and promote nationwide hydropower consumption. Some possible research directions for a consumption mechanism are as follows:

Creating a mandatory market share mechanism for Tibetan hydropower

China has established a renewable portfolio standard (RPS) by learning from the experience of others overseas (Ming-Zhi Gao et al., 2015); however, the generation of renewable hydropower energy is not incorporated within the quota management range.

Hydropower development incurs certain environmental costs, including resource consumption and environmental pollution. The resource consumption mainly includes mineral resources, water resources, and so on. The cost of environmental pollution is mainly the pollution of water resources during construction; however, during the operation of hydropower stations, there is less pollution of water resources and the atmosphere, especially when compared with thermal power stations. In comparison, hydropower is an abundant source of clean renewable energy. It is reliable and its generation technology is mature. Under the power structure dominated by thermal power, China is facing severe environmental pressure. As such, hydropower can serve as China's primary approach to preventing water pollution and air pollution (Zhao et al., 2016). Hydropower in Tibet and the Sichuan-Yunnan Tibetan area is still in the initial stage of its development. Therefore, like other renewable energy sources, it is faced with the difficulties associated with costs. It is reasonable to let hydropower enjoy the same policies enjoyed by other renewable energies and to guarantee the transmission and consumption of hydropower from Tibet and the Sichuan-Yunnan Tibetan area by using government-led mandatory policies.

Therefore, it is recommended to learn from China's experience with RPS and explore a mandatory market share mechanism for hydropower transmitted from Tibet and the Sichuan-Yunnan Tibetan area. Moreover, the relevant departments in China's government should outline the related administrative methods (based on research) in a timely manner to specify the technology range, persons responsible, supervisors and reward/punishment mechanisms to be explicitly incorporated into the share system. Moreover, they need to determine reasonable share indices to be borne by the personnel given responsibility for its management.

Incorporating hydropower into the national carbon emission trading system

The generation of electricity and heat currently makes a contribution of c. 25% to global anthropogenic greenhouse gas emissions, thought to be the main driver of observed climate changes (Pfeiffer et al., 2016). China's breath-taking economic growth and power-generation development during the last few decades have helped to lift hundreds of millions of people out of poverty; however, this success has also turned China into the world's largest emitter of carbon dioxide (Steckel et al., 2011). In this context, China's power industry produces nearly 40% of the country's carbon emissions (Yan et al., 2017).

Around the world, there is much pressure on countries to move to low-carbon lifestyles and so the energy system in China has recently aroused fervent attention (Yuan et al., 2012). There are some government-dominated marketisation approaches that can be useful in this context, e.g., constructing a national uniform carbon-trade market and carrying out mandatory carbon trade.

This measure actually promotes the development of hydropower in two ways. First, hydropower enterprises can earn extra revenue as they are the main sellers of carbon emission permits in the nationwide uniform carbon trading market (this, of course, allows them to gain compensation for their costs via the trade of carbon emission permits). Second, mandatory nationwide carbon trading leads to low-carbon city governance with different costs in different regions. This can inspire cooperation between well-developed and less-well-developed hydropower-generating areas. Such cooperation will bring financial and technological support from developed areas to hydropower-producing areas whose economies are less well-developed. It also promotes further consumption of hydropower in developed regions.

Therefore, it is recommended that China learns from the concept and flexibility of the three mechanisms (joint implementation, emission trading and clean development mechanisms) in the Kyoto Protocol. The approach should be applied based on China's actual conditions after establishing a national uniform carbon trading market. It will be necessary to study how to incorporate hydropower into the national uniform carbon trading market. Issues also need to be discussed relating to the development of legislation, the trading system and mechanism design. It is necessary to legislate for the implementation of carbon trading. First, China should formulate the basic laws of emissions trading, including the legal definition of carbon emission rights and carbon trading. In addition, licensing, distribution, trading, monitoring and management of carbon emission rights should be included. It should also stipulate the carbon emissions trading parties, the corresponding rights and obligations of the carbon emissions trading parties, and the legal liability for violation of the relevant rights and obligations. Second, the relevant policies and regulations should be published, which are administrative regulations for the management of carbon emissions trading, mainly including the regional- and the industry-foci of the carbon trading pilot, management institutions, operation institutions and supervision institutions, total target and quota allocation, trading, monitoring and management rules. In addition, a series of departmental regulations and normative documents are required to stipulate the specific operation of carbon trading, which refinement supplement the above provisions.

Mechanism design for China's carbon trading market mainly includes the price formation mechanism; without doubt, the price formation mechanism of China's carbon trading market will eventually determine the price by market supply and demand, but there should be a gradated approach thereto: in the first stage, government pricing prevails. At the beginning of the formation of the carbon trading market, the market pricing mechanism is not yet mature. To avoid malignant competition to the detriment of the collective good, the government should play the main role in price-setting. The second stage should entail mixed pricing: we should gradually introduce market pricing, and then take market pricing and government pricing together to play a joint role in price regulation. The government defines a reasonable price fluctuation range, and the market plays a pricing role within that defined pricing range to ensure healthy market operation. The third stage entails market pricing. With the continuing maturation of the carbon trading market and the gradual improvement of various systems and rules, government should gradually reduce its direct intervention in price-setting, expand the scope of market pricing as deemed fit, and finally realise a full market pricing mode which is completely determined by market supply and demand.

Acknowledgements

This research has been supported by the National Key Research and Development Programme of China (Grant No. 2016YFC0402208), the National Key Research and Development Programme of China (Grant No. 2016YFC0402205), the National Basic Research Programme of China (973 Programme, Grant No. 2013CB036406-4), the China Clean Development Mechanism Fund Grants Programme (Grant No. 2013114), and The Energy Foundation of the US (China Sustainable Energy Programme, Grant No. G-0610-08581).

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