By Wu Qing, Monique Carroll and Josephine Lao
In the context of global warming, facing national pressure for energy conservation, emission reduction and haze management, China has adopted a policy agenda for energy structure optimisation and clean energy development. Clean energy refers to energy which produces very little or no pollutant. It includes renewable energy, such as solar energy, hydro energy, wind energy, geothermal energy, marine energy and a few fossil fuels like natural gas and clean oil.
China has abundant, though under-developed and inadequately utilised clean energy reserves. During the 13th Five-Year Plan period, a large number of clean energy power generation projects are expected to be approved and launched. Further, the acceleration of China’s clean energy vehicle industry means that there is a huge demand for charging infrastructure.
This article discusses investment opportunities in connection with these clean energy projects, and the associated environmental compliance risks.
The 13th Five-Year Plan period provides substantial policies in favour of and financial support for clean energy power generation, especially nuclear power, hydropower generation, and clean energy vehicle charging infrastructure construction projects.
Among China’s clean energy power generation projects, wind power and photovoltaic power generation are still restrained by their distinct intermittency and volatility, causing low returns. In comparison, nuclear power and hydropower generation projects are relatively mature, enjoying lower generation costs and higher utility.
Hydropower generation projects
China’s 13th Five-Year Plan period promotes the construction of hydropower stations. Nationwide, the newly built conventional hydropower stations and pumped-storage power stations currently provide 60 million kilowatts of power capacity. It is expected that in 2020 conventional hydropower stations will reach a scale of 340 million kilowatts, with the total installed capacity of hydropower reaching 380 million kilowatts.
China’s hydropower generation projects, with installed capacity exceeding 1 million kilowatts, qualify for tax credits in the form of rebates of value-added tax (VAT) paid.
Nuclear power projects
China is also launching a batch of advanced third generation pressurised water reactor nuclear power projects. The goal for 2020 is that the installed capacity of running nuclear power reaches 58 million kilowatts, and that the installed capacity of nuclear power under construction reaches 30 million kilowatts or higher.
The nuclear power industry also enjoys a series of tax incentives. First, nuclear power generation enterprises producing and selling electric power products are entitled to apply for VAT rebates within a period of 15 years. Any VAT refunded to nuclear power generators is income tax exempt but must be used for the repayment of principal and interest on finance. In addition, the Ministry of Finance and State Administration of Taxation have implemented preferential urban land use tax policies regarding land used by nuclear power stations.
Energy vehicle charging infrastructure construction projects
The 13th Five-Year Plan period also transitions China’s clean energy vehicle industry from infancy to advanced implementation. The government has set a target for the industry: production and sales in 2020 shall be more than 2 million while the cumulative production and sales shall reach more than 5 million. However, it has been difficult for China to promote clean energy vehicles due to the lack of charging infrastructure. Given this situation, the National Development and Reform Commission set up a five-year development target for the construction of charging infrastructure requiring 12,000 centralized charging and swapping stations and 4.8 million dispersed charging piles to be constructed by 2000.
To encourage this, the Chinese government provides subsidies to provincial/municipal/district governments where charging infrastructure meets local demands, and where clean energy vehicles are relatively well promoted and widely used. The state encourages local governments to apply the Public-Private Partnership model in such projects.
The 2017 newly revised Catalogue of Industries for Guiding Foreign Investment encourages foreign investment in clean energy power generation equipment, clean energy vehicles, hydropower stations for the primary purpose of power generation and nuclear power stations. However, in industries like manufacturing of whole automobiles and special cars, construction and operation of nuclear power stations and grids, it either requires Chinese parties to be controlling shareholders or sets certain bottom line proportion of Chinese investment.
Environmental compliance regime
Throughout the pre-construction project initiation and environmental impact assessment (EIA) phase, the construction phase, and finally, the post-construction operational phase, projects confront supervision by the departments of environmental protection, water administration, forestry, land and resources, and housing and urban-rural development.
Before construction commences, clean energy projects require a number of approvals. Projects are required to obtain a pre-examination opinion on the land used prior to the commencement of construction, which is issued by China’s land and resources authorities. Hydropower generation projects also require written consent from the relevant department on the project’s flood control plans prior to construction. Construction entities must also prepare a report, a report form or a registration form (the specific type depends on severity) outlining the environmental impacts of the project and must not commence construction before obtaining the EIA’s official reply. For construction projects that require a report of environmental impacts, if the construction entity did not seek the opinion of relevant entities, experts and the general public by holding demonstration meetings, hearings or by any other means, the construction employer could be ordered to solicit public opinions, or the previous EIA official reply could be annulled.
There are five main legal risks once construction has commenced:
- construction without EIA approval;
- drawing water without the appropriate licence;
- discharging pollutants without lawfully obtaining a pollutant discharge license;
- resources and ecological conservation and social problems; and
- division of environmental responsibility between construction contractors and construction project owners.
Construction without EIA approval
Any of the following situations could constitute construction without EIA approval:
- where any construction employer fails to submit the environmental impact assessment documents for its construction project;
- where any construction employer commences construction without permission before the environmental impact assessment documents are approved;
- where any construction entity fails to renew and resubmit clean environmental impact appraisal for examination and approval, if either the nature, scale, venue or production techniques employed, or the measures for preventing pollution and ecological damage has undergone substantial changes after the original application had been approved.
Construction without EIA approval can lead to disciplinary action against those directly responsible and liable persons, and also result in orders to cease construction, a fine of not less than 1% but not more than 5% of the total investment of the construction project, and orders to restore the site to its original state. For example, on 24 February 2015, the Environmental Protection Department of Qinghai Province imposed an administrative fine of ¥200,000 on the Qinghai Yellow River Upstream Hydropower Development Co., Ltd. for commencing construction of its Yangqu hydropower station project without permission before the environmental impact assessment documents were approved.
Water drawing license
Nuclear power and hydropower generation construction projects require a license to draw water. Failure to obtain the appropriate license, or comply with its conditions, can result in an order to stop illegal acts, a fine or a revocation of the license.
Pollutant discharge license
Enterprises and public institutions discharging industrial waste, gases or industrial waste water, directly or indirectly, must obtain a pollutant discharge license. Failure to obtain an atmosphere license could result in:
- an order to take corrective actions;
- an order to restrict production or suspend production for rectifications;
- an order to suspend business operations or close down;
- a fine; and/or
- administrative detention of directly responsible and liable persons.
Resources and ecological conservation and social responsibility
Matters like protection of woodland, watercourses, arable land and natural reserves should also be taken into account. For example, between July and September in 2016, the Forestry Bureau of Qijiang District imposed fines on Sichuan Qaingbo Electric Power Engineering CO., LTD for its requisition of woodland for expansion of its Anwen power plant without lawfully obtaining a woodland requisition license11. The requirements for each project must be considered on a case-by-case basis. For example, regarding hydropower station construction projects, emphasis should be placed on ecological conservation and resettlement of migrants, while security issues should be central to nuclear power station construction projects.
Ongoing environmental responsibility – construction contractors and construction project owners
While construction is underway, responsibility for environmental risk should be clearly divided between contractors and project owners. The issues regulated include the prevention and control of dust pollution, clearance and treatment of solid wastes, and construction noise. There are different criteria to divide responsibility between contractors and project owners for each environmental risk.
During the operational phase, major environmental problems that hydropower generation projects may encounter lie in water pollution, ecological water discharge and treatment of hazardous wastes. For nuclear power generation projects, dealing with radioactive pollution and water pollution is the most important. As for clean energy vehicle charging infrastructure, risks include leakage of electricity and fire.
In each phase, if substantial requirements are not met, the relevant approval may not be obtained. To manage these risks, internal compliance departments could undertake a project environmental risk assessment early on and engage with the agencies which might be involved to provide professional advice on risk assessment and control.
China’s clean energy projects enjoy promising investment prospects during the 13th Five-Year Plan period. Among them, nuclear power and hydropower generation projects have relatively solid foundations, which makes them a wise investment choice.
Further, given China’s current push to develop clean energy vehicles, clean energy vehicle charging infrastructure construction projects have great room for development. However, foreign investors need be aware of and plan for environmental legal risks in the pre-construction, construction and post-construction phases of clean energy projects.
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