Evaluation of the PV technology for rural electrification improvement: China market focus
By
MASSACHUSETTS INSTITUTE
OF TECHN-OLOGY
Kyoung Suk Cho
M.S. Polymer and Fiber Science in Engineering
Seoul National University, 2000
JUN 15 2011
LIBRARIES
SUBMITTED TO THE MIT SLOAN SCHOOL OF MANAGEMENT IN PARTIAL
FUFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF
MASTER OF SCIENCE IN MANAGEMENT IN STUDIES
AT THE
ARCHIVES
MASSACHUSETTS INSTITUTE OF TECHNOLOGY
JUNE 2011
@ 2011 Kyoung Suk Cho. All Rights Reserved.
The author hereby grants to MIT permission to reproduce and to
distribute publicly paper and electronic copies of this thesis document
in whole or in part in any medium now known or hereafter created.
Signature of Author:
MIT Sloan School of Management
May 6, 2011
Certified By:
Henry B. Weil
Senior Lecturer, MIT Sloan School of Management
Thesis Supervisor
Accepted By:
Michael A.Cusumano
SMR Distinguished Professor of Management
Faculty Director, Master of Science in Management Studies
MIT Sloan School of Management
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Evaluation of the PV technology for rural electrification improvement: China market focus
By
Kyoung Suk Cho
Submitted to the MIT Sloan School of Management on May 6, 2011 in
partial fulfillment of the requirements for the degree of Master of
Science in Management Studies
ABSTRACT
Energy use, especially electricity, in China is rapidly growing, but China faced two challenges in
developing new energy supply: global climate changes and unbalanced economic development between
urban and rural regions. Considering its geographical limitation and climate change problem, electricity
generation using renewable energy source will be useful. Among various renewable energy technologies,
photovoltaic (PV) is the most viable option for the rural electrification in China. First, sunlight, which is
source of energy for PV, is sufficient in rural regions in China. Second, technically PVs can be installed in
various sizes and can be applicable to individual houses or towns. Third, the cost competitiveness of PV
with low labor cost and scale of business is achieved. However, low income of rural population and low
level of awareness are barrier to implement PV system in rural region. To solve the issues Chinese
government intervention is necessary.
In this thesis, we first reviewed rural electrification with various angles - market, PV price, PV
applications, and technologies. Then more specifically we researched energy usage, PV industry and PV
market in China. History of rural electrification activities and results of them in China are also presented.
We analyzed China's success and failure factors of rural electrification through the value chain analysis,
Porter's diamond model, and system dynamics analysis. We suggested the business strategy as to the
level of government intervention based on the analysis.
Thesis Supervisor: Henry B. Weil
Title: Senior Lecturer, MIT Sloan School of Management
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Acknowledgements
First of all, I would like to express my heartfelt thanks to Professor Henry B. Weil. He has not
only supportive to preparing my thesis, but also has helped me think one step further about the
problems and taught me how to use analysis frameworks for constructing valuable and practical
solutions. Despite of his hectic schedule, he has always been available to meet with me and has
given valuable feedbacks.
I am also grateful to Chanh Q Phan, Program Manager of Master of Science in Management
Studies, and Julia Sargeaunt, Program Assistant of Master of Science in Management Studies.
They have provided all help to meet expectations from MIT Sloan School of Management and
organized various activities throughout the program. With their supports, I can enjoy the life at
MIT and Boston.
I have had a chance to know beautiful and smart people from various programs at MIT Sloan
School of management, and I have made great new friends. It would be unfair to others if I
mention only a few of them so I would like to name of group. I do want to thank to people in
Sloan Korean Club and I will never forget a farewell trip at Pinehills. Especially graduation
present was really meaningful to me. I am also happy to be a friend with 1st year MBA students
from BU pre-MBA. Last summer we had a great and fun time together at Boston. Last but not
least, MSMS 2011 will be my precious lifelong friends.
Finally and equally importantly, I want to give special thanks to my beloved wife, Eunkyoung
and my sweet son, Suan, and my parents. My wife postponed her studies at law school and came
to Boston in order to support my studies and family. From now on I will support her as best as I
can. Whenever I was tired owing to class preparations, team meetings and thesis, my son has
always cheered me up. I am so happy that he has settled into the new and unfamiliar
surroundings very well. The optimism and challenging spirit inspired by my parents helped me
start studies at MIT, shaping what I am and who I am today.
Studying at Sloan and working on this thesis with exceptional faculties have been a wonderful
experience in my life. It was lucky for me to meet business leaders in the past and in the future at
MIT Sloan School of Management. Being a member of Sloanies is certainly something to be
proud of.
Kyoung Suk Cho
Cambridge, MA
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Table of Contents
Abstract------------------------------------------------------------------------------------------------------3
Acknowledgements-------------------------------------------------------------------------------5
Table of contents
--------------------------------------------------------------------------
7
List of Tables--------------------------------------------------------------------------------------------------9
List of Figures---------------------------------------------------------------------------------10
I
Introduction---------------------------------------------------------------------------11
2
Overview of PV for rural electrification-------------------------------------------------14
2.1
Rural electrification market
2.2
PV module price---------------------------------------------------------------------18
2.3
Electricity access and poverty relationship----------------------------------------------20
-----------------------------------------------------
14
2.3.1 Advantage of PV rural electrification--------------------------------------21
2.4
Barriers of renewable energy penetration
--------------------------------------------
22
2.4.1 Finance schemes for rural electrification-------------------------------------23
2.4.2 Investment subsidies vs. operating subsidies--------------------------------24
2.5
PV products for rural electrification
-----------------------------------------
25
2.5.1 Solar lanterns---------------------------------------------------------25
2.5.2 Solar home systems (SHS)
--------------------------------------------------
26
2.5.3 Healthcare------------------------------------------------------------28
2.5.4 Drinking water pump-------------------------------------------------28
2.5.5 Mini-grid system----------------------------------------------------28
2.5.6 Others
--------------------------------------------------------------------
2.6
PV application in developing countries-----------------------------------------29
2.7
PV technology options---------------------------------------------------32
2.7.1 PV technology barriers and solutions-------------------------------------32
3
Key energy indicator of China--------------------------------------------33
3.1
Energy production and consumption of China--------------------------33
3.2
Necessity of renewable energy development in China-----------------------35
3.3
PV market and industry of China----------------------------------38
3.3.1 China PV industry-----------------------------------------38
29
3.3.2 China PV market------------------------------------------------------------------------41
4
Overview of China rural electrification----------------------------------------------------------45
4.1
History of rural development of China-----------------------------------------------------45
4.2
China's rural electricity market------------------------------------------------------------47
4.2.1 Quantitative analysis of rural electricity market------------------------------------47
4.2.2 Renewable energy policy in China---------------------------------------------------48
4.3
PV program of rural electrification in China------------------------------------------------51
4.3.1 Brightness Program of China----------------------------------------------------------51
4.3.2 Sending Electricity to Townships ----------------------------------------------------
52
4.3.2.1 Issues and lessons---------------------------------------------------------------53
4.3.3 Golden Sun Program-------------------------------------------------------------------54
4.3.4 Other activities of China rural electrification----------------------------------------55
5
Results of program and implication---------------------------------------------------------------56
6
Lesson from China case----------------------------------------------------------------------------58
7
Competitive analysis - Porter's Diamond analysis---------------------------------------------59
8
Analysis via system dynamics - reinforcing and balancing factors for rural electrification in
China-----------------------------------------------------------------------------------------------------66
9
Conclusion----------------------------------------------------------------------------------------------78
Bibliography---------------------------------------------------------------------------------------------81
8
List of Tables
Table 1. Number of installed SHS per country------------------------------------------------------
27
Table 2. Total primary energy demand in China--------------------------------------------------------35
Table 3. Features of Golden Sun Program---------------------------------------------------------------54
Table 4. Features of BIPV program---------------------------------------------------------------------56
Table 5. Key variables and loops of system dynamics analysis on PV industry-----------------71
Table 6. Scenario of rural electrification in China---------------------------------------------------74
List of Figures
Figure 1. Global energy poverty---------------------------------------------------------------11
Figure 2. Sunbelt area---------------------------------------------------------------------------------16
Figure 3. PV investment attractiveness map------------------------------------------------------17
Figure 4. Growth prediction of PV market segments----------------------------------------------18
Figure 5. Levelized cost of energy comparison---------------------------------------------19
Figure 6. Relationship between electricity access and poverty----------------------------21
Figure 7. Examples of rural electrification-----------------------------------------------22
Figure 8. The price of lighting with kerosene and electricity-------------------------------26
Figure 9. Total energy production and consumption in China-----------------------------34
Figure 10. Coal usage and carbon dioxide emission in China-----------------------------34
Figure 11. Electricity generation mix and gap in 2010 and 2020----------------------------36
Figure 12. Provincial distribution of per capita energy consumption in rural China-----------37
Figure 13. PV supply chain and China's industry position---------------------------------39
Figure 14. PV Technology innovation system of China------------------------------------------40
Figure 15. Annual new and cumulative installed PV in China---------------------------42
Figure 16. Comparison of PV potential for Sunbelt countries--------------------------44
Figure 17. Total and per capita energy consumption in the whole rural China--------------46
Figure 18. The scope of the Township Electrification Program in China----------------53
Figure 19. Regional electricity access------------------------------------------------57
Figure 20. Value Chain------------------------------------------------------------62
Figure 21. Diamond Model for PV development--------------------------------65
Figure 22. PV industry in China-SD analysis----------------------------------69
Figure 23. Business strategy without government intervention----------------------76
Figure 24. Government leading PV market development model---------------------77
Figure 25. Government leading PV market development and FIT--------------------78
1. Introduction
Photovoltaic (PV) technology can be used for both on-grid and off-grid electrical applications.
However, PV is the most practical solution to meet the requirements of people without electricity
in rural areas as an off-grid form. About two billion people in the world still cannot access the
modem form of energy and they depend on primitive types of energy such as wood and waste
from agriculture for cooking, heating, and lighting (Borle, Dymond, & Nayar, 1997). If they
have access to modem energy sources, it will improve their quality of life. Because of its
convenience, cleanness and impact on life, rural electrification is one of the most important
political issues in developing countries (Doig, 1999) and governments of developing countries
have developed energy development models (Urban, Benders, & Moll, 2007). According to F.
Urban et al., the model should be modified according to the various contexts (Urban et al., 2007).
QMamn
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an
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Source: (Organization for Economic Cooperation and Development, 2004)
Figure 1. Global energy poverty
Considering the high cost of grid extension and low population density in rural areas,
electrification through grid extension in this area cannot be a viable solution. However
technologies for off-grid rural electrification can provide cost-effective and reliable alternatives
to the grid extension and conventional generator sets in rural areas (Byrne, Shen, & Wallace,
1998). We also need to understand that people live in rural regions where the population is
growing most rapidly so the demand for energy will increase dramatically in the future.
Access to electricity impacts rural life in several ways as seen in the research by the World Bank.
First, rural electrification can improve living standards. For example, women can spend their
time in more productive activities instead of collecting water for drinking and wood for heating.
Children can study at night under bright lights, giving them opportunities for education that will
be able to reduce the economic gap between rural and urban regions in the future. Second, it can
reduce the negative impact of energy use on health and the local environment. Rural people can
use electric light bulbs instead of kerosene lights which give off harmful gas fumes.
Refrigerators can keep nutritious foods longer in summer and store vaccines for treating disease.
Regarding the environment, PVs which generate electricity from solar energy can reduce the
carbon dioxide and sulfur and nitrogen compounds in the air. Third, it can create the jobs of both
supply side and demand side. Many experts argue that renewable energy is not only
economically viable but also an ideal solution for the rural region. The World Bank has
estimated that electricity needs of developing countries' will reach 5 million MW (Painuly,
2001).
Conergy, which is a system integrator as well as PV component manufacturer, suggests that offgrid PV is a natural market and independent from subsidies and its profit margins are higher than
those of grid business (Jan Oliver Kessler, from presentation, 2008). Considering that price
reduction can be realized through stiff learning curve and potential market for rural
electrification is high, if there are proper policies, PV technology can provide solutions for rural
electrification in the near future.
However, there is also skepticism about using PV technology for rural electrification. The
skeptical suggest that since most PV projects in developing countries depended on external funds
from multilateral organizations or government concessions until now, those projects could not
have attracted enough private investments owing to the few economic incentives and suspicions
about the sustainability of the projects. Additionally, PV is one of the many renewable energy
technologies currently available; therefore the market for PVs could become small in the future
owing to the development of other renewable technologies or other energy efficiency
improvements (Philips & Browne, 2001).
Historically, a lot of innovative renewable technologies require investments in small scale
production systems at the initial stage. However, initial investment has been ignored by capital
market (Wohlgemuth, N. & Madlener, R., 2000). We believe that the skeptical view should not
be generalized for the renewable technologies considering the positive impact on the
environment and the future. The focus of the PV project, as well as other renewable energy
technologies is to roll out proper policy for sustainability to attract the attention from people,
government and private investment sectors.
Research shows that there is a great potential in electricity market in China's rural areas. First,
we can consider the changes in the demand side. Although energy consumption in rural regions
is low now owing to low income levels, the need for electricity in the future is high. NREL
estimates that the potential PV market of China is 200MW to 1000MW. Ming Yang concludes
that annual electricity demand in the rural areas in China will increase with a 1.4%-15.6% rate
depending on provinces (M. Yang & Yu, 2004). Second, we can how the policies in the Chinese
government has progressed. Research shows that (figure 1.) a population of 18 million live
without electricity, but the government has an obligation to provide all people with equal basic
necessities. In 2002, the Chinese government also declared that rural electrification is one of the
key issues in China and established "For Principles of Facilitation" to develop the rural
electrification market (M. Yang, 2003; M. Yang & Yu, 2004). Besides, the Chinese government
amended the renewable energy law in 2009 and initiated various PV programs to emphasize the
importance of renewable energy development. Last but not least, the environmental and natural
resources are the important factors behind using PVs for electrification. Sunlight as a resource in
the rural region in China, especially in the western province, is ample. Grid expansion is costly
now, so off-grid systems can supply needed electricity in the rural market. China is also under
high pressure regarding global climate change. China is the second largest green house gas
emitter in the world. To sustain its competitiveness in industry, a stable energy supply without
compromising the environment will be the biggest challenge, so renewable energy development
is not an option but mandatory.
This thesis mainly focuses on the rural electrification market and activities in China using PV
technology. We discover key success factors for PV electrification in China through value chain
analysis and Porter's diamond analysis which has been adapted to the wind system expansion.
Using system dynamics model, we can find reinforcing factors and balance factors. We intend to
suggest that the demand-side stimulation method will be the most effective way for rural
electrification in China through PV technology.
2.
2.1.
Overview of PV for rural electrification
Rural electrification market
Currently about 2-3 billion people in rural areas live without modernized electricity and this
figure is not likely to improve until 2030 (Hoffmann, 2006). According to Sebastian G6lz, rural
electrification is a multi-billion dollar market, but the success of a project in these areas depends
on social factors such as income, background knowledge of the users, financing methods, and
local ability of maintenance (G6lz, 2005). People in rural regions have limited incomes and
knowledge, and social factors are different from region to region. Without information about the
needs of each region, providing electricity to the region cannot be sustainable. Lorenzo
suggested the concept of basic and perceived needs of the rural people. Perceived needs are
greater than basic needs (Lorenzo, 1997) which should be considered in deciding the installation
capacity of PVs.
Rural electrification itself cannot create economic results. Beyond installing equipment, rural
electrification projects should provide people with service. The rural electrification market
should include not only the PV module set but also operation and maintenance if the equipment
is owned by a third party. Tapping electricity to the rural regions is just the starting point of rural
electrification; therefore the main purpose of rural electrification should be eradication of
poverty, removing unbalanced development in rural and urban regions, and helping the
sustainable growth of the rural economy.
The electrification rate and the number of people who have no access to electricity will continue
to diverge among regions (Organization for Economic Cooperation and Development, 2004)
because of various factors such as policy, economic circumstances, GDP, etc., differences will
exist from region to region. However, the number of the unelectrified people will stabilize after
2025 owing to urbanization programs which make electricity available to reach people more
easily.
As incomes of poor families in developing countries increase, they can afford modem
conveniences such as TVs, radios, lights, so they demand more and better energy (Organization
for Economic Cooperation and Development, 2004). In 1980's private companies suggested that
there was a market for PV technology in rural regions for small-scale lighting and entertainment
services. The households were willing to pay commercial prices for a Solar Home System and
several reports found that PV technology was more cost effective than grid extension or diesel
mini-grid for rural regions (Miller & Hope, 2000). According to the World Bank's research in
Bangladesh, 82% of rural unelectrified households are interested in Solar Home Systems if there
are some favorable financing measures (Islam, Islam, & Rahman, 2006).
Over the next three decades, developing countries need new electricity generation facilities
which will require an investment of around $2.1 trillion (Organization for Economic Cooperation
and Development, 2004). An interesting feature is that these unelectrified people are
concentrated in the 'Sunbelt (Figure 2.)' area. High sunlight radiation enables PV electrification
to be competitive to diesel generator electrification in cost effectiveness.
According to the EPIA research, almost 80% of future global electricity demand will come from
this area. In the 'Sunbelt' region, 5 billon people live and they will consume 6800TWh, which is
37% of the total electricity generated in the world (European Photovoltaic Industry Association
(EPIA), Unlocking the Sunbelt, 2010). However, despite the large demand for electricity, it has
been hard to attract private investors. The main reason is that the return on investment is
uncertain owing to unstable governments and the fast-changing policies in developing countries.
Currently 9 out of 10 active PV markets - Germany, Italy, Belgium, France, Spain, Czech
Republic, United States, Japan, South Korea, are located outside the Sunbelt and only China is
located in the Sunbelt region. The PV market potential from the resource point of view is high.
80% of the electricity demand growth will come from this area.
Source: European Photovoltaic Industry Association (EPIA), Unlocking the Sunbelt, 2010
Figure 2. Sunbelt area
In the Sunbelt area electricity consumption is expected to grow 150% in 20 years (EIPA, 2010).
However, the infrastructure of those countries is poor and many countries currently depend on
imported fossil fuels for electricity generation. Even if the government invests in electricity
generation plants and related infrastructures, it is hard to meet the demand for needed electricity
on time. The gap between supply from conventional electricity generation and electricity demand
should be filled with other energy resources. From the resource point of view, the PV will be a
good candidate for the electrification ini those regions. However, even though there is eno rmous
untapped solar potential, a low level of awareness of the PV technology has hindered PV market
growth.
When we assess the attractiveness of PVs in rural regions, we should consider four major criteria:
the size of the electricity market, electricity consumption growth, electricity distribution and the
coverage of electricity network (EPIA 2010). The attractiveness of PV business in China, India,
Mexico, and Australia is superior to other non-Sunbelt countries based on those criteria.
Moreover not only is the economic potential high in these countries, but they have a policy
favorable to renewable energy. Their abundant solar energy source is another key benefit for
electricity price from PV (EPIA 2010). In rural electrification, China and India will be the
biggest PV markets.
h1eangPV
High
0
0
0.
Low
Country invWestrert attractvress
High
Source: European Photovoltaic Industry Association (EPIA), Unlocking the Sunbelt, 2010
Figure 3. PV investment attractiveness map
When it comes to PV market prospects, developing countries have the highest potential in the
near future (Hoffmann, 2006). However, without a proper support scheme or subsidies from
government and without private sector investments for rural electrification it would be hard to
make it sustainable.
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Figure 4. Growth prediction of PV market segments.
2.2. PV module price
The manufacturing costs of PV modules will fall from $6 per peak watt to less than $3 per peak
watt in the near future which will help the spread of PV modules (Philips and Browne, 1998). In
terms of price per kW, the levelized cost of energy of PVs will reach $6.5-$15.6 per kWh (El =
$1.3) by 2020 and will drop to $5.2 - $10.4 per kWh by 2030 (European Photovoltaic Industry
Association (EPIA), Unlocking the Sunbelt, 2010). The levelized cost of energy of PV is already
competitive to diesel-gen set without subsidy in 2010 and by 2030 in a low fuel price scenario,
PV will be more competitive than other technologies in the Sunbelt region (European
Photovoltaic Industry Association (EPIA), 2010).
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Source: European Photovoltaic Industry Association (EPIA), Unlocking the Sunbelt, 2010
Figure 5. Levelized cost of energy comparison
19
2.3. Electricity access and poverty relationship
Regarding the development process of industrialized countries, access to modem type energy,
especially electricity, is closely related to social and economic development (UN energy,
Worldpower, 2000). To overcome poverty, people need sanitation such as clean water and
adequate hygiene, and a good education infrastructure (Organization for Economic Cooperation
and Development, 2004). All of these require cheap and reliable energy. As the graph of IEA
(Figure 6), shows, poverty is significantly associated with electricity access.
In case of China, the access rate ranked in the highest level, but about 60% of the population has
lived with less than $2 per day which means that the access rate and poverty eradication is not
related well in China; even if the government has been trying to invest in electrification, it could
not help people, especially the rural population, to increase income levels through electrification.
From the result, we can assume that electrification in China has not been working efficiently, or
stability and price of electricity were not good enough to generate new income.
Wan, G and Zhou, Z. researched income inequality in rural China based on regression model.
Their research shows that the income gap between urban and rural people has worsened and
geography explains around 40% of this gap. The income of the rural population is closely related
to natural resources and conditions (Wan & Zhou, 2005). To overcome the geographic
difficulties and income inequalities, information and infrastructure developments are necessary,
and before that, electricity supply to all should be the first and urgent task.
Modern energy enables electric lighting which helps children study at night and helps people
work in the evening hours, increasing productivity. The TV, computer, and internet enriches the
quality of life of people and enables them to have access to news and information. Additionally
street lights, telephones, medical applications (light, water pump, refrigeration of vaccines, etc)
can be available in remote areas, enabling people to be better off (Lorenzo, 1997). Additionally
according to the Alliance for Rural Electrification, use of electricity in rural areas has positive
impacts (ARE website) such as safety measures: street lights, warning signals, preventing natural
disasters by acquiring weather from communication facility, disaster monitoring system, and
fostering productivity - water pumps for irrigation, ice making for food or seed preservation, etc.
More detailed examples of rural electrification will be explained in later sections.
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Figure 6. Relationship between electricity access and poverty
2.3.1. Advantage of PV rural electrification
Renewable energy based systems for rural electrification can satisfy both environmental
problems and local economy development. PV is already competitive compared to diesel
generators for small village electrification. PV utilizes ample solar energy and can satisfy the
growing electricity demand in rural regions (EPIA, Unlocking the Sunbelt, 2010). PV module s
can be varied by size but its efficiency is not changed so it is useful for large to small capacity
generation. As PVs can generate electricity from both scattered light and direct sunlight, it can
generate electricity even on a cloudy day. Moreover it doesn't need various mechanical parts so
maintenance is relatively easy and durability of PV module is over 25 years for the current
technology (Hoffiann, 2006). The low operational cost of PV is beneficial for local industry to
consume relatively less electricity. However, the module price of PV is still expensive compared
.................
..............
....
.-
--------
to conventional energy sources and a high up-front installation cost is necessary. If the battery is
attached to the PV, the generated electricity can be used at a time when there is no sunlight (EA
2002). A hybrid system using PV and wind power can be useful solution (Byrne, Zhou, Shen, &
Hughes, 2007).
Figure 7. Examples of rural electrification
The two most prevalent types of PV systems in rural areas are Solar Home system (50W) for
small electronics and Village Electrification (40-50kW) (G61z, 2005) and the costs are around
$500 for individual homes in rural areas (Philip, M., Browne, B.H., 2001). PV manufacturing
and PV policies differ from region to region (EPIA 2010) because renewable energy sources
such as solar, wind, and hydro are different from region to region. To maximize the benefits of
rural electrification, the option of renewable energy should be flexible based on regional
conditions.
2.4. Barriers of renewable energy penetration
Although developing countries, especially the rural areas in these countries, are the potential
candidates for renewable energy installations, it also has several barriers for the renewable
energy deployment (Painuly, 2001).
"
Market failure/imperfection: in developing countries, a top-down approach was adapted
for the fast energy networks installation. As governments controlled most of the energy
sectors, information was not spread to the public which caused a lack of awareness in the
public about the renewable energy development.
*
Market distortions: favorable to conventional energy and unfavorable tax schemes for
renewable energy make renewable energy options costly. Immoderate government
involvement can distort the market, hindering energy efficiency improvement.
" Economic and financial barriers: renewable energy is still more expensive than
conventional energy sources. High up-front cost lengthens the payback period. People in
rural areas find it difficult to finance the purchase of renewable energy generators owing
to the lack of financial institutions in their regions. A lack of credit history of the people
also hinders financial institutions from being involved in rural electrification projects.
e
QA lack of technical standards and skilled persons: without technical support and
standardization, it is hard to supply good quality service through renewable energy
facilities.
" Political uncertainty, perception of high risk in renewable energy technology
2.4.1. Finance schemes for rural electrification
Even though disposable incomes in rural households have increased, financial problem is a key
factor that hinders the successful implementation of rural electrification using renewable energy
technology. Because of the high up-front cost of PV technology, rural people find it hard to
finance needed capital for PV systems. According to Wan et al, the total inequality in income in
rural regions arises from the lack of capital availability and capital input will be the most
important factor to improve the situation. (Wan & Zhou, 2005).
Additionally, economic incentives for operators are the most important factors for the
sustainability of projects. Considering the high risk associated with rural electrification projects,
proper financing schemes should be selected for the sustainability of PV projects through the
socio-economic analysis of the region.
Huang Liming researched financing channels for rural electrification through renewable energy
in China (Liming, 2009). Government financing aims to improve social inequality of rural
regions. The Chinese government initiated various national programs and provided financial
incentives to the Western region. International funding acted as incubation funds for rural energy
development. Commercial banks and non-bank financing institutions were well developed in
rural regions; however they were not willing to be involved in renewable energy development.
Stock markets and private investment is involved in renewable energy development but their
activities are quite low as yet.
The researchers also categorized financing schemes for rural renewable energy development
(Liming, 2009). Grants are providing cash directly to the project owners. It is designed to be
marketed as a commercial project in a short time. For the small scale development, "renewable
energy service companies (RESCOs)' is an appropriate model. The RESCOs can collect
consumers, rural residences, and then provide services and collect monthly fares. Joint ventures,
asset financing, and private equity are successful in specific renewable energy projects. Subsides
are similar to grants. The Chinese government also provides reduction of duty for test equipment
and tax reduction depending on the type of renewable energies.
2.4.2. Investment subsidies vs. operating subsidies
Broadly there are two subsidy methods to help renewable energy installation in rural areas:
investment subsidies or operating subsidies. Each method has pros and cons so it will be applied
depending on the circumstances of the region.
Investment subsidies could be a form of direct subsidies. Tax credit is another form of direct
subsidy. Direct subsidies can be provided per kW generated or as a percentage of total
investment in the project (Wohlgemuth, N. & Madlener, R., 2000). Direct subsidies are so simple
that most private investors are in favor of direct subsidies. It can dramatically reduce the burden
of the initial investment of the investors. However, there are no economic incentives for
maintenance after installation of the system so subsidies providers or related organizations such
as the government must monitor whether execution of budget and maintenance are properly
delivered.
The tax credit method is similar to direct subsidies in that it reduces the capital expenditure by
reducing taxes on the project. This method can attract companies paying a lot of income tax.
However, if the companies are more interested in tax credit rather than the project, the renewable
energy project's success will be compromised. Another issue of the tax credit scheme is that if
the company doesn't generate enough taxable income, the benefit from tax saving is limited so
the efficiency of the scheme will be low (Wohlgemuth, N. & Madlener, R., 2000).
Considering possible problems from direct incentives, even though it could attract more
companies to renewable projects in the initial stages, operating subsidies which paid per kWh of
electricity generation are more sensible in that it could enforce the companies to operate more
efficiently and cost effectively. But the operating scheme also has a drawback that if project
operators cannot trust a stable support in the future because of political uncertainty, they will not
want to be involved in the project (Wohlgemuth, N. & Madlener, R., 2000).
2.5. PV products for rural electrification
To assess the relative advantage of PV for rural electrification, we need tor look at the economic
profitability and social benefit for rural populations (Lorenzo, 1997). Many products using offgrid PV can give those benefits to rural communities by increasing productivity, living standard,
and convenience.
2.5.1. Solar lanterns
Solar lanterns are single units with a lamp, battery, and a solar PV module which can be
detached to lanterns so as to increase exposure to the sunlight during the day. Solar lanterns are
more appropriate for rural lighting tools than kerosene lamps because the real cost of solar
lantern is cheaper than kerosene lamp in terms of cost per lumen and it doesn't have a bad odor,
and harmful fumes and fire risk (Lorenzo, 1997).
0
5
E
4
n
C
3
-*-Electricity
2
-1--Ration Kerosene
-de-
.
.1
1
2
3
4
5
6
7
8
9
Market Kerosene
10
Income deciles
Source: Expanding electricity access to remote areas: off-grid rural electrification in developing
countries, Worldpower 2000.
Figure 8. The price of lighting with kerosene and electricity
The light system is closely related to the education and local business productivities
improvement. During the night children can study, and local factories can produce products. As
the impact of education on rural-urban inequality is significant and rural areas need more skilled
and better educated people, the effect of education on income growth in rural regions will
become important (Wan & Zhou, 2005).
2.5.2. Solar home systems (SHS)
SHS is one of the most common applications of off-grid PV. Given the convenient installation
and availability of portable size systems, many rural populations buy SHS for their electricity
needs. In rural regions where grid extension is not feasible, SHS will be a cost effective solution.
SHS consists of a fixed PV, battery, battery charge regulator, lamps and a socket for small
electronic appliances such as television and radio (Worldpower, 2000).The relative advantage of
SHS, are first, it can replace the dry battery which is relatively expensive for a rural family,
second, it can give rural people access to information via communication tools such as television,
radio, and even telephone. The total reported number of SHS is more than 1.5 million (Lorenzo,
1997). The size of SHS is dependent on the number of appliances a residence uses. In 2000,
there were many developing countries who installed SHS for rural electrification (Table 1.)
Country
Bolivia
Chile
China
Dominican
Eritrea
Ethiopia
Ghana
Honduras
India
Indonesia
Kenya
Kiribati
Lesotho
Malaysia
Mali
Mexico
Mongolia
Morocco
Namibia
Nepal
Philippines
RSA
Somalia
Sri Lanka
Sudan
Swaziland
Tanzania
Tunesia
Uganda
Zimbabwe
Quoted Number
(x 1000)
20.0
5.0
500.0
3.5
1.0
8.0
4.3
2.0
235.0
100.0
180.0
0.6
4.0
2.0
4.0
80.0
5.0
80.0
2.6
39.0
3.0
50.0
1.0
45.0
1.0
1.2
25.0
28.0
10.0
91.0
Year
Population
in 2001 (x 1M)
1998
2001
2002
2000
2003
2003
2002
2002
2003
2002
2003
2003
2001
2000
1998
2000
2001
2001
2000
2003
2000
2000
2003
2003
2003
1998
2003
1999
2003
1998
8.5
15.4
1271.8
8.5
4.2
65.8
19.7
6.6
1032.4
209
30.7
0.08
2.1
23.8
11.1
99.4
2.4
29.2
1.8
23.6
78.3
43.2
9.1
18.7
31.7
1.1
34.4
9.7
22.8
12.8
SHS per
1000 Population
2.35
0.32
0.39
0.41
0.24
0.12
0.22
0.3
0.23
0.48
5.86
7.19
1.9
0.08
0.36
0.8
2.08
2.74
1.44
1.65
0.04
1.16
0.11
2.41
0.03
1.09
0.73
2.89
0.
7.11
Source: TaQSolRe data base
Table 1. Number of installed SHS per country
2.5.3. Healthcare
Rural healthcare centers need electricity for medical uses such as for lighting, water purification,
sterilization, refrigeration of vaccines, etc (Worldpower 2000). Healthcare application is
beneficial to rural residents by improving their quality of life. The storage of vaccines is critical
for reducing fatalities of infants and seniors. Water purification can reduce the chances of
outbreaks of contagious epidemics through water. The pump is located far from the grid so PVs
can be useful for a small village, reducing labor for collecting water. Sunlight in rural areas is
ample enough to pump water and the PV system can be modified depending upon the electricity
needed for the pump (Worldpower 2000).
2.5.4. Drinking water pump
Water resources are scarce in large areas of Africa and Asia. The shortage of water and its bad
quality causes two major problems. First, it makes women and children walk several miles to
obtain water for life with 3-4 hours per day spent on collecting water. Second, it causes disease
from drinking contaminated water (Lorenzo, 1997; Omer, 2001). It is also used for desalination
system (Richards & Schafer, 2003) where the fresh water is extremely limited. The water
requirement in rural regions is around 20L per day per person and 30L per head of cattle
(Lorenzo, 1997). Despite the problem of reliability and efficiency, a PV pump is a good solution
for rural water supply (Short & Mueller, 2002).
2.5.5. Mini-grid system
For consumers in remote regions in small villages where the central grid may not be served, an
isolated mini-grid system will be economically viable. The resource used for generating
electricity using PVs will vary according to the village profile, energy availability, and fuel
transportation (Worldpower 2000). A mini-grid system is applicable from basic to complicated
usage. However, the wider availability doesn't necessarily mean an immediate improvement in
electrification in villages (Lorenzo, 1997). But as the research of A. Chaurey shows, mini-grid
(or micro-grid) is economically beneficial to the village when it has features such as a flat
geographic terrain, more than 500 households located closely, using 3-4 low power appliances
per day (Chaurey & Kandpal, 2010).
2.5.6. Others
PV systems also can be used as battery charge stations, telephone chargers, etc. Although a
battery charge station is an effective way to collect fees, and users in Thailand have changed
their lighting systems from wood and kerosene to battery powered lamps (Sriuthaisiriwong &
Kumar, 2001), battery charge stations are not yet widely popular in the rest of the world
(Lorenzo, 1997).
2.6. PV application in developing countries
Three main criteria determine a good PV market. First, the countries or regions must have an
inefficient gird system to create demand for complementary electricity sources. Second, the rural
population should have easy access to electricity within a region so as to achieve costeffectiveness. Third, a majority of the population in rural regions have sufficient income to make
the minimum payments. If income is not sufficient for payments, proper financing schemes or
subsidies are necessary for the PV program.
When people have income, the SHS providers can sell the product directly to households. The
SHS is simple and is easy to install in any house. However, to attract potential consumers, who
don't have enough income but want to buy PV systems in rural areas, microcredit financing will
be needed (Byrne et al., 2007). The car industry's financing scheme will be applicable for
microcredit financing, but it needs support from the government or multilateral organizations to
reduce the high risk of default in rural regions. If we assume that affordable payment for
electricity in rural areas ranges from around $8 to $12 per month and the cost of a system is
around $500 and the lowest interest rate for the loan is 5% for 5 years, the monthly payment is
$11.89 which is close to the top end of affordable payment (Philip, M., Browne, B.H., 2001).
However, most people in rural areas don't have credit history so it is hard for them to borrow
enough or have full capital for the system purchase.
According to the EIPA research on the Sunbelt region (European Photovoltaic Industry
Association (EPIA), 2010), 9 out of the top 10 PV markets are located outside of the world's
Sunbelt (see Figure 2.). This means that the high PV potential market remains untapped as yet.
Expected energy demand growth will come from the Sunbelt region, and China will be the
biggest market among them under a Paradigm Shift assumption that China will decide to unleash
the full potential of PV to 4% share in power generation by 2020 and 12% by 2030 (European
Photovoltaic Industry Association (EPIA), 2010). However, without a proper financing method,
the PV system is not affordable for rural residents; therefore the first solution will be government
subsidies or grants, but for market sustainability from the long-term perspective the financial
method will be better. The financing scheme using local social networks will be useful in
expanding renewable technology and be beneficial to low income consumers (N. Rangaswamy
and S. Nair, 2009)
The effectiveness of PV for electrification for rural or isolated regions is accepted by many
researchers (Bekker, Eberhard, Gaunt, & Marquard, 2008; Islam et al., 2006; Miller & Hope,
2000). We have some common findings and challenges from various literatures. First, favorable
financing tools are necessary for spreading PV systems for rural electrification because of its
high up-front cost for the system. Many successful programs executed in developing countries
incorporated financing support from multilateral organizations or developed countries. Beside
financing assistance from outside, policies such as taxation, subsidies, and long-term loans for
the project are also necessary. Second, cost reduction activities also play an important role in
rural electrification process. These activities are closely related to the R&D in PV technology.
From crystal silicon manufacturing to module assembly, we can reduce the cost in all of the
value chain. However, currently, silicon feed stock supply is the main critical issue in cost
reduction process. Finally, industry standard setting is helpful for improvement of quality and
reliability. Most of the manufacturing and supply process, and standardization is beneficial for
manufacturing, installation, and maintenance of the PV system.
Most research emphasizes the role of private sectors in PV installation in developing countries
but it is hard to come up with a proper incentive system to attract them. Shortage of credit and
high default risk in rural regions hinders private companies from initiating programs even if the
renewable business opportunities are promising. Transparency of government policy is another
requirement for the participation of private sectors. As rural electrification is a highly political
issue in developing countries, sometimes unrealistic promises could be made. This can ruin ongoing PV off-grid project (Miller & Hope, 2000) as well as long-term prospects of project.
However B. Bekker also suggested that policy uncertainty was necessary for the success of rural
electrification (Bekker et al., 2008). According to his research, a radical policy change could
generate a good result and small project based program could not be sustainable in the case of
Africa.
The World Bank, multilateral organizations, are working extensively in rural electrification to
relieve poverty. The bank has found that rural households which cannot access to grid system
were willing to pay prices for PV systems and such systems could be cost-effective alternatives
for current tools (Miller & Hope, 2000).
However, to accelerate PV systems in rural area policies should be designed to encourage both
supply and demand side of rural electrification. On the demand side, policy incorporates local
communities' involvement in decision making process and ownership. With this, local contents
could be maximized (DANIELSEN et al., 2009). In the case of supply side, more equipment
dealers and service providers are necessary for higher quality of services for consumers in rural
areas. Still the awareness of PV systems in rural regions is quite low and the market for PV
installation is developed in limited areas.
However, China's status of rural electrification has several distinctions from other developing
countries. China has enough sunshine, is the world's top solar cell manufacturer and possesses
technologies which enable the supply of good quality PV products promptly and cheaply.
Additionally, the Chinese government realized the necessity of renewable energy to reduce coal
dependence in electricity generation (EPIA, 2010;(Organization for Economic Cooperation and
Development, 2004); (Chang, Leung, Wu, & Yuan, 2003; Cherni & Kentish, 2007). More
detailed analysis and research will be suggested in section 3.
2.7. PV technology options
Three major types of PV technologies are divided by raw materials or generations - organic:
dye-sensitized solar cell and inorganic: silicon and III-V compound, and also can be divided as
1 st,
2 nd,
and 3rd generation based on photon-energy conversion mechanism, and it is quite certain
that PV technologies are evolving and can provide diverse options for solar energy usage. PV
technology is taking two approaches - cost-reduction and increasing efficiency. For the
expansion of PV installation, in addition to the manufacturing cost and efficiency improvement,
stability, reliability, and raw material supply issues should be solved (Hoffmann, 2006).
Until recently, crystalline silicon base PV system was a major product and Hemlock, OCI,
Tokuyama, Wacker, etc. provide raw material. However, the feedstock supply is still not
sufficient. To reduce the material cost in PV modules, a thin-film technology using silicon
becomes important (Frankl, Nowak, & International Energy Agency, 2010). Liquid crystal
display manufacturers considered the application of their product manufacturing process to thinfilm PV because LCD manufacturing process can be applicable to thin-film PV cell (Shah et al.,
2006).
The cost of PV installation includes raw materials such as poly-or amorphous-silicon, module
assembly such as interconnection and encapsulation, installation cost, land, etc. Because some
costs are proportion to the size of PV system, efficiency improvement becomes more viable for
the cost per unit electricity generation than cost reduction of manufacturing. So high efficiency
PV system using 111-V chemical together with concentrator technology gains popularity even
though its raw material is highly expensive (Frankl et al., 2010; Green, 2004).
2.7.1 PV technology barriers and solutions
PV technology enables to generate electricity from sunlight, but, the technology has limitation;
without sunlight PV cannot produce electricity. For the stable supply of electricity, electricity
should be available in all possible conditions. For example, the lighting system is usually used
during the night or cloudy day. Other appliances, such as refrigerator, cooker or TV should be
available during the less sun shine time and at night. To overcome the limitation PV system
needs to combine with other technologies.
First, we can consider incorporating battery in PV system. During the day when the sunlight is
the strongest, PV system can reserve surplus electricity into the battery and people can use the
electricity charged in battery without limitation. Battery system is also applicable to battery
charge station. Local battery charger station (or battery charger system owners) can recharge the
battery with PV system and it can provide local people with battery charging service.
Second, hybrid system is useful to compensate intermittency of PV (Byrne et al., 2007).
Considering the high price and relatively short lifetime of battery, hybrid system can be another
solution for the intermittency of PV. Distribution of wind and sunlight can compensate each
other so electricity output of combined system will be more stable than PV system.
The most prominent solution will be hybrid system with battery. However, in this case the cost
for the whole system is much higher than PV and battery system. Additionally the maintenance
will be more complicated than PV and battery system. Lastly, the size of battery for PV system
will be varied to circumstance of each house's appliances or facility size of local business.
3.
3.1.
Key energy indicator of China
Energy production and consumption of China
China is the most populated nation in the world, with about 1.3 billion people, over 20% of the
total world population. It is also the second largest energy consuming country. Since 1971 its
GDP has increased 8.2% per year and was $4.9 trillion in 2000. As a result of its economic
growth, the demand for energy in China has been surging, accounting for more than 10% of the
world's total primary energy demand (Organization for Economic Cooperation and Development,
2004). Total rural energy consumption has increased substantially from 307Mtce in 1979 to
977Mtce in 2007. Per capita energy consumption has increased at a steady rate of 4.53% (L.
Zhang, Yang, Chen, & Chen, 2009).
19W
~
~106,U199
lo
M 104MI
lo
*
"
W2
0
0
2M4
6lw100
U90
MINI"I
b. Energy Consumption
a. Energy Production
Source: U.S. Energy Information Administration (EIA),
http://www.eia.gov/emeu/intemational/contents.html
Figure 9. Total energy production and consumption in China
t
1
s9 isr
YeO
IM
M
M
M
~~omasnt
Yt~
a. Net coal export/import
M
M
I
M
o to Is
w
tw
10%
Y"
111ww
M
awenoX
yebtcm~bMwbeemi
b. Carbon dioxide emission
Source: U.S. Energy Information Administration (EIA),
http://www.eia.gov/emeu/intemational/contents.html
Figure 10. Coal usage and carbon dioxide emission in China
Still, China's major energy source is coal which is the major source of electricity generation.
Also, China has a large reserve of natural gas in Shanxi, Kingjian, and Sichuan. The government
initiated the West-East gas pipeline project to exploit the resource (Organization for Economic
Cooperation and Development, 2004). However, technology of exploration, exploitation, and
utilization is still low (Chang et al., 2003).
Coal is distributed unevenly across the regions and its major deposits are the North (Shanxi and
Inner Mongolia), Southwest (Guizhou and Yunnan), and Northwest (Shanxxi) (Ma, Oxley, &
Gibson, 2009). Coal usage is mainly in other developed regions. In the near future, coal still
plays an important role in energy supply in China.
Coal
Oil
Gas
Nuclear
Hydro
Other renewables
1971
192
43
3
0
3
0
2000
659
236
30
4
19
1
2010
854
336
57
23
29
4
2030
1278
578
151
63
54
9
Source: (Organization for Economic Cooperation and Development, 2004)
Table 2. Total primary energy demand in China (unit: Million tons of oil equivalent)
3.2.
Necessity of renewable energy development in China
Per China's Electric Power Research, even if China uses the fullest capacity of coal, hydro, and
nuclear energy as planned, there will be a gap in electricity supply and demand (Li J, Wang S.
China solar PV report in 2007). Li and Wang suggested that this gap should be filled with
renewable energy but there is no clear policy for it.
100%
80%
60%
-
Gap
--
U Nuclear
* Hydro
40%/
n Coal
20%0%
2010
2020
Source: Li J, Wang S. China solar PV report in 2007
Figure 11. Electricity generation mix and gap in 2010 and 2020
China has two major issues with energy. First, the economy of China heavily depends on coal
which is abundant in China and is cheap to extract. Coal meets around 70% of China's energy
demands and represents 90% of fuel usage for electricity generation. However, as the
consumption of fossil fuel is dramatically increased, its carbon dioxide emission has also surged.
China is already a major contributor to global carbon dioxide emission, 3 billion tones in 2000
(Organization for Economic Cooperation and Development, 2004). Second, China's economic
disparity among provinces is also a critical issue (Wan & Zhou, 2005); (M. Yang, 2003).
Economically prosperous cities such as Beijing and Shanghai and North-eastern provinces where
heavy industries dominate enjoy high income and stable energy supply. However the central
agricultural province and Western provinces suffer from shortages and unstable energy,
especially electricity supplies (Organization for Economic Cooperation and Development, 2004).
aaw
da
A
1.7
5.~
kk
Lt~
o
f
X-('!
0 195390
W. &A
780
1.170
Kmv
Source: (L. Zhang et al., 2009)
Figure 12. Provincial distribution of per capita energy consumption in rural China
To relieve China's energy problems, the government developed an energy policy and the
objectives are to diversify the energy mix, to ensure energy security, to improve energy
efficiency, and to protect the environment. In 2009, at a U.N. Climate Change Summit, President
Hu Jintao declared that China would incorporate climate change measures in its economic and
social development plan and take more effective measures for the promotion of renewable,
energy, increasing non-fossil energy shares up to 15% by 2020 (K. Sichao, 2010).
Over the recent years, renewable energy sources are expected to be not only solutions for climate
change but a key economic growth driver. China's PV market is still inactive, but PV costs are
expected to decline owing to price decline of silicon in 2008 so the Chinese PV market is
expected to grow dramatically in the future (H. Yang, Wang, Yu, Xi, Cui, & Chen, 2003b); K.
Sichao 2010). Moreover, currently, the Chinese government is initiating and developing new
schemes with financial support to invigorate usage of PVs and other renewable energy for the
domestic market.
3.3.
PV market and industry of China
3.3.1. China PV industry
The development the PV industry in China is outstanding. Since two major PV manufacturers,
Suntech Power and Tianwei Yingli began their production, China's PV production has grown
rapidly. China's production growth rate is 70% which is almost double that of the rest of the PV
producing world. However, over 80% of Chinese products are exported (Marigo, 2007).
Therefore we can see that PV makers in China are driven by global market demand, the same as
many other products. To meet market demand between 2003 and 2006 in Europe, especially
Germany which has the feed-in-tariff for PV, PV manufacturers in China increased their capacity.
In 2006 China's PV cell production capacity was greater than that of United States and Europe
(Marigo, 2007). According to Eric Martinot and Li Junfeng, in 2009, China supplied almost 40%
of all PVs worldwide (E. Martinot , Li, Mastny, & Worldwatch Institute., 2007; E. Martinot,
2010). China has about 4GW/year of manufacturing capacity and more than 500 PV companies
exist (E. Martinot, 2010).
The first generation of Chinese PV companies are state owned companies and their technology
level was low. Most production line equipments were imported from USA, although, current
companies are equipped with their own designed product lines through technology development.
However, China has invested limited money in R&D compared to other countries, and its main
R&D focus is in module manufacturing to maximize its cheap labor cost. Because of low
technology development, PV products by China have a lower efficiency than that of products
from the rest of the world (Marigo, 2007).
Currently, most installed PVs in the world are silicon based PV cells - mono-crystalline silicon
and poly-silicon and most of the produced PV modules in China are crystalline silicon based.
Even though China has shown dramatic growth rate in PV cell production, its sustainability is
questionable because of an unstable supply of silicon feedstock (Marigo, 2007).
Figure 14 shows China's PV industry position in the supply chain. It has been positioned in the
downstream side in cell and module production. Raw material, silicon feedstock, production
needs relatively high technology and investment as well, and causes serious environment
contaminations during the manufacturing process. However, the rapid PV market expansion has
been restricted by a shortage of silicon feedstock (Marigo, 2007; Maycock, 2005). Usually PV
module companies in China make a long-term supply contract with raw material suppliers to
meet demand from customers. Overall China's PV industry can achieve outstanding progress in
quantitative aspects, i.e. module production, however its qualitative side, i.e. efficiency and
upstream side, is mediocre. (Maycock, 2005)
High
Poly-silicon
Installation
roduction
C
Supply chain
Chn
Chn
Modl PrPr ucuc n
Waf
Production
low
low
Technology
High
Figure 13. PV supply chain and China's industry position
To overcome biased PV industry structure, technology innovation is necessary in China. Guo et
al. suggested technology innovation system for photovoltaic in China (Ying Guo, Donghua Zhu,
& Xuefeng Wang, 2009).
They identified five factors for leading technology innovation:
external force, government, R&D, market, and manufacturer.
External forces, which can facilitate PV technology improvement, consist of an abundance of
solar resource, global PV market growth, climate change, and oil prices. According to Guo's
framework, the government plays an important role in PV distribution. Several programs such as
Village Electrification Programs in 2002 and Measure of Financial Subsides for Solar PV
Building in 2009 helped in the rapid expansion of the PV industry in China.
Most R&D institutions including private and research institutes perform with solar cells at the
laboratory level. Guo et al. state that China is ranked at the top among the range of singlecrystalline silicon solar cells and poly-crystalline thin-film silicon manufacturers, but as
mentioned, China's R&D is focusing on module manufacture, so its technology level remains
low.
Until now, the PV market in China is mainly in communication, industrial application, rural and
remote areas, and grid-connected PV system. Around 54% of the PVs are for commercial
markets and the other 44% belong to the market which needs government and policy support.
Internal markets came from rural electrification but the major driving force comes from overseas
markets such as Europe and U.S. The PV technology innovation system of China is illustrated in
Figure 15.
Stin
Cw'in'm
+4--------
ExbrmlFme
nlate
Cerdral Governnt Sector: NDRC,
MF, MHUD ...
Pivmillrtilirs..
Fians
St-
te
SGlobal nket iieasing
SAbuzde sae
* Chlae Cliam~
*Oil price irimeasing
Naliomi
Energy Developet nt
amirg (NEDP);
Clim Rernwable Emrgy L
(CPEL)
Village Electification Pfgamnme
973 HarRing; 863Plarn-i ......
Stiuai
Danestic
of-grid
urailarhet
I~~~
0
Irdenstioml
an-grid
Mkets
(8)% of
fiin
f
Mkfeell/nodule Developers
ReseawhConnunnity
0
S
*
Climse production is
expcaba)
Univeniies
Feedback
rtutesh
Meufactuars
Nice
rs
R&D
St
Stinudate
rratioml)
Source: (Ying Guo et al., 2009)
Figure 14. PV Technology innovation system of China
nAlet
application
3.3.2. China's PV Market
As mentioned in the prior chapter, most products made in China are exported to developed
countries which have a strong incentive program for PVs. Still, electricity prices from PVs is
around $0.45-0.73 per kWh' in the region (Byme et al., 2007); PVGroup, 2009). The price is
more expensive than conventional resources. Moreover, the price of electricity in China is cheap
and income levels of rural and urban population is not enough to pay a premium for renewable
sources yet (Liu, Wang, Zhang, & Xue, 2010). For China's PV makers, therefore, the export
market is more attractive than the domestic market. If China has a significant incentive system
such as feed-in-tariff or installation subsidies, the PV market can be invigorated.
By the end of 2005, according to Liming, H., PV installation in China was over 70MW. About
50% of the capacity was used for rural electrification and the market would grow 20% per year
(Liming, 2009).
China's PV market mostly depends on export, not on the domestic market. Even though the cost
of PVs are decreasing rapidly, without a support system like subsidies from government or
organizations, it is hard to sustain (The Economist Apr., 2010). R&D institutions including
private and research institutes perform on solar cells at the laboratory level Although China
initiated several programs for PVs or hybrid types, the project size was limited so the impact was
not significant. But we can sense that government policy could lead market growth. When we
look at Figure 16, we can see the rapid installation growth from 2000 to 2002. In 2002, the
National Development and Planning Commission the Township Electrification Program started
(Not Available & National Renewable Energy Lab., GoldenCO (US), 2004b). The program was
for relieving electricity issues in seven Western provinces and in 700 townships that could
benefit from the program. In a short period, the program could boost the PV industry in China.
*
annual fixing
- -accumulative total
*o ~ 80000
90000______________
70000
0=EV 0000
c
50000
C-
40000
o 20000
e
.c
10000
__
1976 1980 1985 1990 1995 2000 2002 2004 2005 2006
Year
Source: (Liu et al., 2010)
Figure 15. Annual new and cumulative installed PV in China
Still, electricity prices from PVs are more expensive than that from conventional sources.
Without a proper subsidies program it is hard to install a PV for electricity generation. Until
recently, most PV consumer markets are in developed countries, especially EU.
However, because of the recent economic recession, many countries cut their subsidies for PV.
Moreover after recovering from a recession, to slow down the overheating of renewable energy
market, the governments tried to reduce subsidies for renewables and this impacted negatively on
the Chinese PV industry.
The Chinese government understood the importance of revitalizing its PV industry and realized
that developing the domestic PV market is a key solution. The Ministry of Finance and Ministry
of Urban and Rural Development introduced a national subsidy program in 2009. Soon the
government will revise its PV generation target for 2020 up to 20GW (K. Sichao, 2010;
PVGroup News by Song. M, 2010).
Historically, rural regions in China heavily depend on biomass. People obtain energy through
combustion of biomass for cooking and heating. But China has a strong potential PV market in
rural areas. In Western China, there are more than 3000 sunshine hours per annum and the low
population density makes PV systems more cost effective than grid extension. PV technology
can make available size variations from home system to plants. As mentioned in section 2.2, the
PV market potential in China is the biggest in the world (European Photovoltaic Industry
Association (EPIA), 2010).
The total installed capacity of PVs in China reached 22MWp at the end of 2002 (H. Yang, Wang,
Yu, Xi, Cui, & Chen, 2003a). The status and future of PVs in China hugely depended on
government policy. Until now major products installed in China are silicon based products and
its efficiency, 10% to 14% varied according to environment conditions and types.
Thanks to the cheap labor cost in China, Chinese PV module manufacturers can achieve
competitive advantages in price, but they suffer from a shortage of silicon supply. However
during 2009 some companies tried vertical integration from silicon feedstock to PV module
manufacturing. The production capacity of PV modules reached 8000MW and produced
4000MW, representing of 40% of total global production in 2009 (PVGroup News by Song. M,
2010).
LOW
Country investment attractiveness
High
a. PV potential for Sunbelt countries by 2030 in paradigm shift (GWp)
700
600
500
400
U China
300
*15 middle market
200
100
0
Paradigm shift
Acce lerated
growth scenario
Base scenario
b. Comparison PV potential for Sunbelt countries by 2030 (GWp)
Source: European Photovoltaic Industry Association (EPIA), Unlocking the sunblet,
2010
Figure 16. Comparison of PV potential for Sunbelt countries
44
4.
Overview of China rural electrification
In China, both the electricity access rate and poverty level of people are high (Figure 6). This
could be explained as that income generating activities from electricity is not efficient. Even
though most people can access electricity, they cannot use it for their commercial activities. We
can also assume that electricity supply is not stable or secured well and it is not cheap enough for
people who want to use it. So we cannot confirm that electricity access really increased the living
standard of people in China yet. The rate of electricity access was varying from province to
province.
According to Ming Yang, China had over 20 million people who had no access to electricity (M.
Yang, 2003). Moreover, around 500-660million people depend on unreliable power supply
(Byrne et al., 2007). According to J. Byrne's survey in Western China, people who live in this
region believe that renewable energy is regarded as a reliable source of electricity. According to
the research, PV market size of tested regions, which are Inner Mongolia Autonomous Region,
Qinghai Province, and Xinjiang Uygur Autonomous Region, is up to 22MW (Byrne et al., 2007).
Rural electrification driven by the Chinese government has two major features. One is
encouraging retail competition in rural electrification market and the other is continuing
government program. For example the "Brightness program" (M. Yang, 2003) and "Golden Sun
Program" was led by the government. From the example, we can assume that the Chinese
government adapted top-down approach at first, and then moved to market efficiency through
competition.
4.1.
History of rural development of China
Total energy consumption in rural China has shown a trend of steady increase, and several
different phases can be found. The first stage is from 1979 to 1995, reaching the first peak at
649Mtce in 1995. During this period, energy consumption grew steadily. From 1996 to 2000 the
energy consumption remained stable or was even slightly reduced owing to energy efficiency
enhancement. After that period, the energy consumption of rural areas dramatically increased (L.
Zhang et al., 2009).
1100
----
1000
Total consumption -0-
Per capita consumption
1600
1400
1200
81000
600
-- - - - - - - - - - - - - - - - - - - - - - - - -- -
00
-------------E~ - - - - 4- - - - 4co
- - - - - - - - - - - - - - - - - - - -400
- - - - - - - - - - - - - -- 40
400
300
- -- ---- ---- ---- ---
-200
0
200
1:
1
11011Year
Source: (L. Zhang et al., 2009)
Figure 17. Total and per capita energy consumption in the whole rural China
We can also see the changes in energy structure and institutional changes in China's rural
electrification process. Electricity consumption is an essential indicator reflecting the economic
development and energy structure in rural regions. To what extent energy is used usually is
determined by the extent of accessibility and rural economics. According to the research of Peng,
at the end of 1940's the government was not very active in rural electrification. Rural
electrification required high delivery cost, but rural residents didn't have enough income to pay
for the electricity usage. Most of all, private investors had little incentive to invest their money
for rural electrification owing to high default risks. There were short of capital, technology and
proper management system for rural electrification in China at the initial stage. Between 1949
and 1977, the Chinese government moved to a vertical system for rural electrification. It
controlled all electrification activities through strict central planning (Peng & Pan, 2006).
However, at the end the 1970s, the Chinese government turned to the decentralization policy and
the central govermnent handed over the management of rural electrification development to local
governments. By changing central planning to a market oriented model, the decision power of
local governments increased sharply. Local level management was the most effective
implementation for planning of rural electrification because the local government understood
their economic and environmental conditions well. But it also caused several problems. For
example, some local governments used up the tariff for collecting various fees. In 1997, the
Asian financial crisis caused a reduction in foreign investment so the central government adopted
an expansionary fiscal policy. Rural electrification was led by government control again. The
final stage, between 1998 and 2002, the institutional structure was to separate local electricity
supply from local governments to facilitate commercial operation (Peng & Pan, 2006).
4.2. China's rural electricity market
4.2.1. Quantitative analysis of rural electricity market
According to research by Yang and Yu, even though the Chinese government had spent $46
billion for the rural and urban electricity market, China's rural electricity market remained
underdeveloped (M. Yang & Yu, 2004). To quantify the rural electricity market of China, they
selected and grouped three different regions according to the economic and geographic
conditions. They revealed the factors effecting to rural electricity demands. First, rural electricity
demand could be divided by industry sectors and households in rural regions (M. Yang & Yu,
2004).
n
EDt=
EDit + EDHt
EDit VAit
EDHt NHt
x
xGDPt+
x
xPOPt
VAit GDPt
NHt
POPt
=
=
Elit x Sit x GDPt + EJHt x INHt x POPt
I: Sector, t:time period, ED: Electricity demand, VA: Value added, GDP: Gross domestic
product, EDH: Electricity demand of household, NH: Number of household, POP: Rural
population, El: Electricity intensity, S. economic share of sector, ElH: Electricity demand of
household, INH: inverse number ofpeople per household
The first equation could be rephrased by several factors. From the equation, we can identify
factors for rural electricity demand. El (=ED/VA) factor explain which rural industries'
electricity demand is high or low and how much value the industry can add to the region. Low
electricity intensity means the efficiency of industry. The El can be varied to the rural region
owing to the difference of industry mix. S is the economic share of the rural economy in each
industry sector. From the S, we can figure out which industry has what portion of the total rural
industry. Most common industries in rural regions in China are township and village enterprises,
agriculture, county level industry, and others. The term GDP (gross domestic product of rural
economy) explains that with the growth of rural economy, the demand for electricity is going up
too (M. Yang & Yu, 2004). EDH is determined by electricity needs of households and rural
populations.
Ming indentified structural effect, sectoral effect, rural activity effect, population effect, number
of people per household, and electricity intensity per household as demand change factors (M.
Yang & Yu, 2004). However, considering that China's market electricity is strictly controlled by
government or country, we should add policy change factors in electricity demand changes. As
low electricity prices affects labor and machine usage in industry, if governments or counties
enforce the policy for the rural electrification and provide people with cheap electricity, the
demand can increase significantly.
Given that the income disparity between cities and rural regions in China is large and that
electricity is one of the basic resources for life, the government should be strongly involved in
the rural electrification market. As mentioned earlier, however, for the efficiency of rural
electrification, the role will be divided by central government and county level. The main
policies, legislation, funds and follow-up control should be supported by central government but
specific management should belong to the county level for invigorating the market.
4.2.2. Renewable energy policy in China
Still, as renewable energy is more expensive than conventional energy, it seems inevitable that
the government is involved in energy development. Usually energy policies are supported by law.
All laws are designed to overcome barriers for renewable energy distribution. Judith A. Cherni
and Joanna Kentish identified the barriers: high cost of developing renewable energy, factors that
have prevented renewable energy connecting to the grid, institutional barrier, and lack of
international investment generation and the factors for the barrier (Cherni & Kentish, 2007).
China extensively depends on foreign resources, oil, even though it is the world fifth largest oil
producer. To avoid the risks of volatility of oil, China has considered that development of
renewable resource to relieve the demand of oil; therefore, it has developed renewable energy
laws and policy. Regarding the law and policy, it has developed several programs for rural
electrification and tax or incentive schemes.
The National Development and Reform Commission (NDRC) plays a major role in developing
policies and programs. In 2001, NDRC launched an energy based rural electrification known as
Sending Electricity to Township. In 2007, NDRC also issued the first policy statement on
climate change. It released Medium and Long-Term Development Plan for Renewable Energy in
China the same year. In 2008, Enterprise Income Tax Law provided tax incentives for companies
which are involved in energy conservation and C02 emission reduction. (Su, Hui, & Tsen, 2010).
China introduced laws for rural electrification: Energy Conservative Law and Renewable Energy
Law are representative. Especially Renewable Energy Law specified renewable energy target,
mandatory connection to grid system, structuring of power price arrangement, tax incentives and
subsidies, and renewable energy development fund and discouraged direct biomass burning and
the usage of fossil fuel (L. Zhang et al., 2009). However, the Renewable Energy Law could not
solve the problem of connection between rapid expansion of renewable energy generation and
central grid system which lead to the amendment of Renewable Energy Law (Su et al., 2010).
In 2009, NDRC adopted Renewable Energy Law Amendments which was effective in 2000. It
addressed inadequate coordination between national energy policy and renewable energy
development, lagging development of power grid for renewable energy, and interconnection
between renewables and grid. (Su et al., 2010).
According to Zhang et al. the rural energy policy in China has shown three major points (L.
Zhang et al., 2009). First, China's rural electrification policies are divided, centralized and
decentralized, but implementation is mainly initiated by central government. Second, policy for
rural energy development has been less effective than regulation policy. Third, environmental
factors play an important role in policy change as the climate change issue becomes critical.
China is under the high pressure to reduce green house gas as well as to solve rural electrification
at the same time. However, there are no clear solutions for securing rural electrification and
green house gas reduction besides renewable energy development.
Through policy development, rural energy consumption has improved and the consumption
structure transformed from noncommercial to commercial usage. This upward spiral structure
could increase the demand for electricity in rural regions, because socio-economic development
is a critical factor for the spread of rural electrification (L. Zhang et al., 2009).
To manage the risk of rural electrification, policies should be incorporated for dealing with shortand long-term risks. Currently, there is no feed-in-tariff for photovoltaic generation in China.
Considering that the feed-in-tariff has been a strong instrument for the financial risk management
in renewable energy generation, standardized interconnection between renewable and existing
grid becomes important. In contrast to electricity from conventional resources, the fluctuation in
electricity generation from renewable sources could cause technical problems; therefore
interconnecting technology and law should be considered for the feed-in-tariff policy. As
mentioned, Renewable Energy Law Amendments could provide a legal foundation for the grid
connection in China (X. Zhang, Ruoshui, Molin, & Martinot, 2010).
According to Wang et al., passing Renewable Energy Law exhibited China's commitment to
renewable energy development and under the law, renewable energy market capacity grew
rapidly. However, there are still three issues in renewable energy development. First, renewable
energy capacity in the total electricity generation capacity has reduced, owing to the fast growth
of fossil fuel generation. Second, electricity generated from renewable sources is not properly
used because of lack of connection to the grid. Lack of storage technology is also a problem.
Third, the efficiency of renewable energy generation is still so low that electricity prices cannot
compete with conventional ones yet. They suggested a market-based mandatory renewable
portfolio and a strong regulation to the grid company. By increasing efficiency, power producers
can achieve low cost and cheap energy. A strong regulation can ensure access to the grid for
renewable energy power producers (Wang, Yin, & Li, 2010).
4.3. Programs of rural electrification in China
Starting in the 1980s, the Chinese Government began rural energy construction work that
focused on renewable energy. The Chinese Government has undertaken a series of national
activities and programs to promote the development and utilization of its ample renewable
energy, especially in rural regions. These include the Comprehensive Rural Energy Planning and
Construction Program; the Rural Electrification Program; the Brightness Program; the Township
Electrification Program. In recent years, those activities led by government have increased the
development of renewable energy industry to a much higher level than before.
The main applications of PV in rural regions are in household PV system and industrial systems
for communication, and household application is growing faster than industrial usage (Ling,
Twidell, & Boardman, 2002). The regions concerned are northern and western China. Population
is dispersed over a large area and population density is as low as 3person/km2. Most of them are
categorized as minority and at below the national poverty income level. The Chinese government
has tried to relieve poverty in rural regions by supplying electricity (Byrne et al., 2007).
However, the cost of grid extension is $5,000-$12,750 per km. For example, in Xinjiang where
population density is 10 persons per kilometer, the electrification cost via grid extension is
around $32,500. Considering the grid can supply electricity for 20 years, the annual cost of grid
extension is $1,625 per household. These facts have prevented the government from investing in
electrification through grid extension in rural areas and have made the government focus on
renewable energy development for rural areas (Byrne et al., 2007).
4.3.1. Brightness Program of China (Not Available & National Renewable Energy Lab.,
Golden,CO (US), 2004a)
The Brightness Program includes the Township and Village Electrification Programs and is
designed to supply electricity to rural areas and to help alleviate poverty. China is focusing on its
efforts in the western provinces including Inner Mongolia, Tibet, Qunghai, Gansu, and Xinjiang.
China's Brightness program provides electricity for 23 million people in remote areas in China
using PV and wind generation.
The objective of the plan is to speed up the activity of
decentralized electrification of rural areas.
Under the leadership of the State Development Planning Commission, the projects were
launched in 2000. In 1996, China's former State Planning Commission formulated and put
forward plans for the Brightness Program. The program was to use hybrid system - PV modules
and wind power systems to sufficiently supply power for daily needs to the rural population who
could not have access to electricity. These people are spread out over nearly half of China's total
area. A considerable proportion of them suffered from poverty. As the Brightness Program is a
project that addresses poverty alleviation, the project has large scale and input a relatively high
level of investment. As to the estimation, the total investment in equipment and services to
achieve the project goals was about ten billion Yuan. Implementation was to focus on the
provinces of Western China - Xinjiang, Inner Mongolia, Gansu, Qinghai, and Tibet. The
program has attracted the attention of the world. The government of Holland is providing support
in Xinjiang and the German government has given technical and financial support.
4.3.2. Sending Electricity to townships (Ku, J. 2003)
China secured electricity access for almost 700 million people in two decades, achieving around
98% of electrification rate in 2000 (Organization for Economic Cooperation and Development,
2004). Despite its impressive electrification, 20 million people still don't have access to
electricity (Not Available & National Renewable Energy Lab., Golden,CO (US), 2004b). As
extending grid system to remote areas is not economically viable, the use of renewable and
micro-grid program, US $340 million plan, one of the largest renewable-base rural electrification
programs in the world, is an appropriate solution.
The Township Electrification Program, known in Chinese Song Dian Dao Xiang, is funded by
Chinese government (Ku, J. 2003). The township program was launched in 2001. 706 villages
operate using PV and PV-hybrid system, with total of 20 MW. National Development Reform
Commission selected 1061 township where the grid system extension was unfeasible.
@J
No. ol
uishios
Source: Ku, J. 2003
Figure 18. The scope of the Township Electrification Program in China (The number of
township using PV or PV-hybrid systems)
The system integrator guarantees the system for three years. Specialized companies will operate
the system commercially, with users paying a reasonable tariff.
4.3.2.1. Issues and lessons
The Provincial Development Planning Commission selected system integrators who designed,
procured and installed system and service companies who operated and were responsible for
maintenance of system. However it is unclear who will own the system. System selection and
design cannot be maximized as intended if there is no ownership. Rural electrification could
improve income generating activities, but it would require a larger system. Tariff and repairing
fee should be set through investigation of willingness to pay, ability to pay, cost of operation and
maintenance. Consumers in rural regions should understand the capacity of PV system so as not
to overuse electricity and damage the system.
If there are system standards, it could enhance the installation and maintenance by reducing parts
inventory and time. Regarding the local environment, PV systems should incorporate other types
of renewables such as wind or diesel generator for reliable and secure supply. Trained local
service companies are necessary for high quality service to remote areas.
4.3.3. Golden Sun Program (PVGroup, 2010, Solar Plaza, 2010, Solar Feeds, 2009)
After the Chinese government realized the importance of China's PV industry and understood
that the domestic market is key for PV industry's revitalization, it announced the second national
solar subsidy program, Golden Sun. In 2009 the Ministry of Finance and the Ministry of Urban
and Rural Development initiated the program which provided upfront subsidies to both on-grid
and off-grid system.
Application
System size
Subsidy
Constraints
Investment size
Others
On-grid and off-grid (rural region)
Over 300KW
300 projects proposed, total 640MW
50% of total cost for on-grid
70% of total cost for off-grid
Construction period less than 1yr
Running period over 20yrs
Around RMB 20 billion (U.S. $2.9 billion)
For grid connected system, on-site consumption is encouraged. Excess
electricity would be sold to the utility companies and rate is calculated
based on local coal-fired grid price.
Source: www.pvgroup.org/events/ctr_031358
Table 3. Features of Golden Sun Program
The Golden Sun program sets a cap of 20MW per province. If all 34 provinces take part in the
program, the total installation by 2011 will be 680MW. However, considering the PV module
price, government subsidies alone cannot satisfy expected return of investors. In result, support
at the county level should be incorporated in the program.
Last year, the Chinese government tendered 13 large projects, totaling 280MW. The main
bidders are state-owned utility companies, independent power producers, and private renewable
energy producers, but mostly state-owned bidders take projects because of their low bidding
price. In light of the bidding result, privatization of electricity market is not fully realized yet, the
issues of efficiency and clarity of projects still remaining.
The 20MW of cap is not good enough in the development scale and the programs' emphasis on
on-site consumption of electricity from PVs cannot generate a proper virtuous cycle from rural
electrification. Because electricity itself is the basic substance of life, it cannot generate direct
extra income or value to rural population; therefore the higher capacity would be better for the
rural development in China.
However, considering China's circumstances, its cautious approach is fairly reasonable. Still the
level of PV technology is low, and the government and PV companies do not have enough
experience in efficient planning and processing of big of electrification projects yet. Considering
these circumstances, the Golden Sun program will provide the government with base line of PV
project. Also, considering that over one million rural populations cannot have access to modern
grid-system, supplying electricity through various methods to as many people would be a top
priority. As the Chinese government experienced difficulty in making a profit from wind system
owing to oversupply, it will not want to make the same mistake in PV electrification even though
the government realized that renewable energy will significantly reduce dependence on fossil
fuel in the future.
To achieve sustainable growth over the next few years, the government should focus on
developing reliable technology roadmap, metrological data while proceeding with PV projects,
reliable monitoring system, and clear and efficient policy application.
4.3.4. Other activities on China electrification
S. Ling et al. researched local PV business activities and accessed the household PV market in
Xining and Qinghai province where unsubsidized free markets exist (Ling et al., 2002). They
concluded that widespread application of renewable energy technologies could help organize a
more successful market than government driven program. They also argued that subsidy
programs could distort the long-term growth of the PV market.
In addition to the Golden Sun program, the Chinese government initiated building-integrated
photovoltaic program (BIPV). BIPV used to replace conventional building material with
photovoltaics (PVGroup, 2010). The suitable places for installation in a building are the roof,
skylight, and facades.
Application
System size
Subsidy
On-grid roof-top and BIPV system
Over 50KW
RMB 15/W for roof-top
RMB 20/W for BIPV
Conversion efficiency requirement:
16% for mono-crystalline
14% for poly-crystalline
6%
for thin-film
Source: www.pvgroup.org/events/ctr_031358
Table 4. Features of BIPV program
5.
Results of program and implication
China's electricity access is for over 900 million people in over 50 years and it has achieved an
electricity access rate up to 98% (Figure 20). This electricity access growth rate is closely related
to economic growth, poverty alleviation, and increasing industrial activity in rural regions.
Especially, it is vital to integrate rural electrification into poverty alleviation and a development
plan which has readily made government support. The Role of the local government and private
investor is also important for
special loans and education of rural people. International
collaboration, equipment supply, technician training, and financing were more readily available
has led to capacity increase in the domestic market.
900-a
-
800-
South Asia (India)
70 0"
Sub SaharanAfrica
600U
50 0
.
400
300
200
0
East Asi (Chin)
100
0
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030
Source: (Organization for Economic Cooperation and Development, 2004)
Figure 19. Regional electricity access
Standardizing system and domestic production played important roles in cost reduction, which
created more favorable condition for rural people who lacked financial support and enough
income. As the demand for electricity increased because of the purchase of additional appliances
in rural households, we should consider load growth factors.
For the Chinese government, renewable energy development is beneficial in that it can provide
positive solutions to environmental issues. By promoting renewable energy, the Chinese
government can achieve poverty eradication in rural regions and reduce usage of fossil fuel or
direct use of biomass burning. Once enough mass market of renewable energy is created, it can
also create sustainable and robust renewable energy infrastructure and related industries and
businesses.
However, a small scale of renewable energy systems have shown mixed success. Much of the
failure comes from the lack of proper institutions and infrastructure to support the programs. In
case of rural electrification, the density of renewable energy installation should be high enough
to increase the local business activities. For this, proper operation and maintenance system are
necessary and training system is also a critical issue for operation and maintenance.
Electricity supply through PV should be fit the regional conditions of each township. If a
township has a small business and needs more electricity, a household PV system is not enough
to help its business activities. It is also considered that programs should not distort the growth of
the PV market by providing townships with excessive resources. Developing feed-in-tariff
system in PV is critical to the success of PV technology expansion in China.
6.
Lesson from China case
China has achieved steady development and considerable rural electrification rate than any other
country in the world. How could China make this progress? The government's emphasis on rural
electrification and favorable policy could be the possible answer to that. However the more
important factor is to realize the rural electrification, besides government's strong support for it,
the government helps to increase the demand of rural electricity through boosting local business
activities. Active local businesses can enhance the commercially sustainable electrification. The
main target of rural electrification is to encourage social, economic, and cultural development for
the maximum function of electricity. In China, the rural energy consumption structure has
already shown considerable changes from non-commercial to commercial energy.
When it comes to policy, we could find two distinctions. First, Chinese government deploys a
combination of centralized and decentralized system. China has a vast territory and each county
has unique feature in environment and socio-economy. To satisfy different needs and conditions
of each region, even though the implementation is somewhat top-down method, the central
government extensively cooperated with local government. Second, environmental factors
became important issues in energy policy in rural electrification, which is reflected in newly
launched policies.
China is subject to green house gas control so it needs to improve energy efficiency technology
and to invest more on renewable energy sources. The answer to the question, how China can
secure rural energy supply and cope with carbon dioxide reduction at the same time, lies in
renewable energy development. Especially the western regions in China have environment
incentives for PV systems.
7.
Competitive analysis - Porter's Diamond analysis
Porter's Diamond Model can deliver an effective methodology by analyzing the competitiveness
advantage of a national industry or a company (Zhao, Hu, & Zuo, 2009). Factor conditions
explain the initial advantages including availability of human resources, access to research
institutions and universities, physical, administrative, and technological infrastructures, natural
resources, and accessibility to capitals. A firm strategy and rivalry provide the level of fairness in
competitions, intellectual property protection, transparency, law system, and meritocratic
incentive systems. Demand conditions are a measurement of demand of a specific regions or area:
sophistication of local demand like appeal of social value propositions, demanding regulatory
standards. Supporting industry are measures of availability of local suppliers, and presence of
clusters (Porter & Kramer, 2006).
Porter's Diamond Model is already used for wind power development in China (Zhao et al.,
2009). Z.Y. Zhao et al. formulated an analytical model to find factors that have a significant
impact on the local industry of wind power generation. They suggested that the Chinese
government's role in speeding up the wind power generation and for this turbine localization is
necessary. We believe that considering the circumstance of renewable energy development in
China, the government's role will be a key factor for the expansion of PV, in the same way as for
wind power. In this paper, we already researched various programs of PV applications in China
so we can conclude that the Chinese government realized that the government led policy for the
renewable energy expansion is the best and fastest choice for the growth of PV.
Before using Porter's Diamond Model, analyzing the value chain of PV industry in China can
give us is the negative or positive impact to the development of PV. The value chain depicts all
activities an organization such as the government and companies engage in business. Inbound
logistics, operation, outbound logistics, marketing and sales, and service are primary activities,
which are supported by firm structure, human resource management, technology development
and procurement activities. Here, through value chain analysis we can find how each chain helps
to give a positive impact to the rural electrification using PV technology (Porter & Kramer,
2006).
Primaryactivities
* Inbound logistics: this is about transportation, raw material handling and storage,
information system, and testing. In the case of PV in rural electrification, all aspects from
supplying poly-silicon feed stock to module manufacturing & installation and all
transportation for all raw and medium products are included. The strength in PV module
manufacturing industry in China is that it will have a positive impact to the rural
electrification using PV technology. However, supplying poly-silicon feed stock and its
cost are the negative factors for PV electrification.
* Operation: PV can produce electricity without compromising the environment. Given that
China is the second largest country in carbon dioxide emission in the world, expanding
renewable energy is essential. The PV module can be used over 20 years, reducing
carbon emission dramatically. People living in rural regions where a grid is not available
can afford electricity necessary for their basic life. However, the upfront cost is expensive
for the rural people whose income is low.
*
Outbound logistics: Most manufacturers of PVs are located far from rural regions, which
will make it less easy for rural people to install PV systems.
* Marketing and Sales: PV and PV installation programs of China are not well known to
rural people. Price is also a critical obstacle to the expansion of PVs in rural regions. The
market in rural regions is not well established and not efficient. The awareness of PV
systems is quite low in rural regions.
* Service: Maintenance is not complicated for a PV system for the house. But small PV
plants for village electrification need continuous maintenance. Monitoring of PV systems
and collecting data on the electricity produced from PVs can provide a basis for the
improvement of the program and can help to decide a level of feed-in-tariff depending on
electricity usage and installation cost.
Support activities
e
Firm structure: Most programs are led by the central government. However, to
increase efficiency of the program, decentralized system is adopted because a
province or a county understands its condition and needs well. Transparency of
process is not well established, leading to cost increase and bad impression on the
renewable energy program in China.
" Human resource management: For the maintenance of PV systems and after-sales
service, qualified technicians are essential. For small PV plants for village
electrification, education programs will be able to provide good quality of electricity.
" Technology development: China does not yet have technology for upstream PV
industry such as poly-silicon production. Most PV manufacturers in China have
focused on lowering cost through using qualified and cheap labor. The government
should support R&D activities on the PV technology, which will lead the electricity
cost reduction from renewable resources, sunlight.
" Procurement: The Chinese government allows tax reduction when companies import
the machines or tools for PV manufacturing. The PV module manufacturers hedged
feed-stock shortage through long-term contract with poly-silicon manufacturers.
The primary activity of PV electrification in the Chinese rural areas has both strengths and
weaknesses. To improve the effectiveness of PV electrification, we suggest that the
government and industry solve the problems of shortage of poly-silicon feed stock,
awareness of PV technology, and training qualified technicians. Support activity is quite well
organized because of the top-down method of the Chinese government. Renewable energy
development cannot be sustained without government subsidies even in developed countries.
Considering the situation, top-down method increases the speed of the project and provides
the companies involved with reasonable profit.
firm infrastructure
human resource management
technological development
procurement
2
.2
;a
Source: (Porter & Kramer, 2006)
Figure 20. Value Chain
In addition to understanding the impact of value chain, PV rural electrification requires an
understanding of the competitiveness of the PV industry of China. Porter's Diamond Model will
illustrate the competitiveness of PV electrification in China.
Even before the PV program initiation by the Chinese government, the PV industry in China had
strengths. Traditionally China could lead the manufacturing industry by using ample cheap and
qualified labor force. The price competitiveness of China enabled Chinese companies to
dominate manufacturing sectors. In the case of PV industry, the Chinese companies have taken
an advantage. Additionally, the high price of oil and the concerns with the environment make
people seek the development of renewable energy. With strong subsidies or feed-in-tariff,
developed countries led the renewable energy projects. In this business context, the PV industry
in China could enjoy enormous profits and enlarge production capacities in PV module
production.
However, the financial crisis halted the majority of renewable energy projects in Europe, and the
Chinese PV module makers could not avoid lay-offs and reduction in production. The Chinese
government, who believed that the development of renewable energy is critical for its pollution
reduction, watched the shrinkage of industry. Realizing the important role of the domestic
market and the untapped rural areas, the Chinese government became aggressively involved in
renewable energy development.
In China, as the government is the leader and executive of the industry, it has a direct and
significant influence on other elements. In addition, factors of chance are included in the model.
As mentioned, in the Sunbelt region, China has ample light resources in rural regions which can
reduce the price of electricity and provide stable supply.
" Factor condition: More than anything else, cheap and qualified labors are the strongest
factors in the PV industry in China. As the most prominent PV module manufacturer,
they have supplied PV modules to the world at a low price and their market share is
around 47%. The top 7 PV manufacturers' capacity reached 4GW per year. Even though
energy conversion rate of the Chinese product is slightly lower than developed countries,
the Chinese product dominates in the world market owing to price competitiveness. With
a stiff learning curve in module manufacturing and the enormous capacity China can
reduce cost significantly. Their R&D activities mainly focus on PV module assembly, but
nowadays some companies are strengthening their competitiveness through vertical
integration.
" Supporting industry: In addition to vertical integration in PV manufacturing, companies
take part in PV installation programs led by the government.
* Demand condition: As countries in EU developed the PV market, PV manufacturers in
China have shown fast growth by satisfying needs from developed countries such as
Germany, Spain, etc. However, as the demand from EU slowed down, the companies'
over capacity could not be sustained. The Chinese government realizes that developing
the domestic market is beneficial to take a lead in renewable energy in the future.
Moreover, to meet electricity demand from a fast growing industry, the government
needs new sources other than fossil fuel. Coal can be an easy and cheap resource for
electricity generation, but the government is under pressure given the problem of climate
change. Given those circumstances, the renewable energy development will play an
important role in electrification in China. The Chinese government has emphasized that
rural electrification is an imperative issue to eradicate poverty between rural and urban
regions. In rural regions, PV electrification is more cost effective than diesel power
generation.
* Firm strategy: Most prominent PV companies are Suntech, Yingli Solar, Trina Solar, and
LDK Solar. At first they focused on scale of business; using cheap labor, they increased
their manufacturing capacity. As Suntech is the largest company in crystalline PV
manufacturing, it has facilities worldwide. After IPO in U.S., it also focused on R&D.
Yingli Solar developed its competitiveness through vertical integration. The company
hedged poly silicon feed stock price volatility and vigorously took part in the government
led projects.
These four factors are the main reasons behind China's competitiveness in the PV industry.
However, the export dominant PV industries are vulnerable to economic turmoil. In 2008, the
financial crisis affected renewable energy projects in EU, PV manufacturers in China
experienced a shrinking of their business and some small and medium sized companies could
not avoid lay-offs or bankruptcy. The Chinese government has developed several PV projects
in China, but after realizing the important role of the domestic market, it develops both ongrid and off-grid programs.
" Chance: In China, two factors could provide a good chance to boost the PV industry.
First, the natural resource of PV, sunlight, is ample in rural regions. As to the EPIA,
China belongs to the Sunbelt region. The most untapped market is the rural region in
China and the government needs to supply electricity to relieve poverty in those regions.
" Government: It is hard to generate economic profit without government support through
electrification via renewable energy. Several PV programs finished and the result was not
promising. However, the government led projects could have a positive impact in the
short period. If the Chinese government set feed-in-tariff for PVs, the speed will be faster.
a. Status quo of the Chinese PV industry and market
b. Improved Diamond Model of PV
Figure 21. Diamond Model for PV development
8.
Analysis
via system
dynamics -
reinforcing and balancing factors
for rural
electrification in China
System dynamics has been used for planning the electric power industry. Applications are
building national models, individual companies and states, the policy of pnivatization and
deregulation, electric cars and utilities, and emerging areas (Ford, 1997).
In this paper, we develop loops for rural electrification in rural regions in China (Figure 23)
under the socio-economic facts. Reinforcing loops from 1 to 4 are generally accepted feedback
loops. The first loop in Figure 23 explains the role of the awareness of PV. If rural people get
information about PV electrification and its usefulness, the demand of PV will go up. This will
increase the potential of the PV market in rural regions. The companies see the growth of
demand as a business opportunity in rural electrification. Moreover, the natural resources, here
usable sunlight in rural regions in China, is enough to produce stable electricity for small or basic
appliances in rural life. Therefore, the demand growth from awareness of rural people is
reinforcing the demand of PV installation. Second loop is about the scale of business and cost
effectiveness. Still the price of electricity from PV modules is higher than the conventional
method. However, investment in PV manufacturing can reduce the unit price of PV modules
through the scale of business. Some leading PV companies in China expand their module
production capacity, enabling them to have price competitiveness in the world PV market. If
domestic market is developed through the government programs, the demand will be enough to
sustain PV manufacturing capacity which will reduce the price of manufacturing. Third loops
show the role of R&D in PV industry. Various R&D activities are involved in efficiency
improvement and cost reduction in manufacturing. Efficiency itself is closely related to cost of
electricity generation via PV technologies. The subsidies from government, even if it is direct or
indirect, will be over some time. With time, PV manufacturers have to reduce the cost of PV
modules and to increase efficiency in order to have price competitiveness with conventional
types of electricity. Here, R&D activity is critical. Joint R&D with universities and worldwide
laboratories set up by companies can provide improved solution. Especially thin film
technologies will be critical in cost factors because it can dramatically reduce the consumption of
poly-silicon which takes up a high portion of PV module price. The fourth loop explains the
learning curve in the PV industry. Traditionally various companies can benefit from their cheap
and qualified labor forces. Once installed bases are expanded, their experience can reduce
learning time, enhancing productivity. Regarding the PV industry, the same phenomena took
place. Still the performance of PV products from China is behind the world's best, but soon it
can catch up through fast learning curves. Adding to that, the fast growing domestic market will
give opportunities to the companies in PV manufacturing as well as electricity supply business
through PV technology. By experiencing the value chain from PV module production to
electricity supply, the companies can maximize their profit because the value will increase as
business goes downstream. The fifth loop is the most important factor in rural electrification in
China. One of the main purposes of rural electrification is eradicating poverty in rural region.
The electricity can help local businesses or entrepreneurs to develop new markets or new
facilities. Income generation from their business requires more electricity, increasing the demand
of electricity and expected return of PV investment. As mentioned, the population growth in
rural regions is the fastest so disposable income growth will be the most important factor in rural
PV development.
The first balance loop is about the government subsides. Electrification in rural area needs large
investment from the government because the current income level of rural people is very low.
With government's various programs, the rural people can increase their living standard.
Lighting, water pump, improvement in hygiene directly benefit rural life. But the most important
factors will be activating rural businesses. However, once the government thinks that there is a
bubble in the renewable energy development, it will reduce the size of subsidies. For the
sustainability of business, private and free competition will be better. As mentioned above, the
government subsidies could distort the health of industries and make them vulnerable to the
volatility in the market. Feed-in-tariff could also be a catalyst or poison for renewable energy
development. Currently the Chinese government has not decided the tariff level for the PVs and
it has a plan to develop an appropriate level of tariff. Several EU countries, especially Germany,
could get an impressive result through feed-in-tariff scheme in PVs. For calculating the tariff,
ongrid system is necessary, however, in case of rural regions on-grid is not a viable solution.
Several countries in Africa could set feed-in-tariff system for off-grid with the help of World
Bank and other organizations. China also has to set its own system considering their socioeconomic circumstances.
Nowadays, Germany and Spain have cut off tariff owing to budget deficits and bubbles in PV
development so the feed-in-tariff should be controlled to sustain appropriate levels of industry
development. Subsidies and feed-in-tariff may be helpful for both consumers and electricity
suppliers using renewable energy, but from a long-term perspective, it may cause market
distortion. A less competitive environment led by the government will eradicate the R&D
investment, compromising the price competitiveness in future.
industry
Technology +
R&D investment
PV industry
PV industry
cost
capacity
-h&Expected profit
frxn PV
+
Pv installed cap
ruralren
Solar energy
resource
otential PV;K
market
+
+
Awareness of
Electrici
opulation
Electricity dennd 0
Busiess growl
rural pouain +Buiesgot
rural region
Rural population
popu+
growth
Dispos ible incane
Subsidies fro
government
Figure 22. PV industry in China-SD analysis
No.
Loop
RI
Awareness
R2
PV industry investment
R3
R&D investment
R4
Experience (know-how)
Description
Rural population's awareness of PV technologies. The
more people understand the benefit of PV for the
electricity supply, the higher PV market potential
To achieve cost competitiveness to the other option or to
reach the parity price level, PV industry's investment is
necessary.
To achieve low cost from PV, R&D activities are
important. New type of PV, i.e. thin film or PV using
materials other than poly-silicon is example.
Managing PV plant or SHS will need experience.
Education or better program can be developed through PV
projects.
R5
Rural business growth
BI
Subsidies from
government
Rural business will cause demands of electricity.
Electricity will help growth of rural business through IT or
other technology available.
Cash grant or other type of subsidies from government
helpful to initiation of rural electrification, but it can
diminish the R&D activities or distort electricity price
which cannot pull the development of PV.
B2
FIT
FIT scheme can give incentives to investors but in the long
run the tariff should be reduced in order to lead company
to investment in technology development.
No.
Key variables
(alphabetical order)
1
Awareness of population
2
Business gro in rual
region
3
Disposable income
4
Electricity demand of rural
.
population
5
Electricity supply
6
Expected profit from PV
Description
The level of awareness of rural populations about the PV
technology and its electrification application.
Local business growth or created local business through
rural electrification. Wealth of local community is
generated from local business.
From local business or entrepreneur business income is
generated. Extra wealth after deducting money for basic
life.
The magnitude of electricity demand from rural region in
China. It is affected by population and socio-economic
factors.
Amount of electricity supplied from PV
The companies expected profit from PV business. This
affected by policy or market changes.
Several EU countries develop FIT scheme for the fast
spread of PV technology. Mostly the scheme is applicable
in on-grid system but some under-developing countries
adapt FIT in off-grid system. In German case, FIT is one
of the strongest tools for the renewable energy adaption.
FIT scheme is not existed in China yet.
8
Potential PV market
9
PV industry capacity
10
PV installed capacity in
______rural
region
II
PV industry experience
12
PV industry investment
13
PV manufacturing cost
14
Rural population growth
15
R&D investment
16
Scale of PV business
Future rural PV market growth.
The total manufacturing capacity of PV module and related
industry, which includes all components in value chain in
PV module manufacturing.
Cumulative capacity of PV module in rural area in China.
Through all business activities companies can accumulate
experience in PV technology and electrification business.
Learning curve is related to experience.
The investment of PV companies to increase
manufacturing facilities.
Include variable and fixed cost for manufacturing PV
module.
Rural area is the fastest population growing region in
China. Necessary energy or electricity is growing as
population increases.
Total capital investment in R&D activities.
Scale of business is closely related to manufacturing cost
of PV module. Generally scale of business is realized
through large investment.
17
Subsidies from
government
18
Solar energy source
For the rural electrification using PV technology,
government initiated various programs and for this several
types of subsides are granted, accelerating the PV business.
However, once the installed capacity reaches to some
extent, the government reduces the subsidies.
Average sunlight per day or per year in rural region in
China. This affect to the unit price of electricity from PV
module. The more sunlight, the more produce electricity.
19
Technology improvement
Enhancement in technology in PV. Generally if input more
capital in R&D activities, the more outcome expected in
I technology development.
Table 5. Key variables and loops of system dynamics analysis on PV industry
Historicalview through system dynamics analysis
Historically, Chinese government and PV manufacturers had focused on PV industry investment
(R2) and R&D investment (R3). These two was so powerful that the PV companies have been
providing good and relatively cheap PV module; they could achieve scale of business and its
cheap and skillful labors could add more value, strengthening competitiveness in PV module
market. However, in the R&D investment loop, their R&D achievement remained in module
manufacturing so the effectiveness of R&D was limited. To overcome the price fluctuation of
poly-silicon feed stock in market, some companies tried to achieve vertical integration and are
willing to strengthen this reinforcing loop.
The major problems of PV electrification in rural region for business side is that most of PV
manufactures have not have experience in PV installation in rural region. There are not enough
companies which have experience in developing micro-grid or off-grid system in rural region.
The factor of PV installed capacity in rural region is so weak in China that the companies were
inexperienced in electrification business in rural region, and rural population's awareness of PV
technology was so low.
Awareness loop (R1), experience loop (R4), and rural business growth loop (R5) are starting
from PV installed capacity in rural region which could be followed by PV industry capacity, but
there was a delay between them. To strengthen the link or to remove the delay, government
policy will play a critical role. Still the PV module price is expensive to the rural customers, and
they don't have stable or enough income to purchase the PV products yet. This is another major
problem of PV electrification. If government policies can reduce the economic burden of rural
population or can support PV manufacturers or system providers, the PV installed capacity
increase dramatically, strengthening those three weak reinforcing loops.
Chinese government already realized that the importance of PV installed capacity in rural region.
Even though the size of programs was not large enough to attract many investors, it initiated
several rural electrification programs which were for strengthening PV installed capacity. In
section of 4.3 Programs of rural electrification in China, we explained several programs managed
by Chinese government and all programs had limited success. As to the system dynamics
analysis, the government intervention was good starting point but it could not strengthen the
linkage between industry capacity and installed capacity in rural region. The program could not
raise the awareness effectively owing to its small size of projects. Moreover, the program was
aimed for poverty alleviation, but it could not provide the solution except supplying electricity to
the towns. In case of Golden Sun Program the system size increased but still it does not have
solution for the local business creation or income generation through the electrification yet.
Without electricity, it was impossible to grow the local business development, but without
income of rural population, the electricity supplying business is not sustainable.
Besi/worst case scenarioof ruralelectrification in China
Through the system dynamics model, we develop the worst, moderate, and best scenarios. We
assume that all other fuel price and appliances are not changed.
The worst scenario: We assume that awareness of PV technology in rural region is not improved,
and there is limited government intervention through government subsidies or policies for the
rural electrification. Income of rural population is not enough to pay for the PV system, and there
is no decent local distribution channel for the PV system; therefore awareness of people in rural
region is low.
PV markets in developed countries are stable and larger than China domestic market, and the
governments of developed countries have sophisticated incentive system for PV technology so
the needs of PV modules are higher than China. PV module makers in China focus on profit
from exporting the modules to developed countries. PV industry investment loop (R2) and R&D
investment (R3) remain but others are not developed well.
The moderate scenario: In addition to the worst scenario, we assume that government initiates or
develop policies to relieve rural electrification, increasing PV installed capacity in rural region strengthen the linkage between PV industry capacity and PV installed capacity in rural region.
Subsides are designed for encouraging all value chain development in PV industry and support
PV makers take part in domestic market development as well as overseas market. Rural
population in China can have information on the PV technologies for their electricity access, and
the PV distributors and makers can gain experience in developing rural electrification business.
The best scenario: In addition to the moderate scenario, we assume that government develops
policies to encouraging local business development through electrification. Adding to basic
appliances such as TV, cookers, and lightening system, information technologies also are
provided as a package. Computer or mobile phone system can be a good candidate to help rural
population access to the market with their products. Especially as time is critical for the
agricultural or fishing products, market information can be beneficial to local business.
Disposable incomes increase the purchase power of rural population and the needs of more
electricity, leading more PV technology spreads. SHS can move to micro-grid systems and
finally micro-grid systems can link to central grid system. For this, more sophisticated
technology, conversion DC to AC and transmission technologies, should be developed, which
results in enhancing PV industry experiences in all value chain.
Scenario
Sn
o(from
1. Worst
2. Moderate
Key features and constraints
system dynamics graph)
R2 and R3 only. Limited government intervention was battle neck
of developing PV market in rural region.
Ri, R2, R3, and R4. Increasing link between PV industry capacity
and PV installed capacity in rural region. PV and related
technology developed through business expansion.
All reinforcing loops and access to central grid system. Industry
experience in all value chain is improved.
Table 6. Scenario of rural electrification in China
Strategiesfor ruralelectrificationin China
Strategy for the worst case: Bottom up approach
The only market player is PV module makers and the demand of electricity in rural region is
high. Without government incentives or subsides, it is hard for the companies to make enough
revenues and profits to recover investment.
However, to prepare for the overseas market downturn the PV module makers needs other
market as a back-up: domestic market. If the companies have experience in electrification
business with renewable energy sources, it can improve whole business competitiveness in PV
electrification business and technologies, which will help to enter into third world such as Africa;
therefore PV makers in China may want to develop the PV market in rural region along with
minimizing cost.
As there is no incentive system in China, the companies cannot invest aggressively. In worst case
scenario, the companies should focus on strengthening PV installed capacity factors first through
PV product differentiation, small size and inexpensive, SHS, and then move to strengthen the
awareness loops. However, the resources are constrained so the companies consider the cost side
of business. The companies can develop distribution channel for the rural region with
inexpensive PV system such as SHS. By organizing middle vendors which will contact local
distribution channel, the company can sell PV systems, get the data of the size of rural PV
market and can increase the awareness of PV technology in rural region.
Alternatively the PV companies can build assembly facilities in rural region where the
transportation cost can be minimized. The labor cost in rural region is also lower than that in
urban region so the companies can reduce the price of PV system. The company can utilize the
domestic market as a test place for the electrification with PV technologies. Gathering data such
as efficiency information as to the environment conditions, costs and effectiveness test, off-grid
system development, building incorporating PV module, etc will be beneficial for the technology
development.
Once the installed capacity in rural region is increased, the demand of PV modules and market
attractiveness will be able to be enhanced. Especially the facilities in rural region contribute to
raise the income of rural population, leading the demand increase. Through this process, all
reinforcing loops can be strengthened. However, the weakness of the bottom-up approach is that
it will take much time to develop PV market in rural region, and generally, longer time in
process means high risk in business development. This risk can be reduced through government
intervention.
Business
Product differentiation
Distribution channel
Cost reduction
Small scale test
Figure 23. Business strategy without government intervention
Strategy for the moderate case: Top-down approach
As the company can get subsidies or incentive from government, the risk of business can be
reduced dramatically. The companies will be able to take part in various programs initiated by
central government or local governments. In here, the major players are the PV companies and
government.
Government strategy: Chinese government can control the rural PV market development through
incentive or subsidies scheme. However, the size of incentives should be designed not to distort
price of electricity. The incentive system also should be planned to encourage the companies to
develop technology which can reduce the price of module and price of electricity from PV
module. The major focus will be increase the PV market potential. For this, the government
should develop policies to invigorate local business using electricity and information
technologies.
Business strategy: the companies should focus on cost reduction through R&D investment.
Government incentive or subsidies will be so attractive for both overseas and domestic
companies that without cost competitiveness it is hard to win the bid. The scope of business
should be not only PV module manufacturing but also electricity supply business through PV
technologies, especially off-grid system. Once they accumulate the experience in PV business,
they can expand business region to third world such as Africa.
Government and business strategy will reduce the time of implementation of PV into rural
market and companies can reduce the risk dramatically. Local business can increase the income
of rural population. Through the strategies all reinforcing loops can be strengthened.
The disadvantage of this strategy is that if companies are interested in only selling the PV
products, the quality of service and product and technologies cannot be improved. If PV
companies in developed countries which have better technologies and capital, the local PV
companies can lose the competitiveness in domestic market, which will be another concerns for
China.
Government
Set the rule of business
Set subsidies or incentives
Assist local business
Efficiency
Business
Cost competitiveness
Expand business scope
Figure 24. Government leading PV market development model
Strategy for the best case: Top-down approach and FIT development
Adding to the strategy for the moderate case, the companies also develop grid connection
technologies and policy, FIT. Incentives for off-grid system is usually cash grant or cash support
to system installers, but once the off-grid connect to the central grid, the government can apply
FIT scheme. It is well known that FIT is the most successful tool for the renewable energy
development. However, as to the system dynamics analysis, FIT can be also balancing factors to
renewable energy development. If the FIT is not well designed, it can distort electricity market.
Government
Set the rule of business
Set subsidies or incentives
Assist local business
aximiz
value ch
Business
Cost competitiveness
Expand business scope
Feed-in-tariff
Figure 25. Government leading PV market development and FIT
9.
Conclusion
Energy use, especially electricity, in China is rapidly growing, but China faced two challenges in
developing new energy supply: global climate changes and unbalanced economic development
between urban and rural regions. China's rural electrification has been so successful that its
electricity access rate has reached almost 99%, but its operation is still mediocre; many rural
populations cannot rely on grid extension owing to its lack of accessibility and poor stability.
The inefficiency despite of electricity accessibility in rural regions in China is caused by a poor
performance in the power sector and a lack of appropriate operation and maintenance, limited
capital investment from private sectors and geographical hindrances for grid extension.
Considering its geographical limitation, electricity generation using renewable energy source
will be useful. PVs can be installed in various sizes and can be applicable to individual houses or
towns. Sunlight, which is source of energy for PV is sufficient in rural regions in China. After
installing off-grid system, it is possible that excess electricity is connected to grid system. Offgrid PV system can provide enough electricity for the basic appliances in rural households. The
weakness of PV technology, intermittency, can be solved by attaching battery system or hybrid
system with other type of renewable technologies. Having independent power producers in
townships is also a good solution for rural electrification.
Traditionally, China's strength is in the manufacturing industry and the PV module industry in
China is also competitive in price. To sustain its competitiveness, the PV industry in China needs
a new market for their growth and the domestic market will be the best place. Until now, it
depended on overseas markets, such as Germany and Spain where the Chinese PV makers have
make sufficient revenue. However during the financial crisis, the export of PV modules to these
countries faced a decrease in demand owing to budget cuts of government. The balance between
exports and domestic use can be beneficial to the PV manufacturers in China. Steady growing
PV business can help keep investments in R&D for the PV technology which will help the PV
companies in China reduce the price of electricity with the PVs.
Using the value chain analysis, Porter's Diamond model, and system dynamics analysis, we can
find key success and failure factors. We conclude that low income of rural population is a barrier
to implement PV system and without government grant or subsidies electrification models with
PV cannot be sustainable in China. However, the PV module business in China could achieve the
cost competitiveness using low labor cost and the scale of business, which will be the key
success factor for the rural electrification.
In our analysis, we can see that business strategy of PV rural electrification is subordinated to
government policies. Considering the PV industry in China and its position in the value chain,
the Chinese government can provide the starting point of PV electrification for the rural regions
in China. Without government subsidies or incentive system, the rural electrification using PV
technologies will consume a lot time, increasing the risk of business.
Government policies can be divided by two layers, policies for business development and for
income generation in rural region. The former is for increasing the electricity access of rural
population with low cost. It also provides stability of PV manufacturing business in China by
diversifying markets. The latter is for growth of PV domestic market by invigorating demandside of electricity. To realize both of them, Chinese government should lead cooperation among
PV manufacturers, IT companies, local government, etc. Business strategy can be varied to the
level of government intervention. If government intervention is low, the business strategy will be
product differentiation; the PV module companies produce small and cheap PV products in order
that rural people or household can purchase the PV device within their low income. If
government intervention is high - providing cash grant or subsides, business strategy moves to
achieve cost competitiveness through technology innovation. Scope of business should be
diversified as to the government invention level. If government strongly supports the PV rural
electrification with incentive scheme, the PV manufacturers can develop electrification business
by managing off-grid type PV plant.
As mentioned, the income levels of rural people in China is quite low so government's subsidies
or PV programs will be critical for the PV industry to implement the electrification business in
the domestic market. The access to electricity does not necessary mean increasing the quality of
life and the standard of living in rural areas. Regarding our system dynamics model, the most
effective way to implement the PV electrification for rural regions is stimulating the demandside through local business and invigorating the entrepreneurial activities. Assume that the main
business of rural regions is primary industry such as agricultural industry and fisheries;
information access to the market will play a critical role. In general, as the primary products are
easily stale, the market information for the sale is important. Excess production in rural regions
can be an income source for the rural population if it can be stored or sold promptly. Therefore,
adding to the electrification, internet or mobile network will be essential for the rural business
development. Nowadays, in many developing countries, the cell phone use becomes common
which will provide adequate information to the rural residents.
We reviewed the PV industry and its potential in rural regions in China. Considering all factors the PV industry in the world and China, socio-economic changes, environmental issues,
unbalanced income distribution in rural and urban regions, and geographical problems, the PV
technology is one of the best solution for the rural electrification in China. We also intend to
suggest that electrification and its usage for developing local businesses is not only sufficient to
relieve poverty, eradication and to attract necessary investment in the long-term perspective in
China, but also sustainable without distorting the electricity market.
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