New Regulations Promote Cogeneration Plants

In Addition

One significant addition to the 1998 Regulations is found in Article 5 of the Cogen Regulations that stipulates the proper approval authorities for cogen projects. According to the Cogen Regulations, prior to the issuing of new State Council regulations on the administration of fixed assets investment, the approval of cogeneration plants shall be implemented as follows:

a) Cogeneration construction projects with a single unit capacity of 25 MW or higher and gas-steam combined cycle plants with a total capacity of 25 MW or above shall be submitted to the SDPC for approval.

b) Cogeneration construction projects with a single unit capacity of less than 25 MW and gas-steam combined cycle plants with a total capacity of less than 25 MW may be approved at the provincial or independent municipality level, and reported to the SDPC for the file.

c) Cogeneration renovation and conversion projects with a total investment of Rmb50 million are to be submitted to the SETC for approval; those with a lesser investment can be approved by the relevant provincial Economic and Trade Commission, and reported to the SETC for the file.

d) Foreign invested cogeneration basic construction projects with a construction cost of more than US$30 million must be approved by the SDPC; technical renovation projects are to be approved by the SETC.

With respect to foreign invested cogeneration projects, it should be noted that the drafting of the Cogen Regulations leaves it somewhat uncertain as to whether the US$30 million threshold for national level approval applies to technical renovation projects. In other words, it is not clear whether SETC approval is required for all foreign-invested technical renovation projects, or simply those with a capital investment of over US$30 million. Thus, while a US$25 million greenfield cogen project may be approved by the provincial level planning commission, there is some question as to whether the same is true for a US$25 million technical renovation project. However, the intent of the Cogen Regulations appears to be that the requirements run parallel, with national approval being required for both greenfield and renovation projects above the US$30 million threshold.

Grids

In order to encourage the use of cogeneration, the Cogen Regulations provide that new cogen plants and the new portions of expanded cogen plants that meet certain performance ratios set out in Article 7 shall be exempt from paying a grid connection fee. Moreover, the grid administration authorities are required to permit connection to the grid. In particular, during the first year of production, cogen plants should enter into grid connection contracts with its grid administration authority in accordance with the annual average electricity and heat ratio and comprehensive efficiency rate confirmed in its approved feasibility study report. Further, on the condition that the cogen plant guarantees its heat supply commitments and it is operating safety, it may also participate in peaking.

Fair and Reasonable Prices

Another difference from the 1998 Regulations is found in Article 21 of the Cogen Regulations which stipulates that fair and reasonable prices for heat and electricity produced by cogen plants should be determined by each level of the price administration department within the scope of its authority and in accordance with the requirements of the PRC Price Control Regulations and the PRC Electric Power Law (中华人民共和国电力法). The 1998 Regulations, on the other hand, had provided that heat and electricity prices should be determined by market principles and reported to the provincial price administration authorities for verification. Given the on-going reforms in the power sector, particularly with respect to pricing issues, however, it is not clear whether this change will have significant long-term impact in practice.

Tarrant M. Mahony,
Freshfields Bruckhaus Deringer,
Beijing