The role of feed-in tariff in the curtailment of wind power in China

Abstract

Abstract While China's wind power initiative has experienced rapid growth, serious curtailment issues persist. Though some studies have investigated this matter, we explain this phenomenon from the novel perspective of excess capacity. We first set up a theoretical model to explore the mechanism behind excess investment and find that the ‘sticky’ feed-in tariff (FIT) and declining costs of wind power generate high mark-up for wind power investors, leading to a higher probability of excessive investment. The theoretical prediction is empirically tested with a probit and tobit model using provincial-level data between 2009 and 2016. The estimation results show that a 0.1 yuan increase in the mark-up leads to a 2%–3% increase in the rate of curtailed wind power. Based on the estimation results, we simulate several scenarios to assess quantitatively how an improved policy design could have alleviated the curtailment issue. Simply increasing the frequency of the FIT rate adjustment while maintaining the same subsidy reduction level between 2009 and 2016 could have reduced the curtailed wind power by 23 to 27 billion kwh, accounting for 15%–17% of actual curtailed wind power. If the policy were better designed to reflect the declining trend of wind power costs more accurately, the curtailment rates could have been further reduced by 2.81%, corresponding to a reduction in wasted wind energy of >43 billion kwh (or 28% of actual curtailment). Although accepting curtailment for a certain period could help to accelerate renewable energy deployment, our analysis shows that the FIT policy design could have been improved to reduce welfare loss. These findings can not only assist the Chinese government in framing effective policies, but also may be applied to other emerging technologies or industries that require subsidy support.