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LEGAL: Legal Overview of Foreign Investment in China’s Wind Power Sector
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China’s renewable energy sector has undergone significant development in the last ten years, in particular with regards to wind power energy. In fact, China is one of the three giants worldwide in terms of the total wind power installed capacity, together with the United States and Germany. Although encountering a decrease of usage in 2012, wind power accounts for the third most common power source in China and is identified as a very important alternative energy in the country. As per the statistics indicated in the Twelfth Five-year Plan of Wind Power Development issued by the National Energy Bureau of China (“NEB”) on 7 July, 2012 (“Twelfth Five-year Plan”), up to the end of year 2010, the national electricity generating capability of wind power has reached 50 billion KW, accounting for 1.2% of total generating capability. Turning to the development of the next decade, the NEB expects a significant growth of wind power development, which may be illustrated in the following table of wind power development target stated in the Twelfth Five-year Plan:
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The aforementioned development target has shown the intention of the Chinese government to enhance its promotion of the wind power sector. There is no doubt that the Chinese production of wind power will be in high demand for both domestic and overseas investors, including but not limited to wind power farms, grid operation, manufacturing and trading of wind power equipment, etc. For the purpose of this article, we especially address the investment incentives granted by Chinese laws and regulations and the noteworthy legal issues for foreign investment in wind power farms in China.
 
1. Investment incentives
 
Under the current legislation system, investors may find various incentives to establish themselves in the wind power sector in China, both from legal and financial perspectives: 
 
•Encouraged Status of Wind Power Farms 
The 2011 versions of the Catalogue for Industrial Structure Adjustment Guidance and the Foreign Investment Guidance Catalogue continue to provide a generally favourable framework for investment in construction and the operation of wind power farms both for domestic and foreign investors. 
 
Being an investment project with encouraged status, the approval of such projects with foreign investment may be carried out before the relevant authorities of lower levels, which usually means less time-consuming and relatively simpler formality requirements.
 
•Grid Connections and Purchase Guarantee Policy
Upon completion of the wind power farm, grid connections and electricity sale may be the main concerns of investors.
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As a general rule, under the Chinese Electricity Law, promulgated in 1995, as well as re-started in Chinese Renewable Energy Law published in 2005 and amended on 26 December, 2009 (“Renewable Energy Law”), the state encourages the wind power generation company to connect to the grid, and the grid operator is obligated to fully purchase the electricity (provided that the technical standards are satisfied) generated by wind power farms. In that case, the connection agreement shall be executed, under which, the electricity will be dispatched by the grid.
 
To realise the connection, detailed procedures shall be handled by the generation company and the grid operator, with the relevant government authorities, such as local counterparts of the National Development and Reform Committee (“NDRC”) and the local electricity supervision authorities are also involved. But the price is not free. The pricing of electricity (generated from wind power sold by wind power farm to grid operators) is subject to the benchmark published by the NDRC in its Circular concerning Improving the Policies for On-Grid Wind Power Prices on 20 July, 2009, which may be referred as below:
•Financial Incentives
Other than the above, in order to stimulate investment in wind power projects, Chinese authorities provide various financial incentives to the enterprises at both national and local levels. We hereby introduce the following financial incentives from the national perspective.
 
•Government Subsidy
In accordance with the Interim Administrative Measures of Special Funds for Renewable Energy Development issued by the State Council in 2006, subject to the examination of local NDRC and local financial bureau, the enterprise invested in wind power projects may apply for the following subsidies:
 
•Less than 3% interest subsidy with the term of 1-3 years for its bank loan, if the project development is listed in the Guidance Catalogue of Renewable Energy Development issued by NDRC on 29 November, 2005; 
 
•Free fund subsidy amounting to the contribution of investors, if the project is invested for common welfare with low profit.
 
•Enterprise Income Tax Preferences 
Under Chinese Enterprise Income Tax Law, generally, enterprises in China will be taxed for Enterprise Income Tax (“EIT”) at a statutory rate of 25% on the profits obtained from rendering services and sales of products. 
For wind power industry, according to Caishui [2008] No. 46 jointly issued by the Ministry of Finance and State Administration of Taxation on 23 September, 2008, for new projects after 1 January, 2008, subject to the examination of the local tax authority, the arising revenues shall be exempted from EIT for the first three years as of the taxable year to which the first revenue arising from production or operation is attributable, and shall be taxed at the reduced half rate from the fourth to the sixth years.
 
•Value Added Tax Preferences
According to the relevant Chinese tax rules, Value Added Tax (“VAT”) is levied on the sales of goods (including electricity). Assuming that the enterprise is qualified as a general VAT payer, a general rate of 17% will be imposed on the sales of goods (including electricity), with recovery of its input VAT borne on supplies, purchases and imports by means of deducting it from the output VAT deriving from its sales. 
Pursuant to Caishui [2008] No.156 jointly issued by the Ministry of Finance and State Administration of Taxation on 1 July, 2008, 50% VAT payable for sales of electricity generated from wind power can be immediately refunded after the enterprises perform their VAT payment obligations.
 
In addition to the above financial incentives nationwide, appealing local incentives offered by various local governments could also be further explored. 
 
2. Legal procedures for foreign investment in wind power projects in China
 
Along with the Renewable Energy Law, the NEB issued the Interim Measures on the Administration of Wind Power Development and Construction in 2011 (“Wind Power Interim Measures”), which provides detailed guidance on the legal procedures and requirements to approve the wind power projects in China. 
 
According to the Wind Power Interim Measures and other applicable laws and regulations, investment in wind power projects in China involves examination and pre-approvals by various authorities at state or provincial levels, with regard to the environmental impact, project location, land use, etc. 
 
Please find below a flowchart providing the main approval procedures applicable to wind power farms for general reference:
 
It is worth noting that, apart from the above pre-approvals to be applied one by one, the wind power investors shall also obtain consent from the local grid operator on the grid connection, which will also be one of the premises for the relevant NDRC to approve the wind power project. 
 
Based on our previous experience, it may take around one year to complete all the above procedures, provided that the requirements of authorities can be duly satisfied. After the above approvals on wind power projects issued by competent NDRC, foreign investors may launch the subsequent work by duly following applicable approvals and registrations, e.g. the incorporation of a foreign invested company, purchasing of land use rights for the project, construction of the project, etc. In addition, during the operation, an Electric Power Business Permit is mandatorily required to perform the electric power business operations in China.
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3. Noteworthy issues
 
Before launching their investments into the wind power sector in China, foreign investors should pay attention to the following issues, which have substantial impact on the final result of the investments of wind power project in China. 
 
•Annual Wind Power Development Plans
According to the Wind Power Interim Measures, the NEB is responsible for the national planning of wind power construction scale and distribution, on the basis of wind energy resource assessment, market demand, land and ocean utilisation, environmental protection, etc. 
 
•Grid Connection 
Theoretically, as mentioned herein above, the electricity grid operators are obliged to purchase the electricity outcomes that are covered by their grid connection. However, in practice, the implementation of such requirements has encountered certain obstacles. For example, although there are now a lot of wind farms in China, many of them are not yet connected to the power grid. This is partly due to the fact that the grid connection plan is not as binding as a law and there is no corresponding penalty for not achieving the goals. Therefore, the grid operators may lack motivation to set up their network to connect all renewable energy plants.
 
To solve this problem, on one hand, as mentioned above, the NEB requires that local grid connection conditions shall be one important consideration during listing new wind power projects into their annual development plans. On the other hand, the NEB urges grid operators to develop their grid construction work and shall provide connection services to wind power projects in priority. However, the actual implementation of grid operators may be subject to local practices and may not be fully controlled by the NEB. Per the Renewable Energy Law, it should be noted that the obligation of grid operators to accept the grid connection for wind farm power is not unconditional, and the wind farm operators shall make sure that the power generated is in compliance with technical standards for connection and shall cooperate with the grid companies to ensure the safety of the grid. 
 
Finally, with various national and local incentives, wind power development has become a promising sector in China for foreign investors. However, before implementation, other than technical research, we advise foreign investors to communicate with local authorities in advance in order to check the investment potentiality from the perspective of government planning and grid connection status. We also advise seeking legal opinion in order to ensure the wind power project is legally and smoothly established and operated.
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By Manuel Torres & Margeret Si
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