Diffusion of solar water heaters in regional China: Economic feasibility and policy effectiveness evaluation
Introduction
Solar water heaters (SWHs) are a mature technology for harnessing renewable energy compared with other solar energy technologies, such as solar space heating and cooling systems and solar PV power generation (Zhao and Zhao, 2009, Han et al., 2010). With the commercialization of SWHs over the past three decades, China has become the largest country using solar thermal power in domestic water heating. By the end of 2010, the country had installed 168 million m2 (collector area) of SWHs, which accounted for more than 60% of SWHs installed in the world. In China, the average collector area of SWHs per capita was only 0.109 m2 in 2009, much less than 0.155 m2 in Germany, 0.330 m2 in Australia, 0.361 m2 in Greece, 0.514 m2 in Austria and 1.073 m2 in Cyprus (Mauthner and Weiss, 2012). There is also a wide gap within China. For example, the installation of SWHs per capita amounted to 0.072 m2 in 2009 in rural China, less than half of that in urban areas.1 With rich solar radiation and increasing demand for hot water in China, the country still has great potential for further diffusion of SWHs, which is especially important against the backdrop of environmental pollution and energy deficits. China has set an ambitious target for renewable energy. The National Development and Reform Commission (NDRC) published the country’s renewable energy development goal in 2007. The ratio of renewable energy utilization to total energy consumption is supposed to reach 15% by 2020 (NDRC, 2007). However, the ratio only amounted to 8.9% by 2010, failing to reach the target of 10% for the year (NDRC, 2012a). The massive application of SWHs will help the country to realize the national target for renewable energy development.
Although the technical feasibility of SWHs has long been established, the financial feasibility at the regional level must be carefully examined, especially in large countries experiencing various natural and socio-economic conditions (Chandrasekar and Kandpal, 2004). For example, Chandrasekar and Kandpal (2004) calculated the annual costs of SWHs by discounting future expected costs in different regions of India; Gillingham (2009) evaluated the financial attractiveness of SWHs in 16 regions of New Zealand using the internal rate of return (IRR) and payback period; and Cassard et al. (2011) employed break-even costs to analyze the economic performance of SWHs in 19 states in the United States.
Although China is rich in solar energy, its solar resources vary greatly among regions.2 Other factors affecting the diffusion of SWHs also generally show gaps among provinces, for instance, income level and the price of alternative energies (Ma et al., 2012). Empirical studies on the economic performance of SWHs in China remain sporadic. To date, two city-level case studies, on Dezhou (Li et al., 2011) and Jinan (Zhao et al., 2008), and a provincial-level case study, on Zhejiang (Han et al., 2010), have been conducted. Although these studies provide rich empirical insights into case studies of SWH application in the country, systemic level studies remain to be performed to form a holistic picture of SWHs in China and reveal regional variation. Our study aims to bridge this gap by conducting quantitative studies that include 27 provincial capital cities3 in China. First, we construct cost models to evaluate the average costs of SWHs within their life cycle. Cost-effectiveness analysis is conducted to illustrate the cost advantage in achieving the given renewable energy objective at a macro level. Then, at a consumer level, we compare the costs of SWHs with their alternative, electric water heaters, and calculate the internal rate of return (IRR) and payback period to reveal the financial attractiveness of SWHs in different regions. The effects are also simulated under different subsidy rates because incentive programs are popular worldwide in promoting the dissemination of SWHs.
In practice, some efforts have been made in China to promote the diffusion of SWHs in recent years. By 2009, China had added SWH products to the subsidy list under a comprehensive incentive program titled “Home Appliances Going to the Countryside Program” (HAGCP). This incentive policy is the only one that exists at the national level, and only targets rural China. Following economic feasibility analysis, we empirically evaluate the effectiveness of the subsidy policy to shed light on future policy design and improvement. Rather than using trend analysis to compare previously installed SWHs with those installed under incentive programs (Chang et al., 2006, Chang et al., 2011, Roulleau and Lloyd, 2008), this paper presents a new approach by establishing a panel data model based on Chinese provincial data to empirically test whether the policy effect is significant. To identify the net effect of the incentive program, the following main control variables are incorporated: SWH stock, net income, population migration and average family size. A series of statistical tests are run to select the proper estimation method. After the empirical analysis, barriers to and solutions for the subsidy policy problem are carefully examined.
We find that although the costs of SWHs per unit energy saving show great variability among Chinese regions, SWHs have general cost advantages over other promising renewable energies, indicating that SWH usage is cost effective in fulfilling the country’s renewable energy target. Through a life-cycle assessment, the costs of SWHs are also determined to be lower than those of EWHs in most regions of China, whereas the financial attractiveness for consumers is proved to be limited and will be undermined because of unmet hot water needs4 and much higher up-front costs. Therefore, an incentive program is required to improve financial feasibility at the consumer level. After estimating the panel data model, we conclude that the subsidy of 13% under the HAGCP failed to accelerate the diffusion of SWHs in rural China. We propose a new specific incentive program targeting SWHs as a means of renewable energy application in rural areas, with the subsidy rates ranging from 9 to 50% according to China’s four large regions.
The rest of the paper is organized as follows. Section 2 estimates the economic feasibility of SWHs in 27 Chinese provincial capital cities by cost-effectiveness analysis as well as financial attractiveness analysis. Section 3 conducts a policy-effectiveness evaluation of rural China by estimating a panel data model and then explains the barriers to and solutions for the subsidy policy. Section 4 concludes the paper, provides policy implications and identifies some remaining issues.
Section snippets
Economic feasibility of SWHs in China
Economic analysis is carried out in this section first to prove that the diffusion of SWHs is the least expensive means, compared with other promising renewable energies, for fulfilling China’s renewable energy target. Then, through a cost comparison with a non-solar alternative (electric water heater) and calculation of the internal rate of return and payback period of SWH usage in 27 Chinese capital cities, we attempt to determine the financial attractiveness of SWHs at the consumer level.
Policy effectiveness evaluation of rural China
Drawing lessons from previous policy is a direct way to shed light on future improvement. In 2009, China issued a subsidy policy for SWH application in rural China under the “Home Appliances Going to the Countryside Program” (HAGCP), which is the only national level policy stimulating the deployment of SWHs.22
Conclusion and implications
With great interest in the development of renewable energies to replace the excessive consumption of fossil fuels and to meet the long-run national goals for renewable energies and for greenhouse gas emission reduction, understanding the cost effectiveness as well as financial attractiveness of SWHs in different regions of China is a critical task for policymakers. Drawing some lessons from previous policy will no doubt shed light on future policy adjustment or reorganization.
Through a
Acknowledgements
We are grateful to the two anonymous reviewers for their helpful comments and suggestions. The first author would like to thank China Scholarship Council for providing the fellowship (No. 201306360056) making this research possible. The authors also thank Qianqian Du, Xuan Zhu and Guobin Fang for their helpful comments. Anyway, all remaining errors are our own.
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