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9 Hot Topics in Carbon Reduction and the Energy Industry in China in 2017, Part 2

The year 2017 was an impressive one for China in its effort to achieve economic growth while reducing carbon emissions. Based on scenario analysis in the Reinventing Fire: China report launched by Rocky Mountain Institute in 2016, China can do this by decreasing primary energy demand and increasing the use of nonfossil fuel energy on its pathway to 2050. RMI’s China program is helping China reach this goal by improving efficiency on the demand side and optimizing energy structure on the supply side. In part one we highlighted key progress that China has made in early peaking cities, transportation, and buildings. Below we continue with China’s efforts in air pollution control, renewable energy promotion, power market reform, and distributed power. 

Air Pollution Control: Clean Heating Scheme

Ten ministries and commissions, including the National Development and Reform Commission (NDRC), the National Energy Administration (NEA), and the Ministry of Housing and Urban-Rural Development, jointly released a plan for clean heating in December 2017. According to the plan, 50 percent of all heating systems in North China will be cleaner by 2019, replacing 74 million tons of decentralized burning coal (including coal used in inefficient small boilers). By 2021, North China’s cleaner heating rate will be further increased to 70 percent—replacing 150 million tons of coal—and the average overall energy consumption of heating systems will be reduced to less than 15 kg of coal per square meter. Due to this, energy-conserving residential building stock will reach 80 percent of total volume in urban areas of North China. The plan clearly defines that clean heating involves the heat source, heat network, and end users. It also provides policy support in mechanical and financial aspects of the development of clean heating.

Electricity: The Electricity Environmental Attribute Market

China launched its voluntary trading system of green electricity certificates (GECs)—the first market in China to separate the environmental attribute of electric power for sale—in July 2017. Customers can offset their power consumption by purchasing GECs and the corresponding generation will not get the feed-in-tariff from the government. Currently, GECs in China are a price premium—any purchase is added to a customer’s utility bill. While many companies and individuals actively purchase GECs, the transaction volume of the market is limited, accounting for only 0.1 percent of the total certificates issued. In April, the National Energy Administration set a renewable portfolio standard target for each province for 2020, specifying how much power must be supplied by non-hydro/nonfossil power, and the specific assessment methods are expected to be announced in the first half of 2018. Whether GECs will be considered as a way to fulfill the green power consumption obligation is still to be decided.

In December 2017, NDRC released the Plan for the Establishment of National Carbon Credit Trading Market (Power Industry), marking the official launch of China’s national carbon market. The plan states that power generation companies or other commercial organizations with annual emissions of over 26,000 tons of CO2 equivalent in the power industry can participate. Captive power plants with the same emissions in other industries are also considered participating entities. Although the plan focuses only on the power industry, more than 1,700 power generation companies were involved with a combined 3 billion tons of carbon emissions—46 percent of China’s total carbon emissions—making China’s carbon market the biggest in the world. Although only one industry is covered in this initiative and the effect on the overall control of total carbon emission is limited, it’s still an important indication of the green attribute of clean power and will lay a solid foundation for the launch of carbon markets in other industries. 

Power Market Reform: Bilateral Contract Volume and Spot Market Pilots

Since the 2015 release of Opinions on Further Deepening the Structural Reform of the Power Industry, specific guidelines and implementation plans have been issued one by one, indicating China’s determination to achieve nationwide power market reform. Almost all provinces have completed the reform of a transmission and distribution tariff, reducing the grid company’s revenue by 48 billion RMB by the end of 2017. In the past, all generation hours were assigned to generators by the government at a set price and customers could buy power only from a grid company. China’s first step to opening the market is to allow customers to directly purchase power from generators by signing a bilateral contract. This successfully saves utility costs for end users and helps power generators better assess their generation costs and get familiar with a market bidding process. The current bilateral transactions focus mainly on coal power, while some renewables are allowed to participate in provinces with high curtailment rates. The policy guidance indicates that renewable participation will gradually open in the future, providing regulatory feasibility for corporate renewable procurement.

NDRC and NEA also jointly released the Notice on the Establishment of Power Spot Market Pilot in August 2017, affirming eight provinces and regions as the first spot market pilots, to be implemented in early 2019. Although China could refer to existing market mechanisms and rules in other countries, the power mix and dispatch challenge varies among different pilot provinces. To design the rules and implement such a big change of market regulation in only one year will be challenging. Some provinces have already released their initial pilot plans and timelines, but they still need to determine the specific market rules. RMI China’s power team is helping pilot provinces smoothly design the market rules in the transition period and explore solutions that can be replicated in other provinces.

Distributed Power: A Decentralized Power Supply Mechanism

China’s 13th Five-Year Plan for the power sector states that installed capacity of nonfossil power should reach 770 million kW and nonfossil power generation should account for 31 percent of total generation by 2020. Since most of the country’s renewables capacity is located in North China while the load center is in the east and south of China, distributed energy development and local consumption of wind and solar will become the new trend. In November 2017, NDRC and NEA issued the Notice on Distributed Power Generation Market Trading Pilot, which enables distributed energy asset owners to sell power to their neighbors at the distribution level. The policy specifies three transaction formats, including a direct transaction between generator and users with a wheeling payment to the grid, trading through the grid company and sharing the profit, or selling to the grid with a benchmark price. In the first half of 2018, provincial regulators will be responsible for identifying the pilot regions, establishing the transaction platform, and developing the transmission fee standard and detailed rules. These pilots will be officially initiated no later than July. Since the wheeling fee at the distribution level should be cheaper than the general transmission and distribution tariff, generators should be able to increase their profit while customers get a lower price, which would further drive the development of distributed renewable generation as well as an incremental grid.

These advancements in air pollution control, renewable energy promotion, power market reform, and distributed power are helping China reduce carbon emissions while continuing its economic growth.

 

Image courtesy of iStock.