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China’s Move Away from Voluntary Green Certificates: Implications for Corporate Renewable Procurement

On March 23, 2018, China’s National Energy Administration (NEA) released for comment a draft of a groundbreaking national policy, the Renewable Portfolio Standard and Assessment Methods (the “draft policy”), that would create a market for renewable energy certificates (RECs). The new REC market is a positive signal and could be very exciting for corporate renewable energy procurement in China. However, a series of market uncertainties need to be resolved for more scalable and economic procurement mechanisms to emerge, and corporate buyers will still need to choose the mechanisms that best suit their needs. Rocky Mountain Institute’s Business Renewables Center China closely follows the market and presents key insights below.

The draft policy establishes:

  • A mandatory requirement to purchase a minimum amount of renewable energy, also known as a renewable portfolio standard (RPS), across all provinces; and
  • A new renewable energy certificate system, which will be used to track renewable energy generation used to meet RPS targets. It should be noted that the proposed REC system does not interrupt the existing voluntary system.

While the draft policy could enable new renewable energy capacity, the RPS has a strong focus on reducing curtailment of existing renewable energy facilities. The RPS formula is based on existing and planned renewable capacity, and importantly includes interprovincial renewable transmission capacity. This is a strong signal that could change the business-as-usual model in which high levels of curtailment exist, and could move renewable energy closer to its potential.

The draft policy states the following entities will be regulated under the new RPS requirements:

  • Provincial grid companies
  • Distribution companies and retail electricity companies, including incremental distribution network companies
  • Industrial users with captive power plants
  • Corporate and industrial users who undertake bilateral trading for their electricity supply

The period to provide comments and feedback closed on March 30, 2018. Although no indication of an implementation timetable has been provided, we await the results.

These Renewable Portfolio Standards Have Teeth

The draft policy strongly emphasizes penalty mechanisms for all provincial grid companies and regulated corporate and industrial users not meeting RPS requirements.

For commercial and industrial (C&I) users that do not meet RPS requirements, the NEA can directly impact a company’s operations by reducing the amount of electricity the company can procure from the market. Alternatively, the NEA can remove a company’s qualification to participate in the market, likely forcing the company to procure electricity from the grid at a fixed, higher price.

There is, however, a reprieve, as C&I buyers can purchase replacement certificates to make up any shortfall. Replacement certificates will be issued by provincial grid companies, which also set the replacement certificate price. Experience from other similarly structured markets indicates the replacement certificate price will act as a cap on REC prices.

Notably, replacement certificates are not related to renewable projects, but act as a mechanism to incent regulated market actors.

Tracking Environmental Attributes

Under the draft policy, RECs are generated and transferred from a renewable energy project owner to the procurement entity on a monthly basis. From January to February, buyers will be able to trade their RECs, but only once.

The draft policy’s REC system development comes eight months after the establishment of the Green Electricity Certificate (GEC) system, which was created to provide an alternative route to subsidy revenue for renewable developers.

Unlike the GEC system, the draft policy’s REC system does not impair a project owner’s ability to receive government subsidy payments for renewable energy. So, if a renewable energy project owner placed generated GECs (being the environmental attributes) on the market and a buyer procured those GECs, then the project owner would not be eligible to receive the government subsidy payment for renewable energy. By contrast, the REC system tracks and records certificate retirements to meet compliance needs, but does not interfere with government payments to renewable energy project owners.

Table 1: Comparison among GECs, RECs, and Replacement Certificates

GECs RECs Replacement Certificates
Status Existing New through the
draft policy
New through the
draft policy
Purpose To enable voluntary
market transactions
To enable RPS
compliance tracking
An option for regulated
market actors to
overcome RPS target
shortfalls
Relationship
with
government
subsidy payments
Replaces government
subsidy payment if
sold
No relation No relation
Price Government subsidy
payment rate acts as a
cap
Price close to
Government payment rates
Replacement certificate
price acts as a cap
Set by provincial grid
companies, annually in
advance, with approval
from the NEA
Attractiveness
to corporate
buyers
Low: Is costly and
lacks physical linkage
to a renewable energy
asset
High (expected):
Market-based price
mechanism
Low: Acts as an
enforcement mechanism

 

Table 2: Implications of the Draft Policy for Corporate Buyers

Buyer Challenge GECs
Lack of tracking system The draft policy establishes a standard tracking system to claim all
types of renewable consumption in China (e.g., direct investment,
on-site projects, or off-site projects). Theoretically, it enables
standards to track and claim verified renewable energy
consumption, in a unified national system. Further detailed
information regarding the REC’s issuance, transaction, and
assessment will be included in forthcoming policies.
Inability to transact Under current policy, C&I users under the mandate still purchase
their RPS requirement from their grid company. Whether they will
be allowed to directly procure renewable energy and RECs from
generators is still uncertain. By including certain corporate buyers
under the RPS mandates, the draft policy adds pressure for
intraprovincial transactions, because without workable transaction
mechanisms, RPS targets would be impossible to meet. Moreover,
it’s not clear whether market actors will be allowed to buy
incremental RECs above their obligation. The draft policy’s
wording indicates there is “more to come” on policies/mechanisms
for procurement by corporate buyers.
Lack of additionality The GEC system provides traceability to specific projects; however, it limits additionality (as projects are already financed before producing GECs). The RPS mandates (using RECs to track compliance) are based on supply/demand. Should a corporate buyer transact with a new renewable project, the associated RECs would not be counted toward a province’s RPS compliance, forcing the purchase of more capacity from other provinces or causing additional capacity to be built elsewhere. Whether purchasing those otherwise curtailed renewables from other provinces will be counted as additionality is still awaiting further discussion.
Still in Progress: REC System Uncertainties

The draft policy is being developed following stakeholder comments. It is expected the overall trend will remain, but as we know, the devil is always in the details, and the draft policy itself is unclear on three key areas:

  • Bundled or unbundled: the policy indicates that the RECs are automatically transferred to buyers as they pay off the electricity bills of renewables. Yet it also mentions that, from January to February, compliance buyer entities will be able to trade RECs both among themselves and with generators. Therefore, it remains unclear whether and how much renewable electricity will be required to be bundled with RECs.
  • Provincial or national: the involvement of the Beijing Transaction Center and the Guangzhou Transaction Center sends a signal that the new REC market will involve interprovincial transactions. It’s unclear, however, whether the interprovincial market will be open to C&I users, or only to grid companies as is the case now.
  • Price and use of replacement certificates: the current policy leaves provincial grid companies to set the price of replacement certificates, but it doesn’t provide guidance on the pricing mechanism. Each grid company will likely set different prices for its own provincial replacement certificates, and the replacement certificate prices serve as price caps for RECs. It can be expected that the provincial grid company would sell its RECs as close to the price of replacement certificates as possible. This is also not stated in the policy and so leaves uncertainty as to how additional revenues from replacement certificates should be used by grid companies to support renewables directly.

The new REC market shows much promise and demonstrates the government’s determination to strengthen and activate the renewable market, which is beneficial to corporate renewable energy procurement in China. However, a series of market uncertainties need to be resolved for more scalable and economic procurement mechanisms to emerge. In the end, corporate buyers will still need to choose the mechanisms that best suit their needs. RMI’s Business Renewables Center China will closely follow the market and update members with key insights.

Image courtesy of iStock.