China is in the midst of creating a quota system for renewable energy. The policy may resemble that used in many U.S. states known as a renewable portfolio standard (RPS), but China’s electricity market and regulatory structures are unique, as are the challenges it faces to renewable energy development.
As China and other countries begin developing renewable energy quota policies, there are many categories of design issues they can consider, such as capacity- or energy-based targets, the point of regulation, compliance flexibility, and interactions with carbon policy. Overview of Renewable Portfolio Standard Design Options from the U.S. Experience (also available here in Chinese), a new paper by the Center for Resource Solutions, highlights the main principles and options that inform RPS program design based on experiences in the United States.
Implications for China
While China’s policy environment and electricity sector are unique, some lessons learned from the U.S. could apply, including:
- Be careful in the transition: Renewable energy programs are hard to design, and it is important to not disrupt China’s already-successful renewable energy policies. China has assumed a world-leading position in renewable energy development, and care should be taken to design an RPS or quota that contributes to this success. Experience on a worldwide basis demonstrates that RPS programs are not easy to design. The ongoing transformation of the electricity market in China makes policy design even trickier. Great care should be given to RPS design in China, in part to ensure a smooth transition from the current policy environment.
- Be clear on objectives, and design the RPS policy accordingly, but don’t expect that RPS policies can solve all problems. RPS policy design can be tailored to meet certain objectives, so being clear on the objectives is a critical first step to effective program development. However, RPS policies cannot achieve all objectives. Perhaps most importantly, grid integration challenges typically are not solved by RPS/quota programs; neither can RPS or quota programs eliminate any “above market” cost of renewable energy.
- Design RPS programs around a set of best practices. Though policy stability is important, China should be ready to adjust the targets if renewable energy supply expands more rapidly than anticipated. Various RPS tiers or carve-outs are worth considering to ensure a level of resource diversity. Compliance should be enforced with clear penalties, but also with some level of flexibility to help enable cost-effective compliance. Renewable energy certificate (REC) tracking systems can serve as an important underpinning to verify RPS compliance. Various types of cost-containment mechanisms can be used to help ensure costs do not exceed thresholds.
- Ensure that auctions for long-term contracts are the primary means of compliance, because renewable energy investors need pricing and market stability. Short-term trade in RECs can be a useful supplemental compliance option, and RECs are often an essential compliance tracking mechanism. However, short-term REC trading should not be the primary form of compliance if cost reduction is the goal. Long-term contracting should be encouraged or required, typically via auctions; international experience demonstrates the significant cost-reducing effects of well-designed auctions for long-term contracts. Other mechanisms for ensuring pricing and market stability include: REC pricing floors or bands; government long-term contracting for RECs; requirements for government-approved compliance and procurement plans; and stable and clear policy design.
- Designating who is obligated to meet RPS requirements is critical, and the range of options should be kept narrow based on considerations of market stability and cost recovery. In the U.S., retail electricity suppliers—or load serving entities—are almost always the obligated party. The reason is simple: These are the entities responsible for developing a supply portfolio to meet customer demand, and so are the natural party to be obliged to purchase renewable energy. Other obligated parties are under consideration in China. Regardless of what entities are chosen, it is essential that obligated parties: (1) are able to enter into long-term contracts for renewable energy, typically via auction; and (2) have an opportunity to recover the costs of RPS/quota compliance from end-use customers.
- Careful coordination among supporting policies and efforts is essential: No single policy will do. Well-designed RPS or quota programs can be effective but are not on their own sufficient to cost-effectively support renewable energy supply and grid integration. Careful coordination is needed among different policy mechanisms, including voluntary green power markets, carbon cap-and-trade programs, and electricity market design and grid integration efforts. It is important that such policies complement one another and not conflict.
International experience in renewables quota design has much to offer China as it develops its national policies. The key lessons counsel decision-makers to adopt a program design that is clear in its objectives, provides stable revenues for developers, and gives strong incentives for economic efficiency and least-cost investment.
Dr. Ryan Wiser collaborates with RAP’s China team on renewable integration issues and is a well-known expert on issues related to renewable energy program design. Rachael Terada is director of technical projects at the Center for Resource Solutions. The authors would like to thank Jillian Forte, Todd Jones, Michael Leschke, Jennifer Martin, Alex Pennock, and Jeff Swenerton for their contributions.