China’s Energy Plan: Making It Work for Carbon Peaking
In November 2020, China’s National Energy Administration (NEA) requested general input on the yet-to-be-published 14th Five-Year Energy Plan (2021-25) and allowed a brief window for submissions. This post is an edited version of the rapid-response input RAP provided. RAP focused on suggestions for the electricity plan component of the energy plan. The electricity plan is an important platform for considering a cost-effective, clean and reliable mix of resources. For many years before the 13th Five-Year Plan (2016-20), the NEA did not issue an electricity plan, instead publishing independent and weakly coordinated plans for various resources, including hydropower, renewable energy, nuclear and energy efficiency. This lack of coordination hampered rationalization of the power sector resource mix. The 13th Five-Year Plan included a plan for the power sector as a whole. The period also included the early stages of a new power sector reform effort, including new market mechanisms intended to improve the efficiency of power sector operations and investment. The 14th Five-Year Plan represents a crucial opportunity to move ahead with power sector reform, including improved electricity planning. Getting these power sector details right will be essential to meeting China’s “before 2030” carbon peaking goal.
Planning for Coal Retirement
In light of the Chinese government’s recently announced carbon peaking (“before 2030”) and 2060 decarbonization goals, a key topic for the five-year energy plan will be how to put the electricity sector on a firm transition path away from coal generation. We offer some selected suggestions on how that might be done, based on international experience and our understanding of China’s ongoing power sector reform efforts.
To begin, we would like to point out that such a transition away from coal would be rational even in the absence of the new 2030/60 goals. As in other countries, the cost of alternative resources — solar, wind, and battery storage — have fallen dramatically. For example, recent estimates in China and around the world suggest that the cost of building new solar generation in China is near or below the operating cost of coal generation. When taking into account the negative impacts on air quality — which are significant, even in the case of the newest and best-controlled coal generation facilities — and the risk of fuel price fluctuations, the case for new coal generation investment is further diminished. For these reasons, it would make sense to build on the NEA’s previous attempts to restrict new coal generation investment, including a near ban on construction in 2016 under its risk warning system, and firmly implement a ban on new coal investment.
While such a ban on new coal generation would be very effective as a high-level guiding objective, it will be necessary to bolster this ban with continued efforts for power sector reform to ensure the most cost-effective mix of clean resources, reliability and a smooth transition. In the next sections we briefly discuss a few key elements of these reforms that we suggest the five-year plan address.
Improving the Way the Plan is Made
In 2016, the NEA released a promising blueprint “planning regulation” for changing the way the five-year energy plan is developed. The planning regulation emphasizes the concepts of “coordination” and “integration.” It requires integration of national and provincial planning efforts and provides for much-needed coordination in planning for hydro, coal, gas, wind, solar and other generation investments. It also stresses coordination of transmission and generation planning. In addition, it requires strengthened environmental impact assessment and, more broadly, better links between power sector planning and environmental planning. These are all valuable reforms.
Unfortunately, it does not appear these reforms have yet been fully implemented. Fleshing out that planning blueprint and encouraging provinces to meet international standards for electricity planning would help level the playing field for clean energy and support the transition away from coal. The 14th Five-Year Energy Plan would be an excellent opportunity to move in this direction.
We suggest two related planning reforms the NEA could consider:
- Incorporating risk management analysis into generation planning. In a world of uncertain electricity demand growth and rapidly changing resource costs, risk management analysis can help manage costs and rationalize investment. Planners in China can draw on multiple tools — from scenario analysis to option value analysis — to better incorporate risk management into generation planning. Doing so would reduce the risks, for example, of overinvestment in coal generation due to demand forecast error or fuel cost forecast error.
- Better integrating energy efficiency and demand response into the energy plan. For provinces where electricity demand is outpacing available supply and peak consumption is growing — primarily the north, central and eastern grid regions — investments in energy efficiency and demand response are likely to be a lower-cost, lower-risk option than investments in new generation capacity. Mechanisms for comparing investments in energy efficiency and demand response with investments in traditional generation resources have been an essential — and very cost-effective — part of the best examples of integrated power sector planning in North America.
Making Sure Electricity Markets Support the Clean Energy Transition
The NEA and officials in various provinces have made significant progress with implementation of electricity markets, but much work remains to be done to ensure that the markets can help reduce costs and emissions. It would be useful if the 14th Five-Year Energy Plan could call for a redoubled effort to implement practical and workable electricity markets.
One key issue that would make sense to advance within the scope of the published plan documents is that of integrated regional spot markets. Countries around the world are working to expand the geographic scope of market footprints to take advantage of the way the variability of wind and solar generation tends to even out over larger geographic areas. The Southern Grid region is slated as the first multiprovince regional spot market, but little has been said about the road map for this process, let alone how other regional markets will form. We suggest the five-year plan specify that the regional markets being formed in the Southern Grid region and other parts of the country be based on the principle of unified regional economic dispatch, ending the practice of province-by-province dispatch. In addition, we suggest that each region implement a single regional approach to transmission cost allocation and transmission pricing. This would help alleviate barriers to interprovincial trade within each region and support integration of renewable energy. In addition, it would be useful to use the energy plan to reinforce key principles of electricity market design, including:
- Scarcity pricing, so that market prices better reflect the fluctuation of wind and solar energy on the grid.
- Strong market monitoring, so that remaining coal generators, which are undergoing consolidation and growing in their ability to dominate provincial transactions, are not able to manipulate market outcomes.
Our recent report for the Southern Grid region provides more detail and international experience on each of these topics.
Enforcing Regulations on Remaining Coal Generation
In 2015, China’s Ministry of Ecology and Environment issued a standard that requires all “retrofittable” coal units to meet “super low” emissions standards for sulfur dioxide, nitrogen oxides and particulate matter by 2020. Meeting these standards, which are comparable to those for natural gas units, requires pollution removal efficiencies that are much higher than what has been commercially available in, for instance, the United States. National policy support in China has led to significant investments in pollution control equipment for coal power plants, with dramatic reported reductions in emissions of all three pollutants. Some empirical evidence suggests, however, that there have been major discrepancies between reported and observed emissions. Better enforcement of emissions standards for coal units would reduce inaccurate reporting by generators and help meet air quality standards. It would also help reduce overinvestment in new coal plants, as such plants will likely be uneconomic when they are forced to meet emissions standards.
The 14th Five-Year Plan can put the Chinese power sector on a strong transition path away from coal generation, with substantial benefits in terms of cost savings, lower emissions and better air quality. Such a transition is essential for meeting the 2030/60 decarbonization goals. In addition to high-level targets for reducing coal generation, the transition will require redoubled commitment to power sector reform. In this post, we’ve recapped some of our related recommendations that are relevant to the five-year plan and coal generation reduction, including continued work on planning processes, and measures to build on progress with electricity markets. There are other important issues for the energy plan, including carbon pricing, electrification and renewable energy integration. We look forward to engaging in further discussions on these topics.