In recent months, the Chinese government has issued several high-profile policy statements directed toward the twin challenges of renewable energy curtailment and runaway investment in coal-fired capacity. These new policies appear to signal policymaker interest in dealing with these problems and might have some success in the near term. However, they rely on blunt mechanisms—guaranteed numbers of annual operating hours for wind and solar generators and limits on coal-fired power plant construction. As such, these policies do little to address underlying problems, particularly the need for increased flexibility and the need for reform of generator compensation.

Meanwhile, a less-discussed policy, issued by China’s National Energy Administration in June, may ultimately be more important for dealing with these challenges. This document, with the innocuous name Power Sector Planning Regulation (Chinese), sets out a broad framework for a transition of the Chinese power sector away from a model in which meeting rapid demand growth is the prime consideration—and toward a model based on careful consideration of complex trade-offs and multiple targets, including China’s goals for renewable energy, environmental quality, affordability, and reliability.

Outside observers are often struck by the emphasis in China on five-year plans and other forms of economic and industrial planning. However, when it comes to the power sector, China suffers from inadequate and poorly coordinated planning. China’s massive power sector build-out over the past decade has unfurled with little attention—on the part of government and regulatory agencies—to the sort of planning seen in the United States and Europe. RAP’s technical primer discusses the history of power sector planning in China, including the omission of a published overall power sector plan from five-year plans in recent years. This lack of coordinated power sector planning is one of the main factors behind China’s struggle with renewable energy curtailment and overinvestment in coal-fired generation—a recent RAP modeling exercise estimates that overcapacity had already reached 100 GW by the end of 2014.

The United States has had its own history of rapid power sector expansion with inadequate attention to costs and environmental consequences. However, in the 1970s, various states began to shift toward more rational power sector planning, in the face of demand for improved air quality and slowing economic growth. Many parts of the United States implemented integrated resource planning. Even in parts of the United States that have implemented electricity markets, planning still plays an essential role in evaluating resource adequacy, informing the need for adjustments to market design, and helping to coordinate investments in generation with those in transmission and demand-side resources. Planning practices continue to evolve, particularly with respect to meeting the challenges of renewable energy integration.

Routine, Transparent, and Integrated: New Regulation Says a Lot of the Right Things

China’s new planning regulation has several promising features. First, it sets out a rolling schedule, on the familiar five-year cycle, with milestones for research, preparation, publication, implementation, adjustment, and evaluation. Second, it calls for transparency, at least in general terms, and outlines a process for comment from “experts” and companies. Third, it puts the concepts of “coordination” and “integration” front and center, by:

  • Providing for much-needed coordination across hydro, coal, gas, wind, solar, and other generation investments;
  • Stressing coordination of transmission and generation planning—an area that has been a source of great difficulty;
  • Calling for integration of national and provincial planning efforts; and
  • Requiring strengthened environmental impact assessment and, more broadly, better links between power sector planning and environmental planning.

The new policy even stipulates that power sector planning be coordinated with planning in other key sectors, including land-use, urban construction, environmental protection, water resource use, transport, gas supply, and heat supply. This latter point is very welcome, given that rapid growth in combined-heat and power plants in northern China has been a significant reason for inflexibility of the grid and has contributed to high rates of wind generation curtailment.

Weak Spots

The new regulation is admirable in putting forth these important concepts. In many ways, it is quite close to what RAP’s team has long recommended as best practice in these areas. However, there are several broad shortcomings in the new regulation. First, and most importantly, the regulation fails to mention demand-side resources or raise the notion of end-use energy efficiency as a resource. At least one media report (Chinese), however, suggests that planning may ultimately include consideration of demand-side resources. Mechanisms for comparison between energy-efficiency investments and alternative investments in more traditional power sector resources have been an essential—and very cost effective—part of the best examples of coordinated power sector planning in North America.

Second, although the regulation raises the concepts of transparency and stakeholder participation, it also limits them to a significant degree. Under the regulation, power-sector firms will provide much of the analysis, with additional contributions from academic experts and industry groups such as the China Electricity Council. In the United States, broader scrutiny—including that from expert organizations who represent consumers and the public interest—provides important counter-balance to utility interests. China’s media outlets—whose analytical capacity and output in these areas has improved greatly in recent years—may be able to provide useful input into planning, if they are allowed sufficient access and leeway.

Third, the regulation would have been better if it had explicitly mentioned the concept of “risk-aware” planning. Ideally, the new planning process should include careful assessment of various risk factors when comparing resource investment options. These risk factors include fuel cost risk, construction risk (unplanned cost increases and delays), water constraint risk, and carbon price risk. On a related note, the analysis that underpins the plan should ideally consider likely changes in policy targets that have yet to be decided or implemented—for example, foreseeable tightening of emission regulations (standards and pricing).

Fourth, questions of how to actually achieve the outcomes identified in the plan are left unaddressed. The regulation briefly mentions that “market mechanisms” are to be used to procure the resources, in line with “guidance” provided by the plan (Article 38). This notion of the interaction between the plan and markets is sensible and in line with best practice in other countries. In addition, increased use of market mechanisms is a “basic principle” of China’s broad push for power sector reform, launched in March 2015. However, although provincial pilots have been announced, wrork on the detailed design of market mechanisms is still at the very early stages,  and there is much work to be done to design mechanisms to deliver resources in line with the plan.

Implementation May Be Rocky

The new planning regulation emphasizes measures to discourage construction of projects that are not called for in the plan (Article 30). In particular, these unapproved projects will not be allowed to access the usual means for compensation. Enforcement will need careful attention as failure to stop construction of unnecessary projects—even when there is a regulatory policy calling for such a halt—has been a major sticking point.

Overall, the new regulation is a very useful blueprint for a new planning process in China. However, the road to successful implementation may be quite long. The next items on the work agenda will include building adequate institutional capacity, establishing suitable analytical approaches, and ensuring adequate oversight and transparency.