With the power sector in China accounting for more than half of annual coal consumption, it will play a key role in meeting the government’s goals to reduce carbon emissions, reduce coal consumption, and improve air quality. Under the auspices of the 12th Five-Year Plan (2011–2015) and the Air Pollution Prevention and Control Action Plan (2013–2017), many provinces and municipalities set very ambitious 2017 goals for coal consumption reduction and air quality improvement. Transformation of the power sector will be crucial to meeting these goals.

Low-Carbon Power Sector Regulation: International Experience from Brazil, Europe, and the United States surveys power sector regulation in the United States, the European Union, and Brazil, highlighting issues important for carbon emissions regulation. The paper offers five key recommendations to align power sector regulation with policy goals in China:

• Design an effective regulatory model: Careful attention to how regulatory decisions can help decrease emissions is essential. The question for China is how to take advantage of international best practices in regulation and design a regulatory model that is best suited to China’s needs and character, while meeting China’s long-term environmental and emissions goals at lowest cost and least risk.
• Utilize energy efficiency as a power sector resource: China already has a set of policies for promoting energy efficiency across the economy, including the “Top 10,000” program, the energy conservation supervision system, and various codes and standards. Integrating this long-standing commitment to energy conservation into a well-designed power sector plan that considers all costs and benefits of various resource options, including energy efficiency, would highlight many further opportunities to displace coal plants and reduce emissions.
• Manage variable renewables and supporting resources: China has had great success in mobilizing investment to rapidly expand power sector resources. However, challenges remain, particularly with integrating renewables into the grid. Drawing on the international experience, the paper offers a series of steps China can take to effectively integrate greater amounts of renewable resources into the grid.
• Evolve generator dispatch: Generator operations are an extremely important determinant of the power sector’s costs and environmental performance. Moving toward a dispatch model based on variable generation costs will help reduce power sector emissions. One approach is to establish a two-part pricing scheme so that generators earn(1) a capacity price paid in RMB per kW per year, tied to generator availability, and (2) an energy price (reflecting short-run variable—mostly fuel—costs) paid in RMB per kWh, tied to generator output.
• Integrate carbon-pricing policies with other emissions-reduction policies: Emissions trading schemes are designed to be well-integrated with other policies, particularly energy efficiency programs. This is because of the difficulty of relying on emissions prices alone to stimulate investment in energy savings and other clean energy resources. Pairing emissions trading schemes with programs that mobilize capital for direct, comprehensive investment in energy efficiency has worked well in other jurisdictions.

Although China has its own particular set of challenges and characteristics, the experiences in Brazil, EU, and the U.S.—both the successes and failures—offer insights and opportunities.

Low-Carbon Power Sector Regulation: International Experience from Brazil, Europe, and the United States is a consultant’s report commissioned by the World Bank and financed by the Energy Sector Management Assistance Program (ESMAP). The findings, interpretations, and conclusions expressed in this volume do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. They are entirely those of the Regulatory Assistance Project.

For more information, contact Max Dupuy.