Power Sector Transformation and Economic Recovery in China


The good news is that coal is struggling around much of the world because the business case for coal-fired power is diminishing year by year. In competitive procurements around the globe, portfolios of clean energy — wind and solar especially — are winning, and winning big. This is happening despite efforts from coal generating companies to advocate policymakers to intervene to distort markets in favor of coal. And large electricity users are opting for 100% renewable power — not merely because it is carbon-free, but also because it has become much more cost-effective.

The low-carbon economy of the future depends centrally on a low-carbon power sector. The big challenge in power sectors around the world is to harmonize the policy, regulatory and market details needed to support the transition to low-carbon resources. In other words, these details should support efficient economic outcomes. The key is to remove the institutional, market and regulatory biases favoring old and polluting technologies and fully recognize the ample benefits of renewables and efficiency. We at RAP are closely engaged with these efforts in Europe, India, the United States, China and other places around the world. Although the details and context vary, there are striking similarities in the ways in which each place is struggling with these energy sector transformation issues. There is much to be gained from sharing ideas and solutions in a joint international effort.

The story is similar in China: The business and policy cases for coal are fading due to underlying economics. Renewables are challenging coal-fired power on the basis of their direct financial costs. When environmental costs, fuel-cost risk, and other risks are taken into account, the choice is clear that renewables are more cost-effective overall. China’s ongoing power sector reform efforts are already revealing this underlying economic truth. The reforms have already helped alleviate distortions in decision-making and put downward pressure on the business model for coal in the power sector. But there is still much to do. Investment in coal generation is continuing, and existing coal generation is not retiring as fast as the underlying economics suggest it should be.

The fundamental obstacle is a legacy approach to power system investment and operations that, though extraordinary in its achievements over the last four decades, today inhibits high penetration of the clean energy resources that China and the world needs. The challenge is to build on and flesh out the power sector reform effort in order to reveal the fundamentally poor economics of coal investments and to facilitate replacement with clean energy resources.

Now there is an added challenge: recovering from the coronavirus pandemic. The story of power sector reform and decarbonization is relevant to the discussions about economic stimulus and recovery. There’s been a lot of debate about whether China’s economic stimulus efforts may promote renewed investments in coal generation capacity, and there is evidence that development of coal facilities might be picking up again. Analysts point to the Chinese government’s response to the 2008 economic crisis, which contributed to a period of heavy investment in new coal generation capacity.

There is good news: China’s power sector structure is not the same today as it was in 2008. Technology has advanced a lot: the global costs of solar photovoltaic and wind power have fallen by an order of magnitude, due largely to China’s initiatives, and their productivity and reliability have soared. China’s grid is now one of the most technologically advanced in the world — resilient, reliable and affordable. This is the consequence of four decades of steady reform and experimentation. Meanwhile, the steps taken by China’s policymakers toward power sector reform have begun to remove distortions in regulation and planning, improving environmental regulation and introducing new market forces to the power sector.

So even as the National Energy Administration has loosened restrictions on coal project approvals this year, there is undoubtedly hesitation on the part of the generation company leaders as they consider whether they really want to make new investments in coal generation. To be sure, these are state-owned companies — but they do care about profits and risk and they do increasingly realize that a coal investment is a doubtful bet.

The challenge of fleshing out and implementing the next stage of power sector reform in China is similar to the challenges other countries are grappling with. And now it must be seen in the context of the recovery from COVID-19. Here is what we see around the world that is also relevant to China:

First, it will be possible to meet ambitious long-term energy transformation and 2050 climate scenarios at reasonable cost and while maintaining reliability.

Second, the key is to create and coordinate an integrated package of reforms that work across several dimensions:

  • Electricity markets,
  • Planning,
  • Regulation,
  • Demand-side management and distributed energy resources,
  • Air quality management,
  • Pricing signals that unlock flexibility in both supply and demand,
  • Emission markets and pricing, and the use of revenues raised by emissions pricing, and
  • Electrification policy.

Electrification of end uses and processes that currently depend on fossil fuels — including space heating and transportation — is a particularly important topic. China has emerged as a world leader in electric vehicle manufacturing and also building out electric vehicle charging infrastructure. An exciting prospect would be to see China become a world leader in unlocking the flexibility that electrified transportation and buildings with smart controls can offer to the grid to manage more clean power. This will involve not just implementation of the right technology but will also require market and regulatory reforms, tightly managed to support the overarching goals for energy revolution. These are challenges that Europe, the United States and other places are facing as well, and there is a lot of room for more international collaboration.

The energy transition was an urgent matter even before the pandemic. Now, the prospect of a green recovery is a challenge that all nations committed to climate goals must, and will, meet as they strive to steer their economies back to full strength.

Government policy and regulation should not be used to protect the profitability of inefficient legacy investments. Such action is rarely sustainable and never in the long-term public interest. There is much to be gained by working together internationally to embrace change and take steps to solidify economic recovery based on clean energy.