China’s power sector accounts for about a quarter of global coal consumption. The Chinese government’s economy-wide energy and environmental plans outlined in the 12th Five-Year Plan (2011–2015) and the new Air Pollution Prevention and Control Action Plan (2013–2017) call for large improvements in air quality and caps on coal consumption. Many policy and implementation details have yet to be decided, but it is clear that meeting these goals will require policies that reshape China’s power sector. Recommendations for Power Sector Policy in China offers practical recommendations for China based on international experience.
We discuss several key areas at the heart of China’s power sector challenges:
- Planning: Achieving public policy objectives at the lowest overall cost to society requires proper planning. We recommend a broader-based, more transparent planning process, which considers the costs and benefits of demand and supply side resources, as well as transmission, in an integrated manner.
- Resource Acquisition: Once the optimal resource mix is determined through the planning process, a framework is needed to acquire those resources in a cost-effective, timely, and reliable manner. We recommend a competitive and transparent auction of long-term contracts to meet the resource requirement identified in the planning process. China’s existing feed-in tariffs for renewable resources have been effective and should continue to be improved.
- Generator Dispatch: Generator operations, or dispatch, are an extremely important determinant of the power sector’s costs and environmental performance. We recommend a two-part pricing scheme in which generators earn a capacity price (fixed cost) paid in RMB/kW each year, tied to generator availability, and an energy price (variable cost) paid in RMB/kWh, tied to generator output.
- Retail Pricing: China’s retail pricing regime has several innovative and effective aspects that should be preserved, including tiered prices, differential prices, and generally higher prices for industrial consumers relative to households. In addition, we recommend creating a transparent price adjustment mechanism that gives grid and generation companies incentives to meet China’s clean energy and environmental policies.
- Renewable Integration: China’s growth in renewable energy capacity has been impressive. It has the most installed wind capacity in the world, and is a leader in solar capacity. However, this rapid growth of renewable energy has caused grid integration problems that risk stalling further progress. Our recommendations include adopting policies to encourage more flexibility from existing generators and prioritizing flexibility in new generation plants, consolidating balancing areas, improving wind forecasting, faster scheduling and dispatch, adopting generation interconnection and transmission planning practices and implementing priority dispatch for renewables.
- Grid Company Demand-Side Management: Energy efficiency is a cost-effective and low-cost resource. The “Demand-Side Management (DSM) Measures Implementation Rule” is an important first step; however, we also recommend requiring grid companies to acquire all cost-effective energy efficiency before purchasing electricity from generators.
- Coal Quality: Washing and processing coal to reduce the sulfur and ash content improves power plant efficiency and lowers carbon emissions; yet, targets dating to the Ninth Five-Year Plan (1996-2000) have not been met. We recommend a policy that specifies, monitors, and enforces the characteristics of the coal each plant is allowed to burn, including type, heating value, and sulfur and ash content.
For more information, contact Max Dupuy.