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Voluntary Renewable Energy Markets in China: Key Conditions for Unlocking Demand

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During the summer of 2017, at the Eighth Clean Energy Ministerial in Beijing, Center for Resource Solutions co-presented a side event highlighting the growing demand for renewable energy in China and new market initiatives, including the Green Electricity Consumption Cooperative Organization. With the concurrent launch of a voluntary renewable energy certificate (REC) program and tracking system by the China Renewable Energy Engineering Institute, many stakeholders were optimistic that new demand for clean energy resources would materialize in the market.

In the year that has followed, however, only 30,000 MWh of renewable energy credits have been transacted. This volume contrasts with voluntary demand in the United States that is expected to eclipse 100 million MWh in 2018. Corporate procurement is a growing driver of new renewable energy deployment in the U.S., and the potential benefits of unleashing the same voluntary market forces in China are enormous. However, as evidenced by the low uptake of the new voluntary REC system, it is clear that the optimal conditions for corporate procurement have not emerged in China.

What are the key elements to successful voluntary markets?

Policy and Regulatory Framework

A solid policy and regulatory framework for voluntary markets is critical for enabling a variety of procurement methods (e.g., power purchase agreements, utility green power programs, REC-only purchases, and direct investment), as well as ensuring that renewable energy retains all the attributes (e.g., carbon benefits, exclusive claims, and regulatory surplus) of interest to voluntary purchasers. Although questions about renewable energy usage claims are still not fully resolved, the main voluntary renewable energy market activities in China are direct investment or self-generation (on-site).

In the U.S., power purchase agreements with generators have been a major driver of new renewable energy deployment since 2015, and it is encouraging to see the possibility of such transactions in China. However, government subsidies in the form of feed-in tariffs (FiTs) mean that onshore wind and solar photovoltaic generators in China have access to guaranteed contracts at favorable rates and must forgo the REC instrument if they participate in the FiT scheme. The increased complexity and risk in working with a corporate off-taker can eliminate many corporate power purchase agreements before they even start. Only in provinces with high levels of curtailment or other special circumstances have generators appeared willing to discuss a lower guaranteed price than the FiT.

China is designing a quota system similar to renewable portfolio standards (RPSs) in the United States. Although REC instruments are proposed in China’s draft RPS, how the REC system under the RPS will interact with or replace the existing voluntary REC system is still to be resolved. Establishing and clarifying the relationship between the quota and the voluntary market and allowing end-use customers to purchase renewable energy production in excess of the quota will facilitate private investment in new projects that would not otherwise have been built and will support longer-term renewable energy growth in China.

As China continues to develop and implement additional carbon policies, such as an emissions trading scheme, it will be helpful to enable voluntary renewable energy purchases to reduce the total emissions of the electricity sector. As with quota design, policymakers can evaluate examples from the U.S.—such as California’s cap-and-trade program and the Regional Greenhouse Gas Initiative—that have mechanisms to tighten an established emissions cap to account for voluntary renewable energy use.

Market and Transaction Infrastructure

Credible market and transaction infrastructure is also crucial to the development of a sustainable system of voluntary renewables purchases. Energy attribute certificates, tracking systems or registries, and transaction certification provide credibility and ensure that ownership and marketing claims are valid.

Energy Attribute Certificates

Because all grid-connected electricity is mixed on the grid, contracts and accounting infrastructure are necessary for determining who is delivering and who is receiving the renewable energy that is generated. In the U.S. and Canada, RECs are used as the essential accounting and tracking tool in both compliance markets (states with an RPS) and voluntary markets to allocate renewable attributes to specific customers purchasing green power. These certificates are used across all procurement methods, including on-site generation, power purchase agreements, utility green tariff programs, direct access, community choice energy programs, and unbundled RECs. Recognized energy attribute certificates like RECs enable corporate clients to contract for environmental commodities and make indisputable claims that they are for their own use.

With the development of its renewable energy certificate mechanism, China has cleared a first major hurdle. However, RECs in China can be obtained only from certain types of procurement methods and technologies: onshore wind and solar PV. On-site, behind-the-meter PV is not allowed to generate RECs, thereby limiting some self-generation claims and the type of aggregation deals that have proved popular in other countries (such as Singapore). As a new quota system is designed, the ability to count on-site generation as a private claim, rather than helping obligated entities meet their mandates, will be an important policy decision that affects market development.

Tracking Systems

REC tracking systems provide exclusive issuance, trading, and retirement of RECs within markets for renewable energy to support compliance and credible claims. They also provide verification of information on the generation and facility and can help ensure full aggregation of environmental attributes. In these tracking systems, RECs are electronically serialized and issued to generators with accounts; they are tracked between account holders, and ultimately permanently retired (canceled electronically) by the entity making the claim or on behalf of an end user making a claim. The China Renewable Energy Engineering Institute developed a tracking system that issues and facilitates the transfer of voluntary market RECs. Full functionality, including the ability for market intermediaries and corporate entities to hold their own accounts, has yet to be realized, and many details in the system still need to be resolved.

Certification

Fundamentally, transaction certification ensures that customers understand what they are purchasing and that they receive all the environmental benefits associated with their voluntary purchase of renewable energy. In the United States, Green-e serves this role and takes it a step further by: standardizing what qualifies as environmentally preferable renewable energy; ensuring that purchases retain carbon benefits; ensuring that RECs are not double-sold, double-counted, or double-claimed; requiring independent audits; and requiring that such voluntary purchases go above and beyond any government mandates. The China General Certification Center is verifying the usage claims of companies, organizations, and events (such as conferences and athletic competitions) in China. Additional transaction verification programs may be necessary to help reduce risk and encourage greater market participation.

Price

FiTs can be effective tools to accelerate the development of renewable energy and help countries meet their renewable energy targets. As in other countries that have FiTs, however, the price of RECs in China is tightly linked with these guaranteed subsidies to generators. This is due to the fact that a generator must choose between receiving either the revenue from the FiT or a REC. As China’s FiTs are guaranteed over a 20-year period, a voluntary customer must compete to provide an attractive alternative to the generator, which can be a major impediment for corporations interested in renewable energy or contracts to help reduce costs. In the United States, power purchase agreements have allowed corporate electricity buyers to reduce their energy expenses or hedge against price increases.

Corporate and industrial customers with existing renewable energy commitments and with operations and supply chains in China are excited by the initial steps taken to facilitate a voluntary market in China. Their aggregate electricity load is significant, and the opportunity to pursue a low- or zero-carbon electricity supply while seeing financial benefit is extremely attractive. However, it is clear that the voluntary market in China is not currently able to accommodate this latent corporate demand. The policy and regulatory framework, the market and transaction infrastructure, and existing pricing dynamics must continue to improve and so open up new opportunities and accelerate renewable energy demand. Once a favorable set of conditions exists in China, the likelihood of significant voluntary demand will dramatically increase.

Orrin Cook is director of international programs at Center for Resource Solutions.