In an interview published in China Electric Power News (in Chinese), RAP senior advisor Dr. David Crossley discussed the role of grid companies in delivering demand-side resources and suggested ways to overcome disincentives to doing so. His recent paper, Energy Efficiency as a Resource for the Power Sector in China, examines the potential use of both energy efficiency and demand response as power system resources in China.

China’s recent high temperatures drove peak demand higher than previously experienced, highlighting the importance of demand-side resources. While many countries have been using demand response to deal with peak demand, China only recently began pilot programs in Shanghai and Suzhou.

Energy efficiency is a more cost-effective approach than building power stations and grid infrastructure. Energy efficiency can also reduce the environmental impact resulting from the use of supply-side resources, thereby reducing the total societal cost of electricity. However, if they implement energy efficiency programs, China’s grid companies face lower revenues due to reduced sales of electricity and the associated program costs.

Dr. Crossley suggests that a well-designed regulatory framework can include mechanisms that enable grid companies to carry out energy efficiency and demand-side management in ways consistent with both their interests and government policy objectives. This would improve the grid company’s cost management and improve reliability and environmental performance. If these regulatory mechanisms are successful, instead of the grid companies being in conflict with government interests and priorities, they will become a driving force actively implementing government policy.

“The roles and responsibilities of grid companies must be redefined to include investing in all cost-effective energy efficiency,” said Dr. Crossley when asked about specific recommendations. “Both the decrease in net income and energy efficiency program costs must be defined as legitimate operating costs for grid companies. The Chinese government should develop and implement regulatory mechanisms to reduce and mitigate the impact of the net cost of energy efficiency projects on the grid companies’ financial positions.”

He also recommends that the overall performanceassessment of the grid companies must include recognition of the work by the grid companies in assisting their customers to improve end-use energy efficiency.

In addition, China’s existing comprehensive industrial energy efficiency initiatives should be complemented by requiring grid companies to obtain all cost-effective energy efficiency resources before they purchase bulk electricity from generation companies.