Post - Blog
Powering the Dragon
- 5 years ago (2018-09-29)
- Junior Isles
Christian Romig, Head of Management Consulting for China at Pöyry
World Battery and Energy Storage Industry Expo 2024 (WBE)
China’s power sector reforms represent perhaps the world’s largest industrial reform programme, with important consequences globally as well as new opportunities domestically.
In 2015, Erdaoqiao, a mountain settlement in South West China, made headlines in Chinese newspapers for being the last village to receive power under China’s plans for nationwide electrification, which have introduced electricity to 900 million people since the founding of the People’s Republic of China in 1949.
China accounts for almost a quarter of the world’s primary energy consumption – including close to 60% of global coal. Its power sector services 1.3 billion consumers, supplying 6300TWh from over 1700GW of installed capacity; or equivalent to eight Germanys. Observers expect the economy to continue expanding out to 2050, with electricity demand rising accordingly. The 13th Five-Year Plan, published in 2016, targets 2000GW of capacity installed by 2020, corresponding to an increase of 20%.
Powering such growth requires building large numbers of coal, gas and nuclear power stations. But less well-known is that it is also the world’s biggest developer of renewables such as hydro, wind, bioenergy and solar plants. By the end of 2017, China was already home to 341GW of hydropower, 163GW of wind and 130GW of solar PV, all world-leading capacities. By comparison, the UK’s renewable electricity capacity was 40.5 GW at the end of 2017 [1] . The 13th Five-Year Plan will further consolidate the country’s leading position, and already by mid-2018 the ambitious renewable energy targets in the 13th Five-Year Plan had been surpassed.
CHALLENGES AHEAD
However, like many other parts of the world, the demand centres are far away from the best renewable resources, so a major new backbone of long distance Ultra-High Voltage 1000kV lines – the highest voltage in the world for such infrastructure – are moving power over 2000km from the windy and sunny north and north-west, and hydropower-rich south of the country to the load centres in the south-east and along the east coast.
But while much progress has been made, China’s power sector still has major challenges to overcome such as:
• rising demand, with targets of over 6.5% GDP growth in the Five-Year Plan
• overcapacity in some regions where new build has outstripped demand growth
• the impact of relatively high electricity prices (by international standards); and
• the need for greater environmental sustainability, as fully 12% (almost 41 TWh) of wind energy produced in China was curtailed in 2017 due to generators being allocated annual generation hour quotas, and network constraints.
A major programme of structural and market reforms was initiated in 2015 to address these concerns, blandly named “Document Number 9”. Competitive markets are being introduced at wholesale and retail level. Incentive-based transmission and distribution pricing has been rolled out across the country, and China is seeking to introduce private capital into distribution networks.
Almost all provinces are piloting either the whole reform package, or specific elements of it. Eight provinces and regions have been selected to pilot spot markets by 2019. Regions like Guangdong and Zhejiang are well into the detailed rulemaking with early drafts now released for public consultation, with others in tow.
OPPORTUNITIES ARISING
The aims of introducing competitive markets are:
• to bring industrial power prices down –in Guangdong, some power trading pilots have seen prices drop 30% below the government-set benchmark price;
• to curb overcapacity through price signals – new capacity should come online when needed, rather than based on capacity targets set by policymakers; and
• to go a long way to solving China’s curtailment challenge by replacing the plan with markets.
But these reforms are introducing markets to China’s electricity sector for the first time. A steep learning curve needs to be climbed by all market participants, many who lack deep knowledge and experience of competition. This in itself presents an opportunity for those with this knowledge.Thousands of newly registered power retail companies are now experiencing first-hand the challenges familiar to European and American counterparts. Authorities in many provinces last year recorded over 30% of power traded by these companies, but already many are struggling to maintain a customer base and counter imbalance risks.
With spot markets starting up, Chinese generating companies will find, as many did in Europe, that old inefficient power stations can be pushed to closure. China, with over 33 provinces and municipalities, is by no means monolithic. Similar to Europe, its provinces vary greatly in their generation and consumption profiles. On the horizon therefore lies the integration of China’s multiple electricity markets through coupling, with Europe as a good example. Doing so, will go a long way to solving the pressing issue of curtailment, but will also enable China’s electricity customers to benefit from efficiencies, and low-carbon generation, from elsewhere in the country.
At the heart of the Five-Year Plan was the ambition to cut down city smog with electric vehicles. By 2020, China aims to manufacture 2 million ‘new energy vehicles’ for domestic and international markets. At least one major domestic carmaker has already announced a move to discontinue manufacturing vehicles with internal combustion engines. Others are now following suit, but with a huge home market on their doorstep, staying ahead of the curve places car manufacturers in pole position.
It has only been three years since Erdaoqiao was connected to the grid; a landmark event aspired to for half a century. Yet now, reforms in the power sector are moving ahead apace. Over the next decade, while western countries are still speculating about how to integrate the transport and power sectors or upgrade their customer billing systems, China may well have already turned to new challenges and be exporting its power sector expertise back to the rest of the world.
Christian Romig is the Head of Management Consulting for China. He has over a decade of experience with China, with a focus on electricity markets and renewable energy. At Pöyry Christian leads our work on electricity market design, analysis, strategy and transaction advice in China with global and Chinese clients.
[1] https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/695626/Press_Notice_March_2018.pdf