Powering the Dragon: How China’s Power Sector Is Evolving

COMMENTARY

China’s power sector reforms represent perhaps the world’s largest industrial reform program, with important consequences on both domestic and global levels.

In 2015, Erdaoqiao, a settlement in southwest China, made headlines 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 more than 50% of global coal usage. Its power sector services 1.3 billion consumers, supplying 6,300 TWh from more than 1,700 GW of installed capacity, which, incidentally, is equivalent to eight Germanys. The 13th Five-Year Plan, published in 2016, targets 2,000 GW of capacity installed by 2020—a 20% increase.

The lights are kept on in China by the world’s largest coal fleet, surpassing 1,000 GW this year. This baseload resource in unfortunately also one of the main drivers behind China’s world-leading carbon emissions levels. But China is also the world’s biggest developer of renewables, across hydropower, onshore wind, and solar photovoltaic (PV)—and since introducing a feed-in tariff for offshore wind in 2014, it is already the third-largest offshore wind market globally.

Challenges Ahead

However, like many other parts of the world, China’s demand centers are far away from the best renewable resources, so a major new backbone of ultra-high-voltage 1,000-kV lines—the highest voltage in the world for such infrastructure—are moving power across 2,000 kilometers from one end of the country to the other.

Accordingly, while much progress has been made, China’s power sector still has major challenges to overcome. Among them are:

  • Rising demand, with targets of more than 6.5% gross domestic product growth in the Five-Year Plan.
  • Overcapacity in regions where new build has outstripped demand.
  • Impact of high electricity prices (by international standards).
  • The need for greater environmental sustainability, as severe local air and water pollution rise up the political agenda, and with global climate action as a backdrop.

A major program of structural and market reforms was initiated in 2015 to address these concerns, blandly named “Document Number 9.” It includes the introduction of competition into wholesale and retail markets, incentive regulation for transmission and distribution networks, and new ownership structures for distribution networks and suppliers.

Piloting either the whole reform package, or specific elements of it, eight provinces have been selected to pilot spot markets by 2019, with some regions, such as Guangdong and Zhejiang, well into the rulemaking process. Already in 2017, greater than 30% of electricity consumed across the country was traded in early-stage semi-liberalized medium- to long-term contract markets.

Opportunities Arising

The aims of introducing competitive markets are:

  • To bring industrial power prices down—already in Guangdong, power trading pilots have seen prices in some auctions 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.
  • To solve China’s curtailment challenge by replacing planned system operation with market-driven dispatch.

However, the challenges of such a development should not be underestimated. Spot markets starting up will inevitably lead to closures of old, inefficient power stations as they did in Europe. With growing proportions of wind and solar on the system, thermal power stations in these new markets are going to experience the way in which weather—season-to-season and right down to hour-to-hour—will send strong price signals to the market affecting profitability. This could cause significant challenges for existing plants to recover their costs, a risk now compounded by advancing carbon markets, high natural gas prices (and slow progress of gas market liberalization), and a slew of new pollution standards placed on thermal (particularly coal) generators.

China—with 23 provinces, five autonomous regions, and four 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. Doing so will help resolve the issue of curtailment, as well as enabling China’s electricity customers to benefit from efficiencies and low-carbon generation from elsewhere in the country.

Last year’s merger of state-owned coal mining company Shenhua with coal generator Guodian came as a major move for the industry, but experience shows that coal miners are also strongly affected by power sector reform, often forcing the least economic mines out of business. Unsurprisingly, reforms need strong political backing to succeed with jobs at stake. In response to this, the 13th Five-Year Plan also outlined plans to increase employment in low-carbon industries to 13 million people across the sector by 2020.

It has only been three years since Erdaoqiao was connected to the grid; a landmark event aspired to for half a century. Still, reforms in the power sector are moving ahead apace. Over the next decade, while Western countries continue 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, exporting its power sector expertise to the rest of the world. ■

Christian Romig is head of management consulting for China at Pöyry (poyry.com).