China promised to reach peak greenhouse gas emissions in 2030 and increase the non-fossil fuels’ share of primary energy consumption to around 20% by 2030. This implies profound reforms in its energy sector.
In 2016, electricity made up 23% of China’s total final consumption, surpassing the world average. China now leads the world in global share in electricity production and consumption, as well as GHG emissions. Electricity is vital to achieving a ‘well-off society’ by 2020 targeted by the Chinese government; by then estimated power consumption in China will be 8 trillion kWh, almost double the current total. Along with China’s economic transition and restructuring, the electricity demand for manufacturing and construction (both together account for about 90% of electricity consumption) will peak around 2030. Low-carbon power generation is expected to dominate such demand.
There has already been a significant shift: by 2017, China’s total renewable energy installed capacity had reached 28.4% of the world’s total renewable capacity. The share of renewables in total electricity generation accounted for about 26% of total power consumption in China, of which only 5% was contributed by non-hydro sources. However, further progress may be difficult for renewable power has been severely curtailed due to the country’s uncoordinated power system. There are distorted pricing mechanisms and no wholesale market, as well as regional protectionism. In 2016, an alarming 50 billion kWh hydropower was curtailed, mainly in Yunnan and Sichuan. In addition 50 billion kWh wind power and 7 billion kWh solar power were wasted, representing almost 15% of total wind/solar power generation of the year.
Therefore, although there has been intensive investment and construction of renewable power generation infrastructure, grid reform has lagged and has now become a bottleneck in the sector. The benefits of electricity sector reform could be substantial, if designed and implemented carefully. For instance, the reform of the cross-subsidization system for electricity pricing wherein industrial and commercial electricity prices subsidize residential prices would be significant for Chinese industrial users under the “new normal” economy, who have to deal with a relatively higher industrial electricity price than the United States (about 50% higher, US$0.1068 per kWh in China versus US$0.0710 per kWh in the United States based on 2014 data).
A reform of the energy system in 2002 was considered a fundamental change to China’s energy industrial framework. Four major steps of systematic reform were planned: the separation of power generation and the grid; market competition in electricity prices; the separation of power transmission and distribution; and the opening up of retail electricity sales. The first step has been accomplished. The gigantic state-owned National Electricity Corporation has been split into five large power generation companies and two grid companies supervised by the State-Owned Assets Supervision and Administration Commission of the State Council. Separating the facilitating companies from the main industry is also on the reform agenda. Over the years, the infrastructure of the power grid has almost been completed but the challenge of designing suitable “software” for the platform remains.
In 2015, another round of substantive power system reform was launched, with a very clear focus on reforming the power grid and pricing system. The power grid is not only an electricity transmission carrier, but also a platform for the electricity market, and more importantly its public service system. That power grids constitute a natural monopoly and power generation an oligopoly is commonly acknowledged. However, a natural monopoly in an economic sense is different from administrative control of the monopoly. For further reform, therefore, vertical unbundling of the power system of both natural monopolies and the introduction of competition is required.
The distorted pricing system is another obvious problem. Both the feed-in tariff and final sale tariff are set by the government. A competitive wholesale power market was not established as expected after the 2002 reform. Private and foreign investors were discouraged by the fluctuating prices, and as a result, the “big five” SOEs remain as the main investors in the power industry. However, they suffer from high asset risks and rising debt. Eventually, it is imperative that private and foreign companies contribute to the investment. They could not only alleviate pressures from investment sources, but also introduce more advanced technologies and management skills to improve industrial efficiency. Hence, establishing competitive wholesale and retail power market is the main objective of post-2015 reform.
Another institutional challenge pertains to achieving a viable balance of benefits among the different provinces. A province-based administration system compromises on the possibility of regional integration and the national balance of electric power. Power transmission infrastructures between provinces are inadequate, as are the soft constraints of provincial administrative institutions, so regional integration is difficult. Electricity feed-in price-bidding for joining the network has been proposed for years and regional power trading centres were built to complete the three-level trading system of the state, region and province. However, more than 85% of the trading volume is still concentrated at the provincial level. Along with the West-East Electricity Transmission project, developing a large regional market for electricity trading is a logical solution. Long-distance power transmission is another barrier, particularly for renewables like hydropower because generators tend to be located far away from the load on the grid. Since 2011, building UHV (ultra-high voltage) systems and urban-rural power networks have become priorities. The plan is to establish a basic framework of a national smart grid by 2020, with at least 39% connected clean power sources.
The ultimate goal of power system reform is to build a sustainable energy framework that supplies safe, stable, economical and clean energy to support socioeconomic development – and to meet China’s ambitions on renewables. In order to build an adaptive power system, China needs to restructure its power market and ownership structure, separating vertically the natural monopoly networks to enhance competition, arranging a secondary market with appropriate economic regulation and promoting efficient low-carbon technologies.
About the author
Dr Yan Zhang, Visiting Fellow 2018-19
Dr Yan Zhang currently works as British Academy Research Fellow at the Centre of Development Studies, University of Cambridge, where she also serves as the Research Associate at the China Centre of Jesus College and Bye-Fellow of Newnham College. Dr Zhang also affiliates to the ... Learn more