Cihang Yuan and Daniel Riley of WWF’s International Corporate Climate Partnerships write on the Utility Dive website discuss three major policy trends have emerged and show strong potential to enable new market mechanisms that can unlock the pent-up demand of corporate renewable energy buyers.
3 major policy trends to watch for in China’s renewable energy market
In the U.S. and around the world, leading companies increasingly recognize the critical role they must play in addressing climate change. More step forward every day to commit to bold climate and renewable energy targets, not only for their direct operations but also for their supply chains.
Across sectors — from retail, to textiles and apparel, technology and many others — global supply chains often lead back to China. For that reason, leading international companies have long been looking for cost-competitive renewable energy sourcing options there.
Five years into the power market reform, the national policy framework has laid a solid foundation for an open and competitive power market. During that time three major policy trends have emerged and show strong potential to enable new market mechanisms that can unlock the pent-up demand of corporate renewable energy buyers.
Trend one: Renewable Portfolio Standard provides new policy opening with the provincial governments
In May 2019, the Chinese government established a renewable energy portfolio standard (RPS) that sets annual renewable energy targets for each province in China. Under the RPS, the grid companies, electricity retailers, electricity buyers in the wholesale market, and captive power plant owners are required to contribute to the overall provincial renewable energy target. Each province must now design the implementation details, including targets for each covered entity, tracking, and enforcement.
The RPS provides strong incentives for provincial policymakers, especially those who are further away from their RPS targets, to explore new market mechanisms to bring more renewable energy onto the grid and activate the demand from corporate energy buyers. In turn, this opens a rare opportunity for corporate energy buyers to engage with provincial policymakers on renewable energy procurement.
We are already seeing collective engagement of buyers, renewable energy developers and nongovernmental organizations with the provincial policymakers in Shandong, Guangdong, Jiangsu, Zhejiang and Beijing-Tianjin-Hebei Area leading toward new procurement options. The ongoing market innovation in these pioneering provinces will empower more energy buyers to take action and engage with policymakers across China.
Trend two: Phase-out of renewable energy subsidies opens the door to cost-competitive renewable electricity and market-based GECs
In 2009 and 2011 respectively, China started to provide subsidies (feed-in-tariffs) for wind and solar power generation leading to an exponential growth of installed renewable energy capacity. However, the rapid growth also brought challenges, including curtailment of renewable energy generation and delays in subsidy payments that left companies frustrated.
In January 2019, China started to correct these policies and now new renewable energy projects built from 2021 onward will be as cost-competitive as the thermal generation. The Green Electricity Certificates (GECs), which were previously pegged to the level of renewable energy subsidies, will now reflect the willingness of corporate energy buyers to pay.
In light of this new context, corporate energy buyers will be able to make a stronger case when engaging with policymakers for cost-competitive renewable energy procurement options bundled with GECs, the possibility to support new projects and improved traceability of GECs.
Trend three: Development of provincial spot markets furthers the possibility of Virtual Power Purchase Agreements
Electricity spot markets, initiated in a few provinces in China since 2017, are designed to reveal generation costs in a timelier manner and inform resource planning.
In the long run, spot market prices will further show investors and policymakers on how best to prioritize future investment, divestment, and retirement decisions. As of now, four out of the eight provincial spot markets have renewable energy access. Spot market development has strong potential for driving more cost-competitive renewable energy options and more flexible procurement options including virtual power purchase agreements.
These three policy trends align the corporate renewable energy demand with the goals and incentives of policymakers, renewable energy developers, and other key market stakeholders. They also create the conditions that are essential to liberalizing the power market with better price discovery mechanisms and more choices for energy buyers.
This lays the groundwork for key provincial market and policy stakeholders to explore new renewable energy procurement options that truly reflects the ambition and demand of corporate energy buyers.
In light of these recent market and policy developments, the corporate sector can work together with the nonprofit community to realize these opportunities. It’s a unique and exciting moment to engage with provincial policymakers, to clearly demonstrate the scale of growing corporate demand for renewable energy, and to pilot new renewable energy procurement options throughout China.