UN Climate Week: China’s Electricity Market Reform Is Underway

During the UN Climate Week, I attended a panel hosted by the Environmental Defense Fund (EDF) China and China Electricity Council (CEC) for a discussion on China’s electricity market reform. Experts in attendance were from Natural Resources Defense Council (NRDC), Energy Foundation China, International Energy Agency (IEA), Regional Greenhouse Gas Initiative (RGGI), Global Energy Interconnection Development and Cooperation Organization (GEIDCO), Columbia University, Tsinghua University, Duke University, Korea University, etc. 

As the world’s largest producer of carbon emissions, in large part reflecting its place as the world’s largest coal consumer, China is being driven to launch new programs to reduce carbon emissions – including scaling up early tests of emissions markets.

In 2018, coal accounted for 58% of the total primary energy consumption in China, of which half was for electricity generation. The electricity sector in China is dominated by coal: in 2018, coal was the source of 66.5% of total electricity generation in China. Experts from CEC said that the share of coal for electric power production is expected to increase as China continues to shift its economic structure from manufacturing to service industries. Despite this, by focusing on improving both production and consumption efficiencies and utilizing pollution control technologies, China is making some progress on reducing the emissions of COx, SOx, NOx, and other particulates. From 1978 to 2018, carbon intensity from all sources of electricity generation has decreased from 1083 g/kWh to 592 g/kWh. Even so, this remains far above OECD and U.S. levels of electricity carbon intensity, which are 408 g/kWh and 473 g/kWh in 2014, respectively.

In 2011, seven provinces in China were selected for carbon emission trading pilot studies. Based on results from these pilot studies, China began planning the launch of a national emissions trading scheme (ETS) in December 2017. Through the phases of market infrastructure development, trading simulations, and market optimization, China anticipates that the ETS will open for trading in early 2020, beginning with the power sector. As this occurs, China will become the largest carbon market in the world, with over 3 billion tons of carbon emissions being managed under the ETS.

The ETS will be structured so that power plant owners will be granted carbon emissions allowances applied for each of their power plants.  These emissions allowances will be traded through the ETS or saved for later use. To ensure compliance with the ETS, China will require Monitoring, Reporting, and Verification (MRV) practices and continuous emission monitoring systems (CEMs), as have been adopted elsewhere.

At the moment, the pace of the tightening of the ETS – and the consequent effects on carbon pricing over the longer-term – is still to be determined. A long-term vision of carbon pricing is recognized to be crucial, so as to send strong economic signals to power plant owners on investment decisions. In the power sector, carbon pricing will be added to electricity prices, and this will improve opportunities and markets for the development of new renewable resources.

When planning for ETS implementation, China learned many valuable lessons from the West, particularly the EU and California. Several customizations are worth noting.

First, the basis for trading will be carbon intensity rather than a “total emissions cap for companies.” That is, instead of setting an absolute emission cap for companies, carbon emissions on an electricity output (g/kWh) will be the basis for trading.

Second, according to experts from CEC, the ETS is trying to simplify the benchmark of emission outputs at their current stage. It is likely that emissions standards will be set by fuel type rather than by power plant type. For instance, all coal-fired power plants may share the same standard, regardless of whether they are subcritical, supercritical, or ultra-supercritical. The aim of this approach is to encourage the utilization of plants with higher operating efficiencies and better emission controls. In other words, it provides a clearer economic signal for plant owners to make decisions whether to improve technology at existing plants or to accelerate their retirement.

One particularly pressing question was raised during this conversation: How much potential does China have to reduce carbon emissions in its power generation sector? The answer depends on whether China requires its currently operating coal plants to run for their entire planned lifetime before retirement. That is, if coal assets cannot be transitioned before the life of the plant is fully exploited, then China indeed has limited near-term ability for carbon emissions reductions, because existing coal plants are relatively new compared to other countries. However, if existing coal plants can be shut down early, with renewable resources being the replacement source of electricity generation, there is huge potential for reducing carbon emissions.

From its start with the power sector, the ETS will gradually expand to include seven other emission-intensive sectors: petrochemical, chemical, building materials, steel, nonferrous metals, paper, and domestic aviation. Over the coming years, it will be interesting – and important – to monitor the ETS and its effectiveness in driving down carbon emissions in an economically-efficient manner as it launches in the power sector and grows to include these other sectors.

Peishan Wang, research fellow at the Boston University Institute for Sustainable Energy, is a graduate student of Systems Engineering at BU. After coming to the U.S. in 2011, she studied Chemical Engineering and Industrial Engineering at Worcester Polytechnic Institute for her undergrad. She also worked two years on developing wastewater sensors after graduation.

The opinions expressed herein are those of the author, and do not necessarily represent the views of the Boston University Institute for Sustainable Energy.