Three challenges to change
While China has made remarkable progress toward its energy transformation, there’s no denying the enormity of work still to do. In particular, three key challenges may slow down its journey toward the tipping points:
Distribution networks, particularly in rural areas, are in critical need of upgrades. Integrating more renewables into the grid – which grid companies are mandated to prioritize over fossil fuels – will require aggressive, but strategic, investment. Companies will need to balance investment in connecting remote renewable farms to the grid, with critical improvements to the safety of the grid and the addition of digital capabilities. While the State Grid Corporation of China (State Grid) has made significant research and development investments in automation to address some of these needs, the scale of work faced by China to prepare its distribution networks for its energy revolution is unprecedented.
The heavily regulated energy market is dominated by China’s state-owned enterprises (SOEs), supported by generation subsidies and price caps that create huge inefficiencies in energy supply and increase generation costs. China’s Government acknowledges the need for change and is progressing market deregulations and the establishment of a real-time electricity spot market in eight regions.
Renewable subsidies have led to unsustainable growth of the segment, oversupply of energy and high curtailment rates. The Government has moved to address this by announcing in 2018 that it would halt subsidies for utility-scale solar projects, in favor of competitive bidding, and reduce feed-in tariffs.
Accelerating progress to energy transformation
But China is accelerating initiatives designed to overcome these barriers. Both Government and industry are prioritizing investment in upgrading the country’s transmission and distribution networks, which will be critical to the success of the energy revolution.
Moves are also underway to improve the governance and efficiency of the SOEs, which includes allowing more private investment in the sector. Private investors are already key players in solar, wind and battery storage, and now the Government is opening up more state-owned parts of the energy value chain to outside investors. As energy reforms continue, we expect to see more foreign investors – currently active in other parts of the energy sector – move into generation, which should improve the competitiveness of the sector.
At the same time, Chinese utilities are looking to overseas markets, in line with China’s Belt and Road Initiative. Assets in foreign energy markets offer potential for growth on a scale not available domestically and also allow utilities to achieve economies of scale. Chinese energy companies including BYD have deployed or are developing large-scale energy storage projects across Europe and the US. Global mergers and acquisitions are also helping SOEs, such as State Grid, gain the technology and management capabilities that will enable these utilities to become true global players.
Chinese consumers willing to pay more for clean energy
Severe pollution in China’s cities has convinced many of its citizens of the need for an energy transformation. Ninety percent of Chinese consumers have expressed a willingness to pay 10% more for electricity if it comes from renewable sources.14 Encouraged by Government and utilities, more people are installing rooftop solar, and EV adoption is increasing faster than anywhere else in the world. That said, the consumer is less of a driver for change in the energy market than in Europe, the US and Oceania. But, as the Chinese “prosumer” continues to become more prominent, both the Government and industry are expected to take note and shape policies to suit.
Countdown to China’s energy transformation
The Chinese energy market is like no other – and its energy revolution has no precedent. The state-dominated energy sector recognizes the need to move toward a market-led economy to make the innovation, efficiency and environmental improvements needed to meet future electricity demands – while delivering on President Xi Jinping’s promise to “make the skies blue again.”
But, bringing in innovation and transformation must be balanced with improvements to the governance and efficiency of SOEs, which will continue to play a critical role in Chinese society. Chinese utilities will be challenged to refine their strategies for a new energy future – regularly reviewing investment priorities and defining a new road map to succeed in light of geopolitical uncertainty, a changing market and digital disruption. A greater focus on developing the right talent and closer connections with international markets, will also support their ability to address challenges and capitalize on new opportunities.