With a promise of bluer skies, how will China power its energy revolution?

By

Serge Colle

EY Global Power & Utilities Advisory Leader

Global energy advisor. Connecting clients with EY services, assets and experience.

9 minute read 18 Jun 2019

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China’s economic growth is driving demand for electricity. Will renewables and digital transformation deliver the sustainable power it needs?

All of the world’s energy markets are changing, but none as fast as China’s. The country’s energy transformation is bigger, more radical and accelerated by several urgent drivers for change.

Against this backdrop, Chinese President Xi Jinping has promised dramatic change – an “energy revolution” – and to build a more sustainable electricity sector as stipulated in China’s 13th Five-Year Plan (2016–20). The plan outlines China’s aim of reducing energy intensity by 15% between 2016 and 2020, with a focus on swapping out coal for renewables and ramping up investment in innovative energy technologies.

China’s three-pronged approach to sustainable energy

The Chinese Government’s energy revolution has three elements:

  1. Reduce carbon emissions: China has postponed 150 GW of coal capacity until at least 2020 and implemented emission restrictions in 28 cities, requiring regions to cut coal emissions by 5% to 10% by 2020.5
  2. Increase renewable energy adoption: Strong Government support has boosted the rollout of rooftop solar and seen China become home to five of the world’s six top solar module manufacturers and five of the largest wind turbine manufacturers.6
  3. Grow use of gas and nuclear energy: China is set to become the world’s largest gas importer by 2019.7 And its current pace of nuclear development will see China become the world’s biggest nuclear nation by 2030.8 

Change has been swift, partly because of the falling cost of renewables but also because of China’s ambition to develop the world’s leading renewable energy sector. Each year, the Chinese Government invests more than US$100 billion in domestic renewables (twice the level of US investment in domestic renewable energy), although renewable subsidies were cut in 2018.9

This overall investment is nurturing a thriving culture of innovation that is hastening progress toward an energy transformation:

  • Artificial intelligence (AI) is a priority for the Chinese Government, which aims to lead the world in AI. The use of AI to automate electricity networks and better manage digital grids will improve the efficiency of the generation and transmission of renewable energy.
  • Electric vehicle (EV) adoption in China is the world’s highest, encouraged by significant investment in EV infrastructure.
  • Battery storage technology investment goes hand in hand with EV adoption and is also benefiting from heavy Government and industry investment. China is tipped to become a leading producer of batteries and, in 2018, installed more battery storage than in all previous years combined.10

Together, these changes push China’s energy sector toward three critical tipping points. 

China’s tipping points 1 and 3 occur later than those of Europe and Oceania, but are on par with some US regions. It is possible that tipping point 2 actually could occur faster than in any other region, considering China’s world-leading EV adoption rates. 

  • Tipping point methodology

    The energy industry is at the start of a period of unprecedented change, one that will fundamentally change the market place (presenting new challenges as well as new opportunities). Three tipping points will mark the emergence of a new energy system.

    Tipping point one is when self-generation reaches cost parity with grid-delivered electricity. To determine this date, we calculated the projected demand for electricity, future generation mix and cost of delivering electricity via a central grid between 2015 and 2050, and then compared it to the predicted cost of self-generating electricity using solar PV and battery storage.

    To help determine when these costs would reach parity, we worked with a leading global analyst house to model the expected adoption and interactive impacts on electricity demands and costs of 10 core distributed energy and information technologies: solar PV; battery storage; electric vehicles; microgrids; home and building energy management systems; P2P electricity exchange; smart meters; artificial intelligence; grid-edge technology; and cloud.

    The study also identified two further tipping points for the energy industry:

    • Tipping point 2: when the price of battery electric vehicles reaches cost and performance parity with traditional cars with internal combustion engines.
    • Tipping point 3: when the mere cost of delivering electricity (i.e., the unit-cost of electricity transmission and distribution) exceeds the cost of self-generated electricity.

    Because drivers vary across markets, the tipping points will hit different regions at different times.

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.

Summary

The journey toward the tipping points for the Chinese energy sector is formidable but achievable, considering the previous pace of change across China’s economy over the past two decades. The world will be watching China’s energy revolution – the impacts of its transformation will extend beyond electricity to play a role in shaping every aspect of China’s future. 

About this article

By

Serge Colle

EY Global Power & Utilities Advisory Leader

Global energy advisor. Connecting clients with EY services, assets and experience.