China’s Energy Strategy 2020: Shifting Focus & Future Directions

The national energy strategy of China has been shifting, amid geopolitical and global market changes that define 2020–including the trade war and the coronavirus outbreak.

Last week, the country’s energy regulator, National Energy Administration (NEA), released the belated annual national energy strategy, the Energy Sector Work Guiding Opinions for 2020.  

The policy launch is part of Beijing’s routine move to regulate the sector’s development direction. The annual release this year is delayed for months due to work disruptions caused by the COVID-19. 

To many, it is easy to get lost in the official tone of such a policy. And the annual releases may look the same in their phrasing.

However, we would like to stress that the subtle changes in phrases or rhetoric could be serious indicators of Beijing’s shifting priorities regarding energy matters. Comparisons of the annual guidelines would provide valuable information.   

The following comparative analysis is our take on the latest policy changes in China’s renewable and power sectors.  Our key conclusions:

Major Strategy Change 2020: “Energy Security” Back to No.1

The most important task of the country’s energy industry now is energy security, the regulator stated in the document. (“保障能源安全是首要任务”) 

The rhetoric change marks the “return” of security as China’s No.1 energy priority. In the past few years, the regulator had clearly shifted its focus from supply-side sufficiency (security) to supply-side optimization (sustainability and market reform).

The change signals Beijing’s concerns over the energy access and sufficiency, again, amid challenges raised by geopolitics and global market issues. The examples of such issues induce US’ export ban over specific nuclear equipment, the enlarging entity list, and the turbine part supply bottleneck due to the coronavirus outbreak.   

Other than energy security, NEA also introduced a new priority—”energy to benefit the people/society” (惠民利民)—which emphasized on price reduction of (gas, electricity) supply and expanding energy network to the remote and impoverished region.  

While “clean and low carbon development” (清洁低碳发展) and “supply-side’s structural reform (供给侧改革) remain as two critical tasks. They appear to be placed in a less-important position. To compare, in the 2018 national energy sector guideline, sustainability was clearly the top priority, with market reform listed at the 2nd place. 

Yuki’s View on Market Implications: 

• Beijing would prioritize electricity price reduction by using administrative orders over electricity market building. 
• Clean power sectors will see less national subsidy available, as price reduction as the top concern. 
• Grid infrastructure investment is likely to bounce back.  

Power Market Reality: Limited Growth Space

Overall, the new guideline show less growing space for new projects and new constructions of wind, solar, hydro, and nuclear. 

Beijing’s attitude towards hydropower and thermal power is relatively similar to that in the 2018 guideline. For hydro, the spirit is to “actively develop” with caution; for coal, phase out low-efficient units remains the theme. Given the attitude, both will some updates in new projects–but in a limited scope, we expect.

However, there is a subtle– but vital–attitude change regarding nuclear, wind, and solar constructions. 

On nuclear, especially, Beijing is hesitant to list out any potential reactors in the pipeline, while it was a routine in the past to point out the commercial new build plans.  

Yuki’s View on Market Implications: 

• Although the industry is pushing for a “nuclear-restart.” The country faces practical difficulty to green-light new nuclear investment. 
• There appears to be limited space for new hydro investment, too. 
• The key focus of the whole power industry would be on projects that already secure construction permits. New investment may need to wait. 

Renewable Strategy: From “Stable” Growth to “Maintaining” the Growth 

Beijing’s intention to curb new wind and solar construction is obvious—this is our read of the 2020 guideline. 

The regulator downgraded its ambition in almost all wind and solar power sectors: China would develop mounted renewable projects “orderly” but not “steadily;” the country moved from “actively” promote offshore wind to calling for the nascent industry to maintain “orderly” development; even in distributed projects, Beijing reduced the scope/scale of its support. 

The current emphasis in the industry is to achieve zero-subsidy (grid-party) on time.  

Yuki’s View on Market Implications: 

• The national renewable subsidy will sunset according to the timeline previously laid down by Beijing. Extensions to the subsidy deadline seem highly unlikely. 
• In the near term, the investment return of many wind and solar projects face uncertainty. More asset sales or stranded investment could be on the way. 

Storage: Renewable-oriented Demands

Energy storage was often mentioned and encouraged in the previous national energy development guideline. But there is one critical change in the 2020 version. 

The emphasis on development storage now is to utilize the applications/solutions in the renewable market and promote renewable consumption. The new guideline, in that sense, agrees with the current market trend where renewable projects are required to build comparable storage capacity.

READ MORE on Energy Iceberg’s View on the Business Opporuntity in Battery Energy Storage Sector in 2020 

Accordingly, the most critical R&D areas now are the applications of storage in auxiliary services, distributed energy and micro-grid. 

Yuki’s View on Market Implications: 

• The policy would provide new momentum for battery energy storage’s market expansion. 
• Lithium-ion battery makers would benefit from the new demand from storage construction for distributed, micro-gird and renewable projects. 

Hydrogen: A New Sector Rising in China’s Energy Strategy and Mix 

For the first time, the national energy development guideline has included hydrogen. The milestone marks the nascent sector securing a position in China’s energy mix.

The task for hydrogen development in 2020 is to establish a national industry plan, the guideline said. Beijing is now aware of the urgency to set up a national framework for the new market after industry experts and lawmakers call for a coordinated effort.

Notably, regional governments currently are leading the hydrogen development game. But Beijing’s new rhetoric heralds policymaking efforts from the central government soon. 

Separately, in the past six months, hydrogen development has been included in at least 15 policy documents issued by different divisions of the central government. 

Yuki’s View on Market Implications: 

• As of now, hydrogen companies and investors should still focus on building up regional connections and securing local governments’ support. 
• As Beijing intends to step in, China is likely to see a more coordinative development approach in 1-2 years. New national funding schemes could be on the way. But on the other hand, the “centralized” process would phase out companies or projects in certain regions, too. In that sense, careful selections on the regional market and partners become even more essential. 

Clean Heating: from Natural Gas to Renewable

Another noticeable change is the country’s clean development strategy for the heating sector.

Since 2018, building low-carbon heating has been one of Beijing’s vital political tasks, as the emission from coal boilers are identified as a primary pollution source in China’s northern regions in winter.

The previous strategies include that in 2018, point to natural gas as the primary solution, with wind power, geothermal and nuclear as back-up sources.

However, that position has changed. In the latest policy, NEA reinstates the development of gas-to-heating should be based on the supply capacity of natural gas. The new strategy follows the severe heating shortage occurred in 2018 and 2019 winters caused on gas import disruption.

In the national plan of 2020, the regulator emphasized wind-to-heating again as the main substitution source. Meanwhile, there is no mention any longer of nuclear’s role in the heating sector.