China has unleashed a new set of policy measures to combat renewable waste or curtailment–a looming issue facing the clean power sectors following recent years of project construction dash.
The latest policy, from National Energy Administration, shows Beijing’s a firmer grip on the issue and its determination in boosting renewable consumption.
However, the new measures may be not entirely good news to renewable investors and developers. And the near-term winner of China’s “renewable consumption pressure” is more likely to be battery manufacturers, storage developers as well as the nascent hydrogen sector.
Renewable Consumption Policy in China: An Update
China’s National Energy Administration (NEA) last month released a policy draft regarding the building of a long-term mechanism for clean energy consumption. The feedback inviting draft is yet to become an effective policy, but it has triggered industry’s attention.
The policy outlines a new “game-plan,” or a new structure, of China’s renewable market.
In many ways, NEA’s new policy can be seen as an update of the Clean Energy Consumption Action Plan announced by National Development and Reform Commissions (NDRC) in 2018. Both aims to solve the renewable waste issue. Both eye on similar dimensions for curtailment reduction, including improving system flexibility, adding local renewable consumption demand, utilizing power trading mechanisms, and expanding grid access.
However, several subtle different lied in the new policy hinted Beijing’s new emphasis in the future “solutions.” The below chart by Energy Iceberg research highlights the key differences between the two policies.
The most significant change is the answer to one critical question:
Who should take the burden/cost of improving system flexibility?
- The answer used to be the coal-fired power plants and the grid operators. The former was required to improve technology and serve as peakers in NDRC’s 2018 policy; the latter were asked to provide more transmission access and improve flexible transmission. But in the NEA policy draft, the responsibility is on renewable generators to build a “grid-friendly” renewable project.
Meanwhile, there are several other changes in the new policy draft.
- The scope of “clean power”: nuclear power (over) supply appears to be no longer a big concern. The industry is barely mentioned in the new draft, perhaps due to the limited nuclear new build units in the past and the coming years.
- The market trading mechanism to apply: establishing auxiliary service mechanisms has been placed in a much higher position; Beijing also hints a stronger push for renewable to participate in spot trading.
- The role of the grid: the grid operators held accountable to fulfil several responsibilities in grid investment and technology innovation in the 2018 policy; in the new policy, its accountability to invest appears to be much lighter. Instead, there is a heavier emphasis on its role in designing renewable development pace.
- The renewable consumption measures: the new version of NEA details the exact methods to promote local renewable consumptions, with EVs, electrifying harbours, hydrogen production listed as crucial measures.
- RE-electrification instead of heavy-industry-focused: there is no more emphasis on mining and metal industries as means to increase power consumption, indicating a “greener” preference on electrification (in heating, cooling, hydrogen, transportation sectors).
New Renewable Power Game Play? What Conclusion to Draw?
The policy draft of NEA paints a likely new landscape of China’s renewable market, where the traditional renewable players (wind, solar, hydro, grid, and regional government) face new roles.
Moreover, the future market will see the participation of new players with increasingly substantial roles. Players like battery storage, hydrogen producers and EV charging providers could have a more massive influence on the market direction in the future.
The market is poised to be more “complex.”
New-Infrastructure Energy Sectors Would Benefit
Notably, the industries to benefit from the new renewable consumption policy are those included in China’s new infrastructure investment strategy.
- Battery energy storage
2020 has redefined China’s energy storage investment approach. The renewable generators are set to take up the responsibility to develop battery storage units, as current policies from the central government and regional regulators show.
While the battery sector saw the dramatic boom and burst of the grid’s energy storage investments in 2019, it is facing new growth momentum provided by the new renewable consumption policy.
As of June 2020, there are at least 12 provinces in China that have laid down energy-storage requirements on renewable new-builds, asking developers to build up storage capacities accordingly.
- Green Hydrogen Production and Transportation
The nascent hydrogen industry shall benefit from the policy.
China currently still has limited green hydrogen development, mostly due to the lacking price competitiveness of green hydrogen—compared to the grey hydrogen produced in China’s massive coal and chemical industries. Meanwhile, the traditional players are in an early stage, exploring the economic potential of green hydrogen based on low-cost power supplies.
But the shifting policy direction will spur changes fast. Already regional governments and power utilities under the political pressure show growing interest and begun to invest in the field.
- Grid Construction
Several new policies in 2020 have strengthened grid companies’ power in the renewable sector. The development appears to be at odds with the reformative measures (against) grid’s position in the previous years.
Renewable Investment Faces New Market Dynamics
A more vigorous policy to support renewable consumption sounds like a good plan for renewable developers, who suffered from severe curtailment issues in the past.
However, in the near term, several new policy measures may add insult to injure of renewable investment, which is undergoing a storm of subsidy sunset and supply chain cluster.
A vital issue for the renewable generator is the increased requirement of energy storage construction, which would drive up their cost.
As several estimation shows, internal investment return could quickly drop 0.3% for wind and solar projects for building the required 10-20% storage capacity construction. At the same time, the new policy did not fix the “marriage” between renewable and energy storage. More than a dozen local governments have introduced regional rules demanding such combination.
While the renewable industry may push back on such development, it is undeniable that the sector is up for a more complex market environment, as a wide range of new players from the demand side is poised to take part in the game.