Power supply spat hints at obstacles for China’s carbon market

Published 11:49 on February 16, 2016  /  Last updated at 14:28 on February 16, 2016  /  China, China's National ETS  /  No Comments

China’s five major state-owned utilities this week complained to the NDRC that the Gansu provincial government forces them to pay coal-fired generators to get their renewables onto the grid, a move that highlights obstacles facing the national ETS before it can make a real impact on CO2 emissions from the power sector.

China’s five major state-owned utilities this week complained to the NDRC that the Gansu provincial government forces them to pay coal-fired generators to get their renewables onto the grid, a move that highlights obstacles facing the national ETS before it can make a real impact on CO2 emissions from the power sector.

The five major electricity generators, all among the nation’s biggest CO2 emitters, have made huge investments in renewable energy in recent years, but struggle to get this power onto the grid.

Merit orders dictating the grid priority of generation sources are decided by the local government in most Chinese provinces, and are usually negotiated on an annual basis.

The five power giants on Monday wrote to the NDRC, China’s top economic planning agency, asking it to review the practice of the provincial government in Gansu in western China, according to China Newsweek.

The companies were offered quotas to deliver just 5,000 gigawatt hours of power to the Gansu grid in 2015, far less than they generated.

The provincial government chose to offer the remaining quotas, representing the vast majority of demand, to local coal-fired generators – major local employers and large sources of tax revenues – that have been struggling amid collapsing coal prices and the country’s clean energy policy drive.

Renewables generators in some cases paid the coal-fired utilities for their grid quotas or negotiated bilateral contracts with large industrial users, causing the renewables generators to lose the fixed minimum price for clean energy set by Beijing that they would normally receive.

“The local authorities have violated the renewable energy law,” Qin Haiyan, general secretary of the China Wind Energy Association, told newspaper China Newsweek.

China plans to launch a national ETS covering more than 10,000 companies next year, including power generators. But the situation in Gansu illustrates the difficulty in drawing up an ETS amid a rigid and inefficient system where local government decisions are unresponsive to market signals.

Ahead of the national ETS, China is making progress at curbing its energy-related emissions, though the rigid power sector structure may slow the pace of future cuts.

Analysts estimate CO2 emissions from fossil fuel consumption fell 3% in 2015.

MARKET REFORM

China is in the early stages of reforming its power market, and last year allowed a handful of regions to set up pilot power trading platforms that allow buyers to purchase electricity directly from generators at negotiated rather than government-dictated prices.

Observers say that if the reforms are successful they would indirectly help the ETS because the power market overall would become more responsive to market signals.

The extent of the reforms remains uncertain amid signs of resistance from the provincial administrations confronting an economic slowdown, which could put further pressure on them to favour cheap fossil fuels.

In the coal-rich autonomous region of Ningxia, one of the power trading reform pilot areas, the government helped major coal company Shenhua to sell coal-fired power to 16 local electricity firms, helping it offset lost revenues from plummeting coal prices, China Newsweek reported.

In the southern province of Yunnan, another pilot region, the government asked wind power suppliers to compensate coal-fired generators in return for an increased share of grid access.

The initial power reform pilot regions were Anhui, Guizhou, Inner Mongolia, Ningxia, Shenzhen, Yunnan. Shanxi province was recently added, and Chongqing and Hebei have also announced individual reform plans.

By Stian Reklev – stian@carbon-pulse.com

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