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The Stumbling Blocks to China's Green Transition

 
 

China’s quest for a “green, low-carbon power system” is no simple endeavor. Although there had been minor initiatives to address environmental issues since the 1980s, such as the promulgation of the Environmental Protection Law, China’s energy generation remained aligned with its development model. This meant an overreliance on coal and the postponement of policies to tackle energy-related inefficiencies that could undermine economic growth.

It is only recently that the Communist Party envisaged an energy transition blueprint under its Energy Development Strategy Action Plan (2014-2020), redoubling efforts to achieve its goal of transforming China into an “ecological civilization.” Today, China is the largest consumer of energy, accounting for 23 percent of the world’s primary energy demand, and the largest consumer of coal, posing great challenges to its much-desired green transition.

To counterbalance this scenario, China is aggressively investing in renewable energy, setting goals and performance standards, and converging policies to establish economic incentives for the nonpublic sector to change its culture of consumption. The 13th Five-Year Plan, for instance, contemplates the goals of a 15 percent reduction in energy intensity and 18 percent in carbon intensity from 2015 levels, which forces both the government and private enterprises to reallocate resources to greener practices. China is already the leading investor in renewable energy in the world, planning to invest another $360 billion by 2020, and is increasingly implementing international targets, such as those comprised in the Paris Agreement. However, despite declining in relative terms, its coal installed capacity is not expected to peak before 2025, at the same time that a top-down green transition is already facing a myriad of tradeoffs.

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Energy Use and the Pursuit of “Beautiful China”

China has achieved enormous progress in terms of economic growth over the past three decades. Due to a development model centered around investments in industrial capital and infrastructure, the Chinese economy grew at an average rate of almost 10 percent during this period, multiplying its GDP 18-fold from 1980 to 2010. Interestingly, its energy consumption only grew four-fold, meaning that the energy intensity required to power China’s economic growth plummeted over time. However, focusing on this alone can also be misleading: not only have China’s socioeconomic transformations of the past decades put an extra pressure on the already fragile environment, but China also relied upon “dirty” energy sources to maintain its economic performance.

The transition from rural development, in the 1980s, to an economy focused on supplying international markets with manufactured goods, generated more incentives for the consolidation of a coal-based energy system. Abundant in China and relatively cheaper than other energy sources, coal accounted for more than 90 percent of energy production in the 1950s, declining to no less than 75 percent in the 2000s. Against this backdrop, there was no government or private-led initiative to curb environmental degradation and pollution originating from energy production in China. The consequences, among others, were mounting air pollution in urban centers, water contamination, and biodiversity loss.

Since Xi Jinping’s inauguration as secretary-general of the Chinese Communist Party, in 2012, there seems to have a substantial political commitment to revert this scenario. For instance, “green development”, together with ‘innovation, coordination, greenness, openness and inclusiveness’, profiles China’s ‘five key development concepts’,” pushes to another level incentives to reform China’s energy system. New sources for financing sustainable projects (such as tax exemptions and market mechanisms) and a control system to oversee enterprises’ practices came into effect. As a result, over the past years, China has become the largest investor in renewable energy, overtaking Germany in 2015 with the largest installed capacity of solar power in the world. It also invested in more than 4.000 projects involving energy saving and structural adjustments, and supported renewable energy producers with feed-in tariffs (TiF) and low-interest rate loans.

Despite these efforts, China still consumes as much coal as the rest of the world combined. According to the report “Energy Transition in the Power Sector in China: State of Affairs in 2016,” “the bulk of Chinese electricity was produced by thermal power plants, mainly coal, which accounted for 65 percent (or 3,906 terawatt hours) of the country’s total power generation.” The industry still represented 71 percent of energy consumption in 2016, which translated into a structural hurdle to the advancement of reforms in China’s energy mix. Renewable energies, on the other hand, accounted for 25 percent of total power generation, with hydropower at 20 percent, wind power 4 percent, and solar power 1 percent. Overall, China has modestly upgraded its power system to afford more sustainable energy sources — for instance, renewables made only 17 percent of total power generation in 2010 — but as of 2016 its economic structure still constituted as an impediment for a quicker green transition.

The 13th Five-Year Plan (2016-2020) and the Energy Development Strategy Action Plan (2014-2020) indicate more robust changes in China’s energy mix. They stipulate state policies and market mechanisms not only to reform energy production, but also to comprehensively impact demand and consumption. Taking into account current trends, as well as the growing share of the service sector and new energy efficiency technologies, the 13th FYP sets reduction targets for energy efficiency, as mentioned earlier, and forecasts renewable energies to compose 34 percent of installed generating capacity in China’s power sector. Nevertheless, this doesn’t mean that coal will lose its importance: in absolute terms, installed capacity for coal is supposed to increase almost 17 percent, from 942.6 GW in 2016 to 1,100 GW in 2020.

As the China Renewable Energy Outlook 2017 reports, “the current power system is still influenced by the last 15 years’ development strategies, which – successfully – aimed for security of electricity supply to power the rapidly expanding economy.” However, “with today’s ‘new normal’ growth rates this approach has led to significant overcapacity of coal power plants with the risk of stranded investments and ‘lock-in’ to fossil fuels in the future power system.” Based on that, it is conceivable to think that the transition to a “green, low carbon power system” already faces a myriad of contradictions that affect policy implementation. The next section, therefore, will analyze constraints related to market forces, technological breakthroughs, social welfare, and environmental resilience.

Market Forces

Declining costs for renewable energies have entered an irreversible track. This, in tandem with governmental support and policies, will boost the energy transition in the next years. However, there are some market mechanisms that, if not thwarted, could at least slow down the full implementation of the reforms. First, the profit margin of coal-fire power increased in the last years, due to low prices of coal and to a relatively stable grid purchasing price. This serves as a stimulus to reinvest private capital in coal production, rather than renewable energy.

Second, in China a “complex web of cross-subsidization and local protectionism means that the actual cost of energy for industry is likely lower than it should be.” Chinese industry is heavily dependent on coal and doesn’t have an infrastructure adapted to be fueled by other sources of energy, while the transition to services — which would “require [a] different approach to managing China’s energy consumption” – faces market disincentives.

Third, the “decentralization of the right to approve environmental impact assessments for new power plants from national to provincial level” represented in practice a relaxation on regulations to prevent new investments in dirty energy. This is supported by the notion, built over the past decades, that investments, especially in infrastructure, boost the economy.

Lastly, in many cases it has been cheaper to pay extra fees due to pollution or breaking environmental regulations than to implement energy-efficient solutions. In this manner, both state and market play roles in stimulating the development of renewable energies at the same time as maintaining structural incentives for the permanence of a coal-based economy.

Technological Breakthroughs

Technological constraints are one of the most important factors that prevent further investments in renewable energies. Technology impacts these sources’ efficiency, operation and maintenance costs, and eventually, market prices. Over the past decades, there have been exponential technological improvements for renewable energies, but there remains at present a discrepancy between these technologies and installed infrastructure. It’s not only the technology embedded in the development of renewable energies that matters, but also the technological adaptations that these new sources of energy require.

In China, “electricity dispatching and absorption does not match the development of renewable energies,” since they are “influenced by a traditional approach to power transactions, which fails to account for the variable nature of large-scale power generation from wind and solar power plants.

This is clear when we analyze China’s grid bottlenecks and curtailment rates for wind and solar powers. Xinjiang, for instance, lost 38 percent of the energy produced by wind power in 2016. Nationally, 17 percent of all wind-power generation was curtailed in 2016 and has been increasing since 2014. Moreover, China’s energy transmission lines still do not support the transference of electricity without losing a considerable amount of energy, whereas industries rely on coal, rather than electricity, to maintain their daily operation.

Finally, more technological improvements are urged for cleaner coal production, since it still dominates China’s energy generation for the foreseeable future, but market disincentives and overestimations regarding technology development for renewable energies eclipse this necessity.

Social Welfare

The transition to a “green, low carbon power system” faces notorious social tradeoffs as well. It is not that greening China’s energy mix isn’t of utmost importance, since it is a precondition to more suitable environments for living. Rather, it is fact that a rapid transformation of the country’s energy profile may not be followed by social patterns.

For instance, establishing new energy sources for electricity and correcting market distortions in the sector may cause the price for residential electricity to soar. Currently, it is “more distorted and significantly below those of OECD countries. At $0.074/Kwh, China’s residential electricity tariff is less than half the OECD average of $0.158/Kwh.” Price reform in the sector would directly impact the population’s disposable income, affecting their purchasing power and savings, as is already happening in some regions.

Furthermore, the government’s decisive policy of shutting down coal power plants in order to meet its pollution reduction targets has two main shortcomings. On the one hand, it contributes to a persistent local high unemployment and deteriorating life quality. This can be exemplified with the recent crackdown on coal plants near Beijing and the prohibition of residential coal-fired heating systems, which both added pressure to unemployment and left no other source for the rural population to warm their homes during the cold winter.

On the other hand, the shift away from coal affects local governments’ budgets, as they witness a decline in financial revenue from industrial taxes. Since the last tax reform, local governments have been burdened with public expenses such that their few revenue sources are not able to cover. In this case, losing another source of revenue only motivates local governments to contract more debts. For these reasons, a relatively rapid green transition, where there is a lack of infrastructure to support the smooth substitution of energy sources alongside an education gap that does not prepare the workforce with skills required in a green economy, eventually will bring about side effects for the Chinese population.

Environmental Resilience

The positive outcomes of a transition to cleaner sources of energy are evident. Chinese cities will reduce air pollution, rural lands will suffer less from water contamination, and natural landscapes can endure longer. Therefore, of the four main constraints to energy reform in China, environmental resilience poses weaker barriers to the deployment of renewable energies. However, there are two repercussions worth mentioning: geographical suitability and interrelationships among environmental issues.

Renewable energies depend on good geographical positioning, where the potential to generate energy outpaces the costs for installation and operation. In China, this translated into a concentration of power plants in specific areas — wind and solar power, for instance, are more advantageous in grasslands and deserts, respectively — that already suffer from soil degradation, erosion, and water scarcity, such as Xinjiang and Inner Mongolia.

This leads to the second repercussion with respect to the interrelationships between environmental problems. Even though renewable energies have reversible impacts on the environment, their scale of production and installation in a concentrated area aggravates the above-mentioned problems. Consequently, because renewable sources of energy depend on bigger and bigger areas of already degraded lands to scale its production, there is a physical hazard to China’s green transition.

Looking Beyond

The transition to a “green, low carbon energy system” is not only feasible, but desirable. However, China’s effort to reform its economic model, with the insertion of more environment-friendly technologies and practices, faces structural constraints, most notably those related to profitable investments in clean energy and its adaptability to the Chinese level of social development.

A more attentive look into China’s plan and current trends to reform its energy system reveals that the so-called “energy revolution” doesn’t mean that China will get rid of its status as a coal-based economy. Industry and market forces will still play a significant role in determining the permanence of coal as one of the motors of China’s economic growth. However, for the foreseeable future, the development of renewable energies will indeed be crucial to address the pressing environmental issues that surround China.

As has been proposed here, though, such a complex transition must be approached cautiously. The plan of building an “ecological civilization” brings tradeoffs worth highlighting.

Daniel de Oliveira Vasconcelos is a Scholar at Yenching Academy of Peking University. He is currently researching China’s energy policies.

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