Interviews | Environment | East Asia

China’s Clean Energy Decline: Impact on the EU and US    

Insights from Frank Haugwitz

Mercy A. Kuo
China’s Clean Energy Decline: Impact on the EU and US    
Credit: Flickr/ The Climate Group

Trans-Pacific View author Mercy Kuo regularly engages subject-matter experts, policy practitioners, and strategic thinkers across the globe for their diverse insights into U.S. Asia policy. This conversation with Frank Haugwitz founder of Asia Europe Clean Energy (Solar) Advisory in Hong Kong and Asian Photovoltaic Industry Association (APVIA) in Singapore and vice chairman of the Renewable Energy Working Group of the European Chamber of Commerce in China (2013-2016) is the 221st in “The Trans-Pacific View Insight Series.” 

Assess the global impact of China’s decision to reduce investment in renewable energy (RE).  

China’s National Energy Administration (NEA) decision to initiate a two year transition period (2019-2020), i.e. moving away from 100 percent subsidy-driven towards a market home to both “grid-parity” and “subsidy-supported” RE projects, to eventually a 100 percent subsidy-free era starting 2021, caused a significant reduction of newly installed RE power generation capacities, notably solar PV in 2019. However, due to the lack of domestic demand, consequently prices for solar PV panels kept falling, thus triggering increasing demand outside of China. Therefore, global demand for solar PV in 2019 has been estimated to increase by up to 15 percent YoY [year-on-year], thus highly likely to off-set the shortfall of China’s solar PV installations. At the same time, China’s wind power market is anticipated to witness a continued strong growth during the last two years of the 13th Five-Year-Plan (2016-2020). Moreover, investments made across China’s solar PV upstream industry remain at an all-time high level. During 2019 the global PV industry invested approximately $9 billion, with Chinese manufacturers claiming a share of around 80-85 percent regarding modules and cell production capacity expansions. Such investments will further drive down cost, thus stimulating demand around the world in future.

Explain climate implications of China’s emissions growth of 3 percent annually.

Preliminary data for the first half of 2019 indicate that China’s demand for coal, oil, gas, and cement increased by 3 percent, 6 percent, 12 percent, and 7 percent respectively, resulting in an estimated increase of CO2 emissions from both fossil fuels and cement production of 4 percent YoY. Statistics suggest that demand for oil and gas kept steadily increasing past years; demand for coal rebounded since 2017; and cement production increased during the winter of 2018.

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Although China’s CO2 emissions shall continue to rise in 2019, a number of important energy and air pollution policies remain. In 2020, 11 provinces accounting for more than 40 percent of China’s coal consumption will have to stay within absolute limits according to their “Blue Sky Defense Plans” for 2018-2020. Given the increase in coal use since 2017, meeting these caps is likely to require strong measures. At the same time, China’s Ministry of Ecology and Environment (MEE) has already included five priority tasks explicitly addressing climate change to the 14th Five-Year National Economic and Social Development Program Outline and the 14th Five-Year Ecological Environmental Protection Plans (2021-2025):

  1. Encourage local government and major industries to formulate clear targets, roadmaps and implementation plans for carbon emission peaking.
  2. Achieve stable and effective operation of the national carbon market.
  3. Improve formulation of climate change laws and regulations and strengthen the capacity of local authorities and officials.
  4. Promote global climate governance under the principle of fairness, joint but differentiated responsibilities and respective capabilities, while continuing to provide support to developing countries.
  5. Place equal importance on climate mitigation and adaptation and update China’s national adaptation strategy.

Can wind and solar compete with coal-fired stations in China? Explain.

A recent study concluded that within 22 percent of 344 cities analyzed across China, electricity generated by solar systems installed on commercial and industrial (C&I) buildings would be cheaper than coal, subsidy-free, today. A combination of technological advancements, cost declines, and governmental support helped to realize such grid parity projects. In this context, on May 20, 2019 China’s National Development and Reform Commission (NDRC) and NEA jointly released the 2019 batch of approved grid parity projects for both wind and solar PV, totalling 20.76 GW. These projects will be given priority access to the grid and long-term (at least 20 years) contracts at the benchmark price of coal-fired power. Furthermore, among the third batch of Top-Runner projects (1.5 GW) located in Jilin, Inner Mongolia, and Jiangsu, the bid price for the project in Dalad, Inner Mongolia was approximately 2 percent below the local coal benchmark price of RMB 0.2829/kWh.

However, the introduction of a base price plus floating mechanism for the coal benchmark price effective since January 1, 2020 could become a challenge for such projects, because the coal benchmark can fluctuate by -15 percent and +10 percent annually (the latter only from 2021 onward, in order to avoid a price increase for, in particular, the C&I sector in the first year of its introduction). Overall, a drop of the local coal benchmark price by 15 percent could consequently challenge the competitiveness of such grid parity projects and eventually may lead to postponements or even cancellation of such projects planned for next years.

What is the impact of China’s clean energy slowdown on Europe’s climate change targets?

A positive impact will be pushing Europe to lead by example, i.e. instead of possibly lowering relevant climate change targets, pursuing a restrengthened global leadership role reflected by the just announced “European Green Deal,” which envisages halving emissions by 2030 and becoming the first climate-neutral continent by 2050. This “Green Deal” is considered as the vital first step attempting to gather a “coalition of ambition” among key countries to fulfil their pledges of the 2015 Paris agreement. The latter is seen as in danger, in particular since the 25th Conference of the Parties (COP) in Madrid ended without any meaningful results. This year’s COP 26 will again take place in Europe and expectations are high that either various European countries or Europe as a whole will take on more ambitious climate change targets.

Since 2005, the European Union (EU) and China have cooperated on climate change. During the last EU-China Summit in 2018, in the context of the “EU-China Partnership on Climate Change” both reaffirmed their commitment to advance the implementation of the Paris agreement. Organized by Germany during its rotating presidency of the EU council, the next EU-China Summit is scheduled to take place in Leipzig this coming September, at a time when China will be finalizing its 14th Five-Year Plan (2021-2025). Hence, it’s a crucial timing, possibly allowing the two regions to announce further enhanced cooperation and more ambitious climate change policies.

What three key factors of China’s clean energy decline should concern U.S. and European policymakers and climate change advocates?    

Today, it is too early to anticipate what concrete global role and position China will assume in order to address climate change in the coming years. A first indication will be provided by the 14th Five-Year Plan (2021-2025), which will define the country’s economic, development, and energy policies. In the context of the latter, China’s Premier Li Keqiang chaired a meeting of the National Energy Commission (NEC) in early October and re-emphasized coal as the primary source of energy security. Furthermore, enhanced domestic oil and gas exploration and utilization shall play an equally crucial role. During a similar meeting in 2016, Li stressed the need to increase the share of renewables in China’s energy mix and accelerated energy transition. However, in the course of last October’s meeting the future role of renewable energy was not mentioned at all.

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The renewed focus on domestic fossil fuel consumption possibly derives from China’s increasing dependence on energy imports and its overall economic slowdown. In 2018, China’s oil consumption was 3.4 times greater than the domestic output and its import dependence reached an all-time high of 72 percent, whereas its import gas dependence reached 45.3 percent.