China’s top political meetings and the energy ‘new normal’

22 March 2016

On 17 March, China concluded its top two annual political meetings. The implications for the decarbonisation of the economy could be huge, but important questions remain, in particular for the renewable energy sector.

The annual session of the Chinese People's Political Consultative Conference (CPPCC) and the National People’s Congress (NPC), normally referred to as the ‘two sessions’ (Lianghui), are seen as having a limited impact on China’s policymaking, since ultimate political authority rests with the Chinese Communist Party and its leader Xi Jinping.

But this year’s meetings were different, because they saw the release of the country’s 13th Five Year Plan (FYP), for 2016 to 2020. The FYP contains comprehensive and detailed guidelines for social and economic development initiatives over the next five years, and this one was particularly crucial: not only will it encompass the policy agenda for all aspects of the economy during Xi’s remaining term in office, but also China’s economic growth is slowing to a record low since 1990.

In that context, how to adapt to downward pressure while guiding China’s sustainable economic and social development – a condition known officially as the ‘new normal’ - has become a major challenge for Chinese policymakers.

The energy system at a crossroads

An essential part of this challenge lies in the transformation of its coal-dominant energy sector towards a cleaner, more efficient and safer energy system. According to draft FYP guidelines from China’s central planning agency, the National Development and Reform Commission (NDRC), the energy policy priorities will focus on the advancement of energy sector reforms, optimising the energy mix, and constructing ‘smart’ energy transmission and storage networks.

Quantitatively, its targets include a 15 per cent reduction in the energy intensity of the economy (energy consumed per unit of GDP) from 2015 levels by 2020, and increasing the share of non-fossil fuels in the energy mix to 15 per cent. China also committed to an 18 per cent reduction in carbon intensity (carbon emissions per unit of GDP) from 2015 levels by 2020 and to keep energy consumption below 5 billion tons of standard coal equivalent by 2020, China's first target of this kind.

The problem of energy over-supply

None of these targets can be achieved easily. At the outset, slowing economic growth will further contract energy demand in heavy industries, and for the first time since economic reform Chinese planners need to worry about the problem of energy over-supply.

All forms of energy will be affected by this over-supply problem, but it is thermal power that faces the most daunting situation. Currently more than 190 GW of thermal capacity are under construction in China, with another 200 GW already approved by various local governments. If all this thermal capacity is built before 2020, China will likely have over 1,300 GW of thermal capacity – and will face permanent thermal power overcapacity.

Therefore, containing the rapid growth of thermal power capacity is an unprecedented challenge, particularly where forced shutdowns of power stations will inflict further pain on downstream coal industries, that are already struggling with the social and political consequences of massive layoffs.

Avoiding large scale social disturbance – or maintaining social stability, in the parlance of the Party - is always a red-line for the central government, raising questions over how tough the leadership can get with the fossil fuel industry as the plan is implemented.

But thermal power is not the only form of energy that is expected to expand rapidly. China has announced ambitious plans to develop its nuclear energy sector by reaching 58 GW installed capacity and another 30 GW under construction by 2020.

Although there are not yet quantitative targets released for the hydropower sector, it is also expected that the development of large hydro power bases in southwestern China will be accelerated. In a context of low public trust around nuclear and strong environmental opposition to large dams, these options also come with considerable social and political questions.

Renewables: the end of the ‘peaceful rise’?

So, when the size of the cake – overall energy demand – is shrinking, but major traditional energy resources are showing no sign of deceleration, warfare among energy suppliers seems inevitable.

The biggest question from the perspective of decarbonisation is how renewable energies like wind and solar, the two fastest growing sectors with the greatest potential, will vie with each other – and how they can survive these rising structural conflicts.

Here the outlook is not so promising: despite enormous growth in the sectors, planners have been cautious about giving quantitative pledges on wind and solar energy – compared to ambitious plans for nuclear and hydro.

The priority for government in these sectors is to address problems in the delay of subsidy payments and grid curtailment, suggesting that expansion itself is no longer the key criterion. Policymakers at National Energy Administrations announced earlier this year that policy adjustment is the main theme for the wind and solar sectors, aiming to avoid the reckless development of capacity without grid connectivity – as happened in an earlier era.

Yet how such policy changes will impact the decarbonisation process of the Chinese energy system – a key question not only for the economy, but also for the global climate - remains to be seen.

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