July 13, 2020

Policy in the Pandemic: Will China's Economic Recovery Derail Its Energy Transition?

Nicholas Institute for Environmental Policy Solutions

By Jackson Ewing

China’s economic rebound from COVID-19 disruptions is in full swing. Greenhouse gas emissions, which dropped by roughly one-quarter during the six-week lockdown in February and March, rose 4-5% year-on-year in May. Steel and cement production began booming in April in anticipation of a construction-heavy stimulus package, bringing with it the suite of environmental concerns one might expect. As with reactions to the 2008 global financial crisis and the domestic slowdown of 2015, the country appears poised for an economic rebound that puts emissions on a higher overall trajectory than would have resulted from having no slowdown at all.

There are entrenched drivers of this dynamic. China Electric Power Planning and Engineering Institute (EPPEI), the authoritative consultancy that has designed most of China’s coal power units and grid infrastructure, warned in June 2019 that 16 provinces in the country should increase new capacity and start working on a new batch of thermal power plants to avoid the possibility of shortages in the next two to three years. The think tank affiliated with China’s giant grid utility company, State Grid Corporation of China (SGCC), stressed the need to “not close coal power plants at a large scale too soon or too fast” and to maintain 1,200 GW of coal power out to 2030 for reliability and reserve reasons.

Despite years of effort, China has also struggled to create effective pricing instruments and incentives to make renewables cheap and easily accessible on power markets when they are available. Power- and energy-intensive industrial sectors have long been managed through segmented and inefficient approaches at the intersection of national and provincial authority. While national planning holds sway on overall strategy and target setting, province-level decisions drive much of China’s energy and industrial outcomes—notably factory and power plant construction and operations geared toward expanding provincial revenues, consuming local resources (including coal), and competing with other provinces. The result has been significant curtailment of wind and solar resources amidst impressive rollouts of infrastructure in those sectors.

There are also drivers of energy transition rollbacks unique to the COVID recovery. By reducing energy demand during the lockdown, COVID lowered renewable energy surcharge revenue at the same time that the National Energy Agency (NEA) implemented previously planned renewable subsidy reductions. This put a number of renewable projects in jeopardy, with many still tenuous. Reduced demand also led to less coal consumption, but likely because of the factors discussed above, this has not led the NEA to accelerate coal plant closures or alter plans for future development—at least not yet. The more unknown factor is the degree to which China’s post-COVID stimulus will be green or brown. While there are calls for further green spending from within China, the existing responses from the National People’s Congress have focused on increasing local lending, growing employment, and boosting consumption—with few signs of major changes to traditional infrastructure spending in the power and heavy industry sectors.

Remaining on this track would be a mistake. The coal sector in China is already struggling. With coal plants averaging around 4,000 hours of operation per year, less than half of the 8,760 theoretical maximum, the profitability of major power companies is already very low. Last year saw the first bankruptcies in the sector, with pressure from wind and solar among the key factors. A coal-heavy energy and industrial base sprawling into the decades to come will perpetuate and even amplify the negative public health outcomes and civic frustration with air pollution often on display in China. It would also make ratcheting China’s climate mitigation pledges under the Paris Agreement—the foundation upon which Paris rests—very difficult.

Existing policies contain the antidote. A recently released draft energy law seeks to give preference to renewables on the grid and create a “guaranteed purchase system” for green energy, which would expand promising pilot experimentation in spot trading in seven major energy markets in China. This comes in direct contrast with traditional guaranteed purchase agreements in the coal sector, which if rolled back alongside grid liberalization in inter-provincial electricity transmission, will bring more existing renewables onto the grid at the expense of coal. China’s national emissions trading system (ETS) is likewise set to begin active trading by the end of this year. Through plausible design decisions on coverage and benchmarks, the ETS can significantly amplify the cost impetus for China’s energy transition. Such power sector reforms and ETS potential undermine the economic case for new coal plants. What is unknown is the extent to which they will be prioritized during a moment of urgency around fast and familiar economic growth.

The next eight to ten months will prove critical. With China finalizing its 14th Five-Year Plan—the country’s central planning and goal-setting policy—between now and March, pivotal decisions will be taken on whether to double down on positive energy transition trends or flee to the familiarity of more traditional approaches to power and heavy industry. COVID is often framed as an opportunity to change business as usual and build back better. The world will soon see if such sentiments resonate in Beijing.

Jackson Ewing is a senior fellow at Duke University's Nicholas Institute for Environmental Policy Solutions and and an adjunct associate professor at the Sanford School of Public Policy.

The Big Questions

To continue the conversation on this week's topic, here are a few questions for further consideration and study:

  1. What industries will be prioritized in China’s future stimulus planning?
     
  2. Will China’s New Energy Law be approved and executed in time to affect post-COVID energy strategies?
     
  3. Will China’s oft-delayed emissions trading system begin active trading during 2020 as planned?
     
  4. Will the 14th Five-Year Plan substantially increase China’s energy and climate mitigation goals?

What to Know for This Week

  • U.S. summer electricity demand is on track to be the lowest it has been since 2009, according to the U.S. Energy Information Administration (EIA). This summer is forecast to be 1% cooler than last year, yet demand will drop more than 5%, suggesting the trend is driven by the response to COVID-19 rather than by weather. While residential electricity use will increase (+3%), as more people work, study, and play from home, this demand is more than offset by lower electricity use by the industrial (-9%) and commercial (-12%) sectors. Moreover, this summer coal plants will be on vacation, with generation from these units dropping sharply over last year (e.g. more than 20% from 2019 summer levels in the Southeast). Hydro, natural gas, and renewables will pick up the slack.
     
  • In its 2020 UN climate inventory, the EPA estimated there were 3.1 million abandoned oil and gas wells in the United States in 2018; more than two-thirds are uncapped. The resulting methane emissions from these wells accounted for 7 million metric tons of CO2 equivalent. That was before the Russian-Saudi price war and COVID-19. Now, regulators and industry experts warn we may see a “tsunami of additional orphan wells” as companies file for bankruptcy or go defunct. The climate implications for this are sobering—while methane persists in the atmosphere for a much shorter time than carbon dioxide, over 20 years it has a warming potential 86 times that of the more familiar greenhouse gas.
     
  • In developing countries, unreliable access to electricity presents additional challenges to health systems already struggling to provide oxygen and ventilators for patients with the most serious cases of COVID-19, reports Energy VoiceRob Fetter, senior policy associate with the Energy Access Project at Duke, told Energy Voice that off-grid solutions, such as solar minigrids, could be implemented relatively quickly to help address the issue. (For more on this topic, read Fetter and EAP Director Jonathan Phillips' piece in the June 22 edition of "Policy in the Pandemic" and a June 5 post on the Brookings Institution's "Future Development" blog.)
     
  • Kenya Power and Light, the country’s national transmission and distribution electrical utility, is among the utility companies from around the world facing a devastating financial year from COVID-induced economic slowdowns. Already under financial threat, March-June sales and collection shortfalls are expected to drop 2020 earnings by 25%. With demand low and full reservoirs behind its government-owned hydropower assets, the utility has issued force majeure notices to the independent power producers from whom it is obligated to purchase power, throwing the finances of generators into deep uncertainty.
     
  • As part of the Moving America Forward Act, the U.S. House of Representatives voted July 1 to approve $20 billion for a new nonprofit accelerator to invest in clean energy and transportation infrastructure. Based on a proposed national climate bank, the Clean Energy and Sustainability Accelerator would create more than 3 million jobs, according to estimates from the Coalition for Green Capital. The bill requires 20% of the funding to go to low-income and climate-impacted communities, which are also some of the most affected by the economic fallout of the COVID-19 pandemic.

Subscribe

"Policy in the Pandemic" is a weekly email featuring insights from the Nicholas Institute on how the COVID-19 pandemic is affecting environmental and energy policy. Click here to subscribe.