Central-Local Relations and China's Clean Energy TransitionJonas Nahm

Assistant Professor of Energy, Rescoures, and Environment Johns Hopkins SAIS

A green giant?

• TOP 10 NEW INSTALLED CAPACITY JAN-DEC 2017

France South Africa Rest of the world

Turkey

India - - - - -

United Kingdom

Country

PR China

USA

Germany

United Kingdom

India

Brazil

France

Turkey

Sou th Africa

Finland

Rest of the world

Total TOP 10

World Total

Germany

JAN-DEC 2017

MW

19,660

7,017

6,581

4,270

4,148

2,022

1,694

766

618

535

5,182

47,310

52,492

USA

%Share

37

13

12

8

8

4

3

1

1

1

10

90

100

Source: GWEC

TOP 10 CUMULATIVE CAPACITY DEC 2017

Italy

France _____ j

Un~ed -----Kingdom

India

Country

PR China

USA

Germany

India

Spain

United Kingdom

France

Brazil

Canada

Italy

Rest of the world

Total TO P10

World Total

Rest of the world

Germany

DEC 2017

MW

188,392

89,077

56,132

32,848

23,170

18,872

13,759

12,763

12,239

9,479

82,391

456,732

539,123

USA

PR China

%Share

35

17

10

6

4

4

3

2

2

2

15

85

100

Source: GWEC

2017 Solar Production Capacity (GW)

Rest of the World41%

China59%

Source: Renewable Energy World, 2018

2017 Global Solar PV Demand (GW)

Other26%

France2%

Japan9%

India14%

USA17%

China32%

Source: Energy Trend, 2018

The Big Read Electric vehicles ( + Add to myFT)

Electric cars: China's highly charged power play

Beijing bets on battery vehicles in state-backed push to become a high-tech industrial

power

[ W I

f I in I ill Share ~ save Charles Clover in Beijing OCTOBER 12, 2017 P16 8

2015 Generation Capacity (GW)

Nuclear2%

Solar3%

Gas4%

Wind9%

Hydro22%

Coal61%

Source: NBS 2016

2015 Generation (actual, GW)

Nuclear3%

Solar1%

Gas3%

Wind3%

Hydro20%

Coal70%

Source: NBS 2016

The Argument

Institutional fragmentation has created incentives to prioritize growth over environment, progress only where both aligned

Current prospects for centralization alone are unlikely to improve outcomes: similar patterns of behavior, both positive (enforcement) and negative (shirking), between central and local administrations when it comes to energy and climate policy

Structural incentives for local governments continue to undermine ambitious plans for decarbonization

But: continued experimentation, policy innovation

•

•

•

•

Agenda

Who makes energy policy in China?

China’s energy transition in practice

Re-centralization under Xi

Prospects for China’s clean energy transition

• • • •

A monolithic state?

Clean energy transitions as a test of state capacity, need to overcome vested interests

Authoritarianism ≠ state autonomy

Two axes of institutional fragmentation in China

•

• •

Central SOEs

China's national administrative structure for energy

National Energy

Administration

National Development and

Reform Commission

Other departments,

e.g. Price, Basic Industry,

Climate Change

Dept. of Resource Conservation

and Environmental

Protection

Provincial Energy Regulatory Body

Provincial Commissions and Administrations

II Members of the National Energy Commission II Office of the National Energy Commission

Ministry of Environmental

Protection

Ministry of Land and Resources

Ministry of Science and Technology

Ministry of Water Resources

Ministry of Commerce

Ministry of Finance

Ministry of Industry and Information

Technology

Ministry of Transport

State-Owned Assets Supervision and Administration

Commission

State Administration of Work Safety

State Bureau of Taxation

National Bureau

of Statistics

I

• Administrative level Administrative division of the nation's territory

Provincial-level

Prefecture-level

Country-level

Township-level

p-------------------------------------------------------------- -1

I .. -- ---- ----- - ---.- - - -I I I I

I .. ------ -- ---- ---·- -- -I I

I ... -------------- -.- ---I

I •-------------------

.

.

.

.

Province / National autonomous region / Direct-controlled municipality / Special administrative region

' . Prefecture-level city/ Autonomous prefecture/ Prefectual administrative office

' . Country-level city/ Country/ Municipal district

' .

TO\\'nship / Town / Autonomous town / Sub-district office

~ . Village

------------------------------,--------------------------------• I •

Local government

Fiscal federalism in China

Local governments:

are responsible for raising taxes to fund local expenditures

have autonomy over economic development policy-making

Central government:

has control over macro-economic policy, promotion of officials, overall tax rates

• • •

• •

Fiscal federalism in China

Intra-jurisdictional competition

Local experimentation

Growth-oriented policy-making

“Helping hand” of government

• • • •

State Council

Provincial Government

EPA

EPA

kuai

kuai

tiao

tiao

Central Government

Provincial Government

?

Agenda

Who makes energy policy in China?

China’s energy transition in practice

Re-centralization under Xi

Prospects for China’s clean energy transition

• • • •

Early central government policies

2007

Renewable Energy Law

FIT Wind (2009 implemented nationally)

Indigenous Innovation Policies

2009

FIT Solar (2011 implemented nationally)

“Strategic Emerging Industries” to include new energy

• • • •

• • •

• SEAP

National Energy 2015

2020 Targets {2014- actual 13FYP 13FYP

2020) levels

Total energy consumption cap about

5Gtce no more

4.3Gtce 4.8Gtce than 5Gtce

Energy consumption per unit of N/A -15% from N/A -18.2% from GDP 2015 level 2010 level

GO2 emissions per unit of GDP N/A -18% from N/A -20% from 2015 level 201 0 level

Percentage of coal in primary 62% N/A less than 64%

energy consumption 58%

Percentage of non-fossil fuel in 15% 15%

more than 12%

primary energy consumption 15%

Wind energy installed capacity 200GW N/A more than 129GW 210GW

Solar energy installed capacity 100GW N/A more than 43GW 110GW

Hydro energy installed capacity 350GW N/A 380GW 320GW

Coal energy installed capacity N/A N/A less than 900GW 1100GW

Installed wind generation capacity•

•

a 150 ,,...._

China s us l9 '-"' >.

+-' 100 ·-u ro Q. ro u

-0 C ·-3:

50 -0 Q)

ro +-' V)

C

0 b::::===========~========-...L_ _ ___L __ _j 2000 2003 2006 2009 2012 2015

Year

•

Cumulative Global Wind and Solar PV Manufacturing (in MW)

300, 000 ----------- --------------------------- ----------------------

225,000

Chinese firms enter wind and solar

sectors Wind turbine manufacturing

150,000 ----------- --------------------------- --------- -----------

75,000 ----------- ---------------------------Solar PV manufacturing

0 1995 1998 2001 2004 2007 2010

Source: Earth Policy Institute, 2013.

““There was little reason to start from zero. Technology could be licensed, but manufacturing was not as simple. Early attempts were a terrible failure. Whole blades dropped off and the main shafts broke. It was really very dangerous.”

Wu Gang, Goldwind

Focus: innovation in commercialization

Innovative manufacturing: engineering and design capabilities at the intersection of manufacturing and traditional R&D

Engineering capabilities that allow firms to simultaneously manage tempo, volume, and cost.

Designated R&D teams that

substitute materials and components with lower-cost alternatives

upgrade product designs for manufacturability

integrate new technologies into existing products

•

•

• •

• •

Year Yingli Trina Suntech

2007 163,563,089 172,905,295 321,200,000

2008 248,557,724 299,626,000 638,500,000

2009 267,427,776 512,903,000 800,400,000

2010 158,652,178 887,557,000 1,400,800,000

2011 389,472,291 1,306,833,000 1,573,400,000

2012 875,820,790 1,208,009,000 /

2013 935,589,882 1,109,384,000 /

Short-term Bank Borrowings,

Major Chinese Solar Firms

0

5000

10000

15000

20000

25000

2002 2004 2006 2008 2010 2012

ChinaGermanyUnited States

Annual Solar PV Production by Country, 2002-2012 (in MW)

Source: Earth Policy Institute, 2013.

United States

Germany

China

---

USA Germany China

Wind turbine A

Wind turbine B

Wind turbine C

Solar cell

Solar component

•

MINCVANC WIND POWEA

OlfENSYS ~ GOLDWIND

JASOLAR

What could go wrong?

Export reliance

Year Germany Spain USA PRC Total Abroad

2007 50.9 34.6 6.4 1.9 98.1

2008 29.7 37.4 7.4 7.0 93.0

2009 41.4 3.6 9.5 4.5 95.5

2010 28.2 3.0 15.3 5.3 94.7

2011 20.1 1.4 23 11.8 88.2

Suntech Power Holding,

Percentage of Net Revenue by Country (in Percent)

Poor incentives in domestic power sector

benchmark tariff for coal operators

no marginal cost-based bidding

under-recovery for coal operators when operating hours fall

BUT: also no adjustment for falling coal-prices recently, leading to over investment in coal capacity

• • • •

Generation capacity under construction (GW)

0

50

100

150

200

2010 2011 2012 2013 2014 2015

Coal Nuclear Hydro Wind

Source: China Electricity Council, 2015

II II II II

Grid coordination

Local governments approve wind installations below 50 MW

Center approves installations above 50 MW, but localities frequently split parks to circumvent the center

Local cap was removed in 2013, all parks approved locally

BUT:

Long-distance grid interconnections are planned at the central level

Inter-provincial electricity transfers are administratively determined, provinces try to balance production and consumption.

• •

• •

•

•

Dispatch order

Determined administratively

Negotiations with thermal operators, many thermal plants owned by local governments are grandfathered in with dispatch priority

Historically, no automatic priority for renewables

• •

•

Cost premium recovery for renewables

Grid companies collect FIT levy and pay premiums to renewables generators in their own province

Transfer mechanism to other provinces, when payment obligations exceed revenues

BUT: if renewable generations grows rapidly, funds are insufficient, payment gap!

•

•

•

•• • . • ' •

..

•

\, . .,.

...

. •

s . ---. ' .....

XINJIANG

--- ...,.. ---c. ---' -..... '

• • .. "

' ~ .... ,/U B.E'T_ ; : : •

•

Ultra-high-voltage direct-current projects in China

Jii.. Operating line .. ------~ Planned line

'

Population density, 2015 (est) No data

Sources: State Grid; Centre for International Earth Science Information Network

Economist.com

750km

• . )

••

0.

•

'

• • • • .. .. . . . #\ t

• ... • 4

.. '

•

Wind and Solar Energy Curtailment Rates by Province in China, First Six Months of 2015

50%

45% • Wind Solar PV

40% a,

35% .... n, = 30% .... C a, 25% E -·- 20% n, t:

15% ::, u 10%

5%

0% "-- Ci) X J: s: r- s: :c ..... c:, V, z -< V, ::J: -· - -· -· -· (1) ::T C: =r' -· cu (1) QJ (1) QJ -· C: :::, :::, .::l. -· (1) 0 (1) C"' _:::,. -: QJ :::, :::, cu C"' -· - :::, :::, -· :::, ~ :::, :::, en cu 0 :::, (1) :::, C'D C: ~ O'Q -· )( cu a. :::, -· -· :::, O'Q -· :::, a. • :::, -· QJ :::, 0 0'Q es. -· O'Q 0 :::, -· :::, QJ 0'Q

:::, O'Q O'Q

-------- a 150 ,....._

China s

Agenda

Who makes energy policy in China?

China’s energy transition in practice

Re-centralization under Xi

Prospects for China’s clean energy transition

• • • •

Central SOEs

Ministry of Ecology and Environment

China's national administrative structure for energy

National Energy

Administration

Provincial Energy Regulatory Body

National Development and

Reform Commission

Provincial Commissions and Administrations

II Members of the National Energy Commission II Office of the National Energy Commission

Ministry of Land and Resources

Ministry of Science and Technology

Ministry of Water Resources

Ministry of Commerce

Ministry of Finance

Ministry of Industry and Information

Technology

Ministry of Transport

State-Owned Assets Supervision and Administration

Commission

State Administration of Work Safety

State Bureau of Taxation

National Bureau

of Statistics

I

State Council

Provincial Government

MEE

MEE

kuai

kuai

tiao

tiao

Central Level

Provincial Level

Municipal Government

MEE

kuai

tiao

Municipal Level

MEE Monitoring

MEE Monitoring

tiao

Power Sector Reforms State Council Document #9

Direct access and retail competition: large users can bypass the grid companies and negotiate prices directly with generators.

Decoupling

Improved dispatch

Renewables integration: new mechanisms for ancillary service provision and improved inter-provincial, cross-regional power trading mechanisms

Distributed generation: remove market access barriers and allow distributed generation to participate in power trading

•

• • •

•

Curtailment-Specific Reforms (Document 625)

Conventional generators and grid companies will have to compensate for curtailment (Document 625)

Guaranteed purchase amounts according to plans set by National Energy Administration

Compensation for ancillary services, including thermal base load, cycling cost

BUT: Questions about implementation, effect on local government interests

•

•

•

•

Capacity control

Recentralization of thermal plant approvals

National Energy Administration (NEA) directly involved in enforcing coal power investment in provinces with overcapacity

NEA introduces sanctions, limits access to financial capital for ownership groups that disregard central orders

Six provinces had wind power approval authority revoked due to overcapacity

• •

•

•

Climate change

Expectations rise over launch of China carbon trading scheme JAMES KYNGE AND PILITA CLARK LONDON EMILY FENG - BEIJING

Expectations are growing in the run-up to the global clhnate talks in Germany this week that China is preparing to start a national carbon trading scheme.

Xi Jinping, China's leader, said two years ago that Beijing would launch an emis-sions trading system (ETS) in 2017, which would almost certainly eclipse that of the EU and become the largest of its type in the world.

With time running out, government officials, industry experts and research-ers at Chinese think tanks say Beijing could announce the scheme at the two-week Bonn climate change meeting, which begins today.

Expectations of what could be an important move come as Beijing has indicated its readiness to fill the gap in global climate leadership left by the us after President Donald Trump's deci-sion to withdraw from the Paris climate change deal.

"We are expecting the launch of national ETS in conjunction with the Bonn climate conference," said Li shuo,

senior campaigner for Greenpeace East Asia. But it is unclear how extensive or effective the scheme would be after ana-lysts said there were problems with the pricing and monitoring of carbon.

Problems have bedevilled China's preparations to build a vibrant scheme, which would allow the counti;,,s biggest corporate polluters to buy credits from those that do not emit as much.

A policy document outlining the designofthemarkethas beenapproved by the powerful National Development and Reform Com.mission and is now awaiting approval by the leadership,

Beijing smog: a crackdown on heavy polluters in China has started

according to Mr Li. China is the world's biggest source of climate-warming greenhouse gases but has pledged to cap growth by about 2030 through the use of cleaner energy.

If the scheme is a success it will rein-force China's claim to global climate leadership. "china wants to be a leader in a global sense on climate change and green technologies," said Paula DiPerna, special adviser for CDP North America, an environmental charity. '~d there is also a vacuum to fill with the us pulling out of the Paris accord last year."

In a sign of how Chinese companies are preparing for mandatory carbon trading, a CDP survey found that the number of businesses using an internal carbon price has risen strongly in recent years.

Nicolette Bartlett, director of carbon pricingatCDP, said the number of Chi-nese companies implementing or plan-ning such a move has risen from 54 in 2015 to 73 last year and 102 this year. Some 336 companies in China responded to CD P's questionnaire.

Beijing has in recent weeks shown stronger intent at the grassroots level, beginning an unprecedented crack-

down on heavy polluters, mandating that some of the country's biggest steel and coal producers nearly halve produc-tion this winter.

Households in China's industrial heartland have been equipped with nat-ural gas heaters this year to reduce dependence on coal-fired generators.

Reliance on coal-fired power has been steadily declining as China makes a push into developing renewable energy capacity in wind, hydropower and solar. Although new coal-fired capacity has continued to come online, additional capacity has been at its lowest since 2004, accordingto Greenpeace.

When plans for a national emissions trading scheme were first announced in 2015, policymakers identified eight industrial sectors it would target in its first stage, such as petrochemicals and iron and steel. However, that list was suddenly shortened in May to three: power generation, aluminium and cement.

Experts now say that the first stage of national carbon market will probably only cover power generation, though that represents a significant proportion of china's carbon emissions.

Agenda

Who makes energy policy in China?

China’s energy transition in practice

Re-centralization under Xi

Prospects for China’s clean energy transition

• • • •

Local governments can’t shake old habits

ETS Pilots

Seven municipalities launched ETS pilots by 2014

SOEs influenced allowance allocations in several areas, SOE managers often enjoy higher administrative ranks than the urban planners that are supposed to regulate them

Most allowed for ex post adjustment to accommodate output changes without affecting normal operation

Most adopted flexible caps to avoid impact on the local economy

Most most pilots allowed enterprises to apply for extra allowances

• •

•

• •

Vehicle Electrification

Dual credit scheme: 10 percent of sales need to be EVs by 2019, 12 percent by 2020

Initially 28 pilot cities, now nationwide experimentation with local incentive programs: public charging stations, blue plate laws, financial subsidies, exemption from driving bans

BUT:

Renewed local protectionism, attempts to reward ‘local’ EV manufacturers and prevent markets for others

Fragmentation of the domestic market

Likely repeat of the solar PV story: overinvestment in battery production facilities

•

•

• •

• •

Power Sector Reform

Currently establishment of power trading platforms to allow power generators, industrial users and distributors in Guangdong, western Inner Mongolia, Zhejiang, Shanxi, Shandong, Fujian, Sichuan and Gansu

No inter-provincial power markets yet to balance regional demand and supply

Race to the bottom and race to the top in coal power investments, air pollution control

Existing long-term power purchase agreements with thermal generators inhibit establishment of energy efficient dispatch

Recent coal investment binge create significant opposition to price, dispatch reforms: up to 40 percent of generation assets held by local governments

Expansion of direct trading for industrial customers allows polluting plants to participate if they can compete on price

•

• •

•

•

•

Local governments are not the only ones to blame

Fragmentation at the center

Despite concentration of energy policymaking in fewer agencies, significant fragmentation remains

National oil companies, state-owned enterprises continue to wield significant power

Central SOEs often exempt from efficiency requirements, or not fined for violations, even when they belong to the center

Example: State Grid’s push for UHV technologies

•

•

•

•

Climate is not always a priority

Belt and Road Initiative established to create export markets for domestic industries with overcapacity

China is in the process of exporting thermal power plants to much of the developing world, starting in Southeast Asia

In 2016, China was involved in 240 coal-power projects in 25 countries, state-owned development banks provide financing

•

•

•

The center doesn’t always knows what’s best

Made in China 2025 strategy repeats focus on techno-nationalism, aspiration to become technologically independent, including in clean energy sectors

Short-term thinking also prevalent in Beijing. Example: E10 strategy

Poor incentive structures, lack of enforcement mechanisms. Despite ETS, heavy reliance on command-and-control mechanisms with poor policy design.

•

•

•

“1. Institutional fragmentation likely to persist and shape China’s clean energy transition. 2. Centralization is no silver bullet.

3. In combination with central intervention, fragmentation can yield positive results: experimentation, policy innovation.

Central-Local Relations and China's Clean Energy TransitionJonas Nahm

Assistant Professor of Energy, Rescoures, and Environment Johns Hopkins SAIS