Power system transformation pathways for China to 2035

45 Hourly production cost modelling is employed using the PLEXOS® modelling tool to capture a sufficient level of detail for the Chinese power generation fleet, electricity demand, market rules and interregional transmission network.

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China Power System Transformation Power system transformation pathways for China to 2035

Notes: GW = gigawatt; kWh = kilowatt hour.

Sources: The World Bank (2018), World Bank Open Data, https://data.worldbank.org/; United Nations (2019), UNData, http://data.un.org/.

China’s power system has experienced rapid expansion over previous decades.

As a result, clean energy, and especially variable renewable energy (VRE), has seen large and rapid expansion. However, this expansion, combined with a very large coal fleet and more modest rates of growth in power demand, has highlighted limitations in the flexibility of China’s power system. Although profound achievements have been made in the ongoing Document No. 9 round of reform (see Chapter 2 and IEA [2018b]) as well as in reducing VRE curtailment, a deeper transformation towards a cleaner and fully efficient system has yet to be realised and still requires focus.

Achieving a “Beautiful China”

The transformation of China’s power system depends on the outcome of a number of transitions that are underway, supported by policies aimed at achieving a more sustainable development model for future prosperity. The “Beautiful China” initiative is among the most important guiding principles for this transformation. To support the overarching goal of a “Beautiful China”, the government is implementing domestic policies addressing regional development and environmental protection.

The “Beautiful China” initiative was proposed at the 19th National Congress in October 2017 as the general blueprint for China’s future development (Xi, 2017). The initiative aims to address what the government sees as China’s main development challenge: the contradiction between unbalanced development and the people’s ever-growing need for a better life. Targets have been articulated for two main years. First, by 2035 the target is to generally realise modernisation, i.e. a more advanced economy, while increasing equality in urban–rural development and in regional development levels, alongside a much better environment and the “ecological civilisation”. Second, by 2050 the target is essentially to achieve widescale modernisation in all respects, notably economics and trade, science and technology, military and defence, culture and governance.

Following the general policy framework, the economy is starting to orientate away from a reliance on export-driven, heavy industrial sectors towards domestic consumption, higher

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value-added manufacturing and services, which affects regional power consumption. In parallel, more stringent environmental policies have been promulgated to reduce air pollutants and greenhouse gas emissions. The policies include curbing overcapacity in heavily polluting, carbon-intensive industries by closing down the oldest and least-efficient factories. More environmentally friendly electricity sources are expected to see a dramatic increase in capacity. These policies have been considered and included in the modelling exercises presented in this chapter, in particular the regional shift in industrial consumption (more detail can be found in Annex A).

Key variables for system transformation

China is shaping its future power system by continuously focusing on energy efficiency, adopting renewable energy, containing construction of new coal-fired plants and taking steps towards substantially reducing its coal utilisation in the long term. In addition, the desired shift in industrial structure away from heavy industry and towards knowledge-intensive industries and services is anticipated to reduce the energy intensity of China’s economy.

In 2017 China’s total installed power generation capacity increased by 127 GW. Two-thirds of this growth came from renewables, including rapid growth in wind and solar photovoltaic (PV) (see Figure 27). However, due to the limited flexibility of the power system – a combination of operational, economic and technical factors – China had to curtail over 100 terawatt hours (TWh) of power generated from VRE.

Source: IEA (2018c), Renewables 2018.

Significant increases in wind and solar PV capacity have been achieved in China over the past seven years, and this trend is expected to continue.

In 2015 China launched its Document No. 9 reform programme, which has already achieved substantive progress in improving VRE integration and system efficiency. For example, transmission and distribution tariffs have been published; double-digit percentages of electricity are being traded through energy trading institutions; final customer tariffs are being defined according to the market for large customers; and the first spot market pilots are being implemented (for details see IEA [2018b]).

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However, a systemic transformation has yet to be realised, with several crucial issues in need of a good solution. Chapter 2 of this report has given an overview of the basic characteristics of the current Chinese power system and highlighted the objectives of the Document No. 9 round of reform. Chapters 3 and 4 of this report have provided an international perspective on establishing a market-based power system with the application of upgraded system planning and operation and power trading, in the context of global trends in power system evolution and future potential flexibility sources. Simultaneously considering the context of China’s power system, international experiences and global trends, three major variables could be crucial for determining the speed and extent to which China can transform its power system:

Dispatch order: the “fair dispatch” methodology has long been adopted together with benchmark pricing to secure power generation investment (see Chapter 2 for a detailed explanation of fair dispatch). However, this dispatching order inherently creates inflexibility, which has become apparent as VRE capacity has increased rapidly. Transitioning to economic dispatch, which is a cost-optimised order of dispatch based on short-run marginal costs of each technology (subject to relevant system constraints), will be necessary to meet the target of both a clean and economically efficient power system in the future.

Interregional trading: due to its large geographical area and climatic diversity, China has a diverse endowment of generation resources and demand patterns. Integration of the power system at a regional level could therefore offer important benefits. As an extension of this, investigating the potential of interregional trading would be an important activity – not only to understand how to unleash the potential of existing and committed interconnectors, but also to examine the necessity of investing in new interconnectors in the future to accommodate demand growth and power sector transformation.

Demand-side response (DSR), storage and efficient end-use electrification: in a future power system with a high share of VRE, system flexibility is a crucial issue to consider. These flexibility options could provide a large amount of flexibility that is complementary to a supply side that is dominated by VRE. Storage options include thermal, electrochemical (batteries) and pumped storage hydropower (PSH), while efficient end-use electrification includes electric vehicles (EVs) and water and space heating.

Given that there is no single pathway for the future of China’s power system, this report uses a scenario-based approach to highlight the key policy choices, consequences and contingencies that lie ahead, and to illustrate how the course of the power system in China might be affected by making changes to the crucial variables described above. This approach is underpinned by system-wide modelling that covers all fuels, technologies and regions. As explained in the next section, the main scenarios are based on the IEA WEO 2018.

Different power system pathways

This section introduces the pathways which underpin the power sector modelling exercise. The national-level features of the scenarios are based on the IEA WEO 2018. WEO is the IEA flagship publication, widely recognised as one of the most authoritative sources for global energy projections and analysis. It presents mediumto long-term energy market projections and extensive statistics, analysis and advice for both governments and the energy business. Previous editions of the WEO specifically focused on China’s energy sector (IEA, 2017) and the future of the global energy sector given the increasingly important role of electricity (IEA, 2018a). Box 24 describes key findings from WEO related to China’s power sector and global electrification.

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