Summary and conclusions

Summary and conclusions

Power system transformation in China

China has already embarked on its own pathway to power system optimisation.

The 19th Party Congress in October 2017 set a number of key guidelines for the mediumand long-term evolution of the Chinese economy and hence also for the power system in the People’s Republic of China (“China”). This included the important ambition to realise modernisation, i.e. to develop a more advanced economy while increasing equality between urban and rural areas, reduce disparity between regional development levels, bring about a much better environment and achieve the “Ecological Civilisation” by 2035 – and ultimately a “Beautiful China” in 2050.

Achieving these ambitions implies a fundamental transformation of the power system in China. In 2017, 64.7% of power generation came for unabated coal-fired power plants, corresponding to a total amount of 4 150 terawatt hours (TWh). This was associated with emissions of 4 565 million tonnes (Mt) of carbon dioxide (CO2), 1.2 Mt of sulphur dioxides (SO2), 1.14 Mt of nitrogen oxides (NOx), and 0.26 Mt of particulate matter PM2.5. However, in the same year, China led investment in wind and solar power globally for the fifth year in a row, adding 18 gigawatts (GW) of wind capacity and 53 GW of solar photovoltaics (PV). In addition, China now has 1.2 million electric vehicles (EVs) on its roads, in addition to 249 million electric twoand three-wheelers.

A number of important reform projects are being pushed forward at the national, provincial and local levels, including the reform of the Chinese power market, the introduction of an emissions trading system in the power sector, and the adoption of a more sophisticated renewable energy policy based on auctions and quota obligations.

Integrating variable renewable energy and an orderly reduction of coal power will be the primary challenges for successful power system optimisation.

Two issues stand out with regard to achieving a successful transformation of the Chinese power system by 2035 and 2050. These are the integration of a very large amount of variable renewable energy (VRE) and – connected to this – the orderly reduction of unabated coal-fired generation.

The scenarios assessed in this report feature a share of up to 35% VRE in annual power generation by 2035. As the international experiences in this report demonstrate, achieving such levels of VRE penetration calls for a system-wide approach to integrating renewable energy. While high shares of VRE can be achieved in a cost-effective fashion, the required system adaptations can have profound implications, in particular for the economics of existing power generators.

The projected share of coal generation in 2035 varies from around 45% and approx. 4 500 TWh (New Policies Scenario [NPS]) to 20% and 1 900 TWh (Sustainable Development Scenario [SDS]), compared to 4 150 TWh in 2017. This means an annual average reduction in coal-fired generation of up to over 4 percentage points. The economic challenge associated with this reduction calls for a well-coordinated approach to managing the market exit of unabated coal capacity. Such transition pathways have been implemented successfully in other countries – the

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rapid reduction of coal fired generation in the United Kingdom is a recent example. However, the scale of the challenge is much higher for China than for any other country.

Power system flexibility will become the most important attribute of a transformed power system.

Power system flexibility is the key factor that determines success or failure in integrating VRE. Against the background of the critical importance of VRE for system transformation, this means system flexibility is the most important attribute of a transformed power system. Flexibility describes how well a system can cope with variability and uncertainty of electricity demand and supply across all timescales. It can be provided by all power system assets: generation, demand, grids and storage. A lack of power system flexibility can lead to VRE curtailment, increasing the cost of integrating VRE and ultimately undermining power system reliability.

China has already made substantial progress in enhancing the flexibility of its power system, as reflected in falling levels of VRE curtailment. In 2018, a total of 27.7 TWh of wind power (7% of actual production) and 5.5 TWh of solar PV (3% of actual production) were curtailed. Only two years before, these numbers stood at 49.7 TWh of wind power (17% of actual production) and 6.9 TWh of solar PV (10% of actual production). This progress has mainly been achieved through four factors: trading, dispatch, power demand growth and slowing VRE additions.

In respect of trading, the main changes were increased inter-provincial trading, trading of VRE with captive power plants located at industrial customers and increased trading of VRE via spot market mechanisms. As for dispatch, the main contributions were better sharing of balancing resources and operating reserves across provinces, as well as better usage of pumped storage hydro and interconnections. Finally, more dynamic growth of power demand and slower growth of VRE in 2018 compared to 2017 also contributed to the reduction in curtailment.

Looking ahead, the introduction of wholesale energy market structures and the strengthening of regional co-ordination and transmission interconnectivity can help to further unlock latent flexibility in the Chinese power system. Advanced flexibility strategies, including active load shaping and electricity storage, may also be needed to reach sufficient levels of system flexibility. This implies stronger links between different components of the wider energy system (i.e. sector coupling), such as directly linking the transport and electricity system via electrification. It may also be necessary to harness indirect electrification via production of hydrogen and derivative products (e.g. green ammonia, synthetic hydrocarbons) and use these either directly as a feedstock or process agent, or as a transport or power generation fuel.

Different layers of the power system need to be addressed in order to achieve system transformation successfully.

Power system transformation requires co-ordinated changes across the entire value chain of electricity production and consumption. Indeed, it may even necessitate the creation of entirely new roles in the power system, such as aggregators of small-scale power system assets (e.g. smart charging of a fleet of EVs in order to provide grid services).

In practice, this means that it is not sufficient to look only at the technical or economic aspects of system transformation. The institutional setup and the roles and responsibilities of different stakeholders in the system require review and possibly revision. This is particularly relevant for establishing mediumand long-term system plans. Here it is critical for all stakeholders to ensure that planning entities operate in a transparent environment that is free of conflicts of interest, and work to promote fair market access and competition as plans are translated into reality.

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The alignment and integration of different policies and measures in the power sector and related sectors are pivotal to long-term success.

Power system transformation affects the entire power system and, ultimately, via sector coupling, has implications for the energy system more broadly. This means that much closer co-ordination between different policies and measures is needed.

Looking only at electricity, the interactions between power market design, renewable energy policy and carbon policy need to be taken into account when designing policies in any of the three areas. Ideally, policies can be designed in a way that mutually reinforces their success. For example, electricity market reform can lower prices for customers and facilitate renewable energy generation. In turn, this can create room to introduce a carbon pricing mechanism. Similarly, a well-designed renewable energy policy can boost the liquidity and efficiency of electricity markets. Finally, a well-designed carbon mechanism can enhance the competitiveness of renewable energy, reducing the need for government support. Going beyond electricity, successful sector coupling calls for much closer co-ordination between electricity-related policies and transport and heating policies.

Options to facilitate implementation of the

Document 9 reforms

Optimising the dispatch of power plants is a fundamental prerequisite for reducing power generation costs and preserving VRE investability.

The fair dispatch rule – which guarantees power plants a certain number of full-load hours irrespective of their fuel costs – has been a very effective mechanism to de-risk investment in coal-fired capacity. Moreover, in the context of rapid electricity demand growth, all power plants have historically been needed to meet demand and hence meeting target full-load hours did not imply large economic inefficiencies.

However, in the context of China’s ongoing power system transformation, the accelerated deployment of wind and solar power to meet environmental and economic objectives – combined with large investments in coal-fired capacity – has led to an overall excess of capacity. By implementing a more economically optimised dispatch of power plants, VRE generation will in most circumstances be given greater priority, as VRE resources have no fuel costs and nearzero operating costs. The utilisation of more VRE resources in an overcapacity system will inevitably result in reduced generation levels for other sources. This may result in reduced revenues for particular legacy power plants. However, doing so offers the significant benefit of improving the operational efficiency of the power system, leading to lower system-wide energy costs, a reduced environmental footprint, and a more favourable environment for VRE investment.

Creating short-term markets and robust short-term price signals can greatly facilitate power system transformation and reduce system-wide energy prices.

Changing dispatch arrangements can be achieved in different ways, for example by establishing a priority order by which power plants are called upon to generate (e.g. the conservation dispatch that was previously implemented in parts of China). However, such mechanisms can be complex to implement and can inhibit the participation of new actors.

International experience generally demonstrates that a well-functioning short-term market (spot market) for electricity is a very powerful measure to drive power system transformation.

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In such an arrangement, the power plant with the lowest generation costs has priority for meeting electricity demand (economic dispatch). In most designs, the cost of the last (most costly) plant that is needed to meet the demand sets the price paid to all generators.

Spot markets are particularly useful in fostering power system transformation for the following reasons:

They solve the issue of needing to allocate the right to generate to different power plants. No explicit regulations are required to determine how much each plant is allowed to generate. Plants can try to improve their operating time by cutting their operational cost and optimise their profitability by enhancing their flexibility (in order to generate when prices are high and turn down when prices are low).

They reveal the actual value of electricity at different times and locations. Spot markets usually have a different electricity price for each hour of the day (in some cases even for every five minutes). They can also be designed to have different prices for each location or zone of the grid. This means that spot prices highlight when and where electricity is most precious and most in abundance. This information is crucial for integrating VRE.

Their price signals can inform commercial negotiations for longer-term contracts. Spot markets are very useful because they discover an accurate price for electricity. This information can be used to inform long-term pricing of electricity, guide investment in new generation capacity, and help with the establishment of financial markets for electricity, as explained in this report.

They allow for the market entry of new players. A liquid spot market with well-designed market rules can facilitate the participation of new actors, such as demand aggregators or electricity storage.

The modelling carried out for this report shows that transitioning from fair dispatch to economic dispatch can bring substantial benefits. In the 2035 ‘NPS Dispatch’ case, annual operational costs are around 11% (USD 45 billion [United States dollars] per year)

The optimised use of existing and soon-to-be-built transmission lines can substantially reduce renewable energy curtailment and integrate additional wind and solar capacity.

Grid infrastructure is a crucial source of power system flexibility; it brings a double benefit of smoothing VRE output across large geographical regions and linking together many diverse flexible resources (generation, demand shaping, and storage).

China has very successfully established an advanced electricity grid, including 13 ultra-high- voltage direct-current (UHVDC) links (as of 2018). Barriers to trade between provinces, alongside a number of technical challenges, have translated into the sometimes low utilisation of these assets. According to the China Electricity Council, the average utilisation of interconnectors was 37% in 2017, ranging from 3% to 64%.

The modelling carried out for this report demonstrates that relying only on existing grid infrastructure and lines that are planned for commissioning by 2022 can achieve large-scale integration of much higher levels of VRE generation. In the ‘NPS Operations’ case, moving from 2017 utilisation patterns (average of 17%) to a fully optimised use of lines (bringing utilisation to 50%) can bring substantial benefits in 2035, lowering total operational costs by 13% (USD 54 billion per year).

It should be emphasised that no new lines beyond those planned for 2022 are assumed in this analysis. Hence, the existing grid provides ample flexibility to absorb more VRE. However, there are regions that would face insufficient export capacity in this case: in Northwest China

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