Technical analysis

Introduction

Throughout the world, power systems are undergoing profound change. The fundamental drivers behind this transformation are three-fold. First, renewable energy – in particular wind and solar power – is on track to becoming the most cost-effective source of new electricity generation in many regions of the world. Wind and solar photovoltaics (PV) can already out-compete new natural gas, and even coal-fired power plants, in areas with high-quality resources and low financing costs. In addition to meeting energy demands at lower cost and relying primarily on local resource, this trend also makes achieving decarbonisation goals more affordable.

The second driver is digitalisation of the power sector. Digitalisation is expanding from the transmission level – where digital sensors and controls have been used for decades – into mediumand low-voltage networks, all the way to individual devices. And finally, distributed energy resources (DER) such as electric vehicles and rooftop solar PV systems are changing the value chain of electricity. The demand side is poised to play a much more active role in the system through energy efficiency and controllable loads, and distributed generation is emerging as a more relevant complement to large-scale generation.

These trends are not happening independently. In fact, they can be mutually reinforcing. The growing share of variable renewable energy (VRE) requires a more sophisticated approach to system operation and a more active demand side in the power system. The most promising distributed generation technology in both the near and long term in most settings is solar PV. The resulting increase in supply-side variability reinforces the economic case for a more active and responsive demand side. Meanwhile, the increased flexibility of the power system that digitalisation and demand response unlock increases the amount of VRE generation that can be economically accommodated by the power system.

However, as this publication explains in detail, such a virtuous cycle does not happen by itself. Legacy technologies together with traditional policy, market and regulatory frameworks can often impede an accelerated transformation.

“Power system transformation” describes the processes that facilitate and manage changes in the power sector in response to these novel trends. It is an active process of creating policy, market and regulatory environments, as well as establishing operational and planning practices, that accelerate investment, innovation and the use of smart, efficient, resilient and environmentally sound technology options. It is a complex task for policy makers.

Fundamentally, the triple objective of energy affordability, security and sustainability remains unchanged under power system transformation. However, the emergence of low-cost, clean

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energy sources – alongside advanced technologies to facilitate their system integration – presents new opportunities to achieve all three objectives in parallel. Rather than facing sharp trade-offs between the three, the deployment of new technologies, combined with the implementation of appropriate policy, market and regulatory reforms, can deliver a power system that shows improvements along all three dimensions of modern energy policy.

The People’s Republic of China (“China”) has already embarked on its own path towards power system transformation. In terms of absolute numbers, it is the clear global leader in the deployment of clean energy technologies, from solar PV and wind power to nuclear energy. However, China also faces formidable challenges in the transformation of its power sector. The current largely coal-based system has been remarkably successful at fuelling the country’s very rapid economic growth over the past two decades. However, the environmental cost of this system has become a pressing challenge in the form of both the immediate problem of local air quality and the long-term systemic threat of climate change. Also, despite many years of continuous refinement of policy, market and regulatory frameworks, China is still in the process of reforming its power markets and related policies to further improve the performance of the system.

Against this background, this publication has twin objectives. First, it provides a summary of the state of play of power system transformation in China, as well as a comprehensive discussion of power system transformation internationally. Second, it provides a set of detailed power system modelling results for China in 2035, exploring scenarios from the International Energy Agency (IEA) World Energy Outlook (WEO) that describe possible configurations for the Chinese power system in the year 2035. The modelling underpinning this document relies on the wellestablished WEO New Policies Scenario (NPS) and Sustainable Development Scenario (SDS). At a high level, these scenarios offer two distinct visions for the evolution of the Chinese power system.

The NPS provides a measured assessment of where today’s policy frameworks and ambitions, together with the continued evolution of known technologies, might take the energy sector in the coming decades. The NPS is used to explore the value of current and proposed power sector polices, particularly those specified in Document No. 9 reforms that aim to introduce spot electricity markets and increased levels of cross-provincial power trade.

The SDS starts from selected key outcomes and then works back to the present to see how they might be achieved. The outcomes in question are the main energy-related components of the Sustainable Development Goals, agreed by 193 countries in 2015:

Delivering on the Paris Agreement. The SDS is fully aligned with the Paris Agreement’s goal of holding the increase in the global average temperature to “well below 2°C”.

Achieving universal access to modern energy by 2030.

Reducing dramatically the number of premature deaths caused by energy-related air pollution.

The SDS is used to explore the importance of innovative power system flexibility measures – in particular those on the demand side – to support a deeper transformation of the Chinese power system. The costs and benefits of these measures are derived from the modelling framework and presented for consideration.

Based on the insights stemming from the modelling work, the publication concludes by providing a set of policy options for making accelerated progress in power system transformation and also discusses possible international implications of such a transformation in China.

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IEA. All rights reserved