Renewable energy development: How close is the People's Republic of China to achieving carbon neutrality?

Yao, Lixia Working Paper Renewable energy development: How close is the People's Republic of China to achieving carbon neutrality? ADBI Working Paper, No. 1438 Provided in Cooperation with: Asian Development Bank Institute (ADBI), Tokyo Suggested Citation: Yao, Lixia (2024) : Renewable energy development: How close is the People's Republic of China to achieving carbon neutrality?, ADBI Working Paper, No. 1438, Asian Development Bank Institute (ADBI), Tokyo, https://doi.org/10.56506/HXPU5515 This Version is available at: https://hdl.handle.net/10419/296830 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may be saved and copied for your personal and scholarly purposes. You are not to copy documents for public or commercial purposes, to exhibit the documents publicly, to make them publicly available on the internet, or to distribute or otherwise use the documents in public. If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by-nc-nd/3.0/igo/ ADBI Working Paper Series RENEWABLE ENERGY DEVELOPMENT: HOW CLOSE IS THE PEOPLE’S REPUBLIC OF CHINA TO ACHIEVING CARBON NEUTRALITY? Yao Lixia No. 1438 March 2024 Asian Development Bank Institute The Working Paper series is a continuation of the formerly named Discussion Paper series; the numbering of the papers continued without interruption or change. ADBI’s working papers reflect initial ideas on a topic and are posted online for discussion. Some working papers may develop into other forms of publication. Suggested citation: Lixia, Y. 2024. Renewable Energy Development: How Close is the People’s Republic of China to Achieving Carbon Neutrality? ADBI Working Paper 1438. Tokyo: Asian Development Bank Institute. Available: https://doi.org/10.56506/HXPU5515 Please contact the authors for information about this paper. Email: [email protected] Yao Lixia is a senior research fellow, Energy Security Division, Energy Studies Institute, National University of Singapore. The views expressed in this paper are the views of the author and do not necessarily reflect the views or policies of ADBI, ADB, its Board of Directors, or the governments they represent. ADBI does not guarantee the accuracy of the data included in this paper and accepts no responsibility for any consequences of their use. Terminology used may not necessarily be consistent with ADB official terms. Discussion papers are subject to formal revision and correction before they are finalized and considered published. The author gratefully acknowledges the contribution of Phan Dam Quan, a former student of the National University of Singapore, concerning the literature review for this study. Asian Development Bank Institute Kasumigaseki Building, 8th Floor 3-2-5 Kasumigaseki, Chiyoda-ku Tokyo 100-6008, Japan Tel: +81-3-3593-5500 Fax: +81-3-3593-5571 URL: www.adbi.org E-mail: [email protected] © 2024 Asian Development Bank Institute ADBI Working Paper 1438 Y. Lixia Abstract Goals to mitigate climate change are to be achieved through government strategies and policies, as well as the availability of low-carbon technologies, and are subject to the underlying institutional, political, economic, and other factors that promote or constrain progress and the path taken. A large CO2 emitter, the People’s Republic of China (PRC), has set the goals of carbon dioxide emissions peaking by 2030 and achieving greenhouse gas neutrality by 2060. This study reviews the PRC’s efforts to phase out fossil fuels and analyzes the factors that have an impact on the PRC’s renewable energy development and its path towards carbon neutrality. Four factors are found to be critical in the decarbonization of the PRC: the costs of retrofitting existing coal-fired power plants and upgrading the power grid to accommodate renewable energy; institutional factors; technology factors; and marketbased schemes. Given these factors and the PRC’s enormous coal-dependent infrastructure, transitioning away from fossil fuels will be challenging. Another big challenge is the intermittence of renewable energy sources. Hence, the growing penetration of renewable energy in the PRC’s electricity mix requires effective policy tools and appropriately designed market signals. To put it simply, the PRC has the potential to develop renewable resources on a large scale, yet it still has a long way to go to achieve carbon neutrality. Keywords: People’s Republic of China, carbon neutrality, fossil fuel phase-out JEL Classification: P28 ADBI Working Paper 1438 Y. Lixia Contents 1. INTRODUCTION .......................................................................................................... 1 2. THE PRC’S RENEWABLE ENERGY RESOURCE AND CARBON REDUCTION TARGETS .............................................................................................. 2 3. FOSSIL FUEL PHASE OUT ......................................................................................... 4 4. CRITICAL FACTORS IN ACCELERATING RENEWABLE ENERGY ADOPTION ...... 5 4.1 Cost .................................................................................................................. 5 4.2 Potential Institutional Factors ........................................................................... 6 4.3 Technology ....................................................................................................... 8 4.4 Supportive Schemes ...................................................................................... 10 5. GOVERNMENT’S EFFORTS TO ADDRESS CHALLENGES IN RENEWABLE ENERGY ADOPTION ................................................................................................ 11 6. CONCLUSIONS AND POLICY IMPLICATIONS ........................................................ 12 REFERENCES ...................................................................................................................... 14 ADBI Working Paper 1438 Y. Lixia 1 1. INTRODUCTION In December 2020, President Xi announced to the United Nations that the PRC’s carbon dioxide emissions per unit of GDP would decline by 65% from 2005 levels, and the share of nonfossil fuels in the energy mix would rise to 25% (Xinhua Net 2020). This followed an earlier pledge by the President to the United Nations General Assembly on 22 September 2020 that emissions would peak before 2030 and that the country would strive to achieve carbon neutrality by 2060 (Farand and Darby 2020). Given the ambition of the PRC government, this study aims to explore what factors are critical to energy transition in the PRC and what challenges should be tackled in the process of energy transition to achieve carbon neutrality. Several measures can help accelerate energy transition, such as developing renewable energy, increasing energy efficiency, and prioritizing environmental protection. Since 2020 when President Xi announced that the PRC would strive to achieve carbon neutrality by 2060, an increasing number of scholars have been conducting research on the PRC’s climate mitigation and energy transition issues. Many of them are quantitative studies using modeling. Some reviewed the PRC’s financial development on carbon emissions, analyzing the pathways, and suggested that the PRC should be focused in particular on the promotion of green finance (Zhou and Zhang 2024). Some project mitigations of carbon neutrality in the PRC (Li et al. 2022a); others focus on the projection of carbon neutrality of a specific region in the PRC, e.g., Beijing–Tianjin– Hebei Region, finding that under the constraint of the carbon neutrality target, this region should formulate more stringent emission reduction measures to ensure that the overall carbon emission will reach its peak in 2030. This indicates that the final allocation scheme will greatly encourage carbon emission reduction in Hebei Province (Zhang et al. 2023a). Zhang et al. (2023b) examine specific policies, such as the Carbon Trading Pilot Policy and its impact on the achievement of the carbon neutrality target. Besides studies using quantitative methods, a few qualitative studies look into the PRC’s carbon neutrality issue from a policy or legislative perspective. Gao et al. (2023) conduct an evolutionary analysis of the issuance and implementation of the PRC’s carbon neutrality policies, finding that the PRC’s carbon neutrality policies and initiatives grew gradually and in an orderly manner in the preliminary and decentralized exploration stage from 2006 until 2013, and continued to grow steadily from 2014 to 2019. The PRC’s carbon neutrality policies started to grow explosively from 2020. Since then, there has been a series of top-down design policies and supportive policies in various industries and sectors. Shi and He (2023) look into the PRC’s current legal system in achieving carbon neutrality goals and discuss the improvement of the legal system. It is suggested that a unified legislation system among central, local governments should be established to achieve carbon neutrality. Little research is focused on a comprehensive discussion about the roles and challenges of renewable energy development in achieving carbon neutrality in the PRC. This paper is focused on renewable energy because it is crucial for achieving carbon neutrality. Having said that, this paper intensively reviews the PRC’s renewable energy development and overall current situation in phasing out the use of fossil fuels in the power sector. After that, this paper analyzes the critical factors that may have an impact on the phasing out of fossil fuels in the PRC. These factors include cost, institutions, technology, and market-based schemes. Challenges are discussed before policy implications and suggestions are provided at the end of the paper. ADBI Working Paper 1438 Y. Lixia 2 2. THE PRC’S RENEWABLE ENERGY RESOURCE AND CARBON REDUCTION TARGETS There is vast potential in renewable energy resources in the PRC. It has the highest hydropower potential capacity in the world. In particular, the hydropower capacity that can be technologically harnessed is 542 GW, while the capacity that can be harnessed for economic benefits is 402 GW (Huang and Yan 2009). The potential hydropower capacity is unevenly distributed in the PRC’s territories as 78% of them are concentrated in the southwest, near the Tibetan plateau (Huang and Yan 2009). The PRC has considerable potential in utilizing solar energy. Many provinces, such as Tibet, Xinjiang, Qinghai, Gansu, Ningxia, and Inner Mongolia, have desert landscapes, high radiation, and many hours of sunshine, making them suitable for the installation of solar panels. It is estimated that if 1% of the PRC’s desert area were covered by solar photovoltaic systems with an annual energy generation of 120 kWh/m2, the PRC would generate at least 1,296 TWh from solar energy (Liu et al. 2011), almost four times the PRC’s total yearly solar power generation. The PRC’s solar energy potential is unevenly distributed as those places with the highest solar potential are concentrated in the northern and western areas of the country. As for wind power, the PRC has a technically exploitable onshore wind energy of 2,548 GW for places that are 10 m above ground level (Liu et al. 2011). Most of the PRC’s potential onshore wind resources are concentrated in the north and northeast region, especially in Inner Mongolia. As regards offshore wind, the PRC has a potential 400–500 GW of offshore wind energy capacity that is concentrated outside the southern and southeastern coastline (Zhang et al. 2017). The PRC is also rich in biomass resources, which are mainly extracted from biogas that can be generated from industry wastewater, livestock manure straw, firewood, forest wastes, municipal wastes, and energy crops (Liu et al. 2011). According to the BP Statistical Review 2022, about 35% of the total electricity generation was from nonfossil fuels in the PRC in 2021. The annual growth rate of installed solar capacity and wind capacity in the PRC was about 58.3% and 21.6%, respectively, from 2011 to 2021. The share of the PRC’s energy consumption from renewable resources is expected to continue to increase as the current installed electric capacity from renewable resources in the PRC is becoming more significant. In the meantime, however, the PRC has been the world’s largest emitter of carbon dioxide emissions since 2005. As of 2021, the PRC accounted for 30.9% of the world’s carbon dioxide emissions (BP Statistical Review 2022). The PRC’s carbon dioxide emissions from energy have risen threefold since 2000. However, the trend has been quite erratic, reacting to changes in economic policy. The growth of emissions accelerated twice in response to the economic stimuli following the Asian and Global financial crises, respectively (Figure 2.1). Since 2013, there has been a slower rising trend in CO2 emissions corresponding to the “new normal” economic situation.1 The slowing down of the PRC’s increase in CO2 emissions since 2013 is also due to the successful implementations of emissions control policies in the 13th Five-Year-Plan. Nevertheless, the PRC now accounts for about 30% of the world’s carbon dioxide emissions from energy.2 1 “New normal” is a concept used by the PRC government and economists to describe the fact that annual GDP growth has slowed from the double-digit levels of many years when the economy was booming. 2 BP, BP Statistical Review 2022. ADBI Working Paper 1438 Y. Lixia 3 Figure 1: PRC Carbon Dioxide Emissions from 2000 to 2021 (Million Tonnes of Carbon Dioxide)a a BP, BP Statistical Review 2022. In terms of CO2 emissions by fuel type, most of the PRC’s CO2 emissions are emitted from the use of fossil fuels, including coal, crude oil, and gas. Figure 2.2 shows the breakdown of the PRC’s CO2 emissions by fuel type from 2000 to 2020. In general, most CO2 is emitted from the use of coal, which accounts for 70%–80% of all CO2 emissions. The use of oil accounts for the second-highest amount of CO2 emissions at around 15% of the total, while emissions caused by using cement and gas account for the remainder. From 2000 to 2010, the percentage of emissions from using coal steadily increased from around 70% to 76.4% of all emissions in the PRC. However, from 2011 to 2020, this figure dropped from 76.4% to 69.5%, which suggests that the PRC’s decarbonization policies have proven their effectiveness. Figure 2: Shares of the PRC’s CO2 Emissions by Fuel Type (2000–2020) (%) Source: Our World in Data (2022). ADBI Working Paper 1438 Y. Lixia 4 On top of this, the PRC government is continuing with its targets in reducing energy intensity. It plans to reduce its industrial energy consumption per unit of GDP by 13.5% during the period 2021–2025 by introducing new technologies and financial services. Further, as industries account for about 65% of the total national energy consumption, it is believed that improved efficiency would be a critical measure in reducing energy intensity. By improving the energy efficiency of industrial enterprises, about 37% of the country’s planned carbon emission reductions could be achieved from now until the middle of this century (Reuters 2022). Given the PRC’s rich renewable energy resources and its target of carbon reduction, the country can build on its current renewable energy momentum, as a power sector dominated by renewables can accelerate the PRC’s renewable energy transition. In other words, the accelerated development of the PRC’s renewable sector is a concrete step in the country’s efforts to make carbon emissions peak by 2030 and to achieve carbon neutrality by 2060. 3. FOSSIL FUEL PHASE OUT The PRC has a detailed plan to reduce fossil fuels in its energy mix. Different PRC master plans for national energy development have outlined that the share of fossil fuel is expected to drop to below 20% by 2060 (Regan 2021). Furthermore, the PRC’s 14th Five-Year Plan on energy aims to phase out 30 GW of inefficient coal-fired capacity, which accounts for about 3% of the current installed power capacity (Lin 2022). To phase out inefficient capacity, the PRC is expected to shut down a significant proportion of its coal power plants from now until 2030. Moreover, the PRC is expected to continue to improve the efficiency of its coal-fired units and reduce the average amount of coal used for each kilowatt-hour of electricity to reduce the greenhouse gas emissions of its coal-fired power plants (Xue and Ng 2021). However, the demand for Chinese goods has surged since the world started to reopen after COVID-19. Chinese factories hence need a lot more electricity, more than half of which is produced by coal. In the meantime, coal production has been slowed down as the PRC government attempts to make the country carbon neutral by 2060. Restrictions on the import of Australian coal made the shortage of coal supply even worse. The balance between supply and demand pushed up coal prices, while electricity prices were strictly controlled by the government. As a result, coal-fired power plants drastically reduced their output as they were unwilling to operate at a loss (Hoskins 2021). These power shortages have caused many incidents of blackouts across the PRC, with some power grid operators having to ration electricity for important businesses and industries (You 2022). To mitigate the crisis, President Xi Jinping announced that coal was still the PRC’s main source of energy, which was followed by PRC government meetings that ordered more than 150 coal mines in major coal-producing regions, such as Shanxi, Shaanxi, and Inner Mongolia, to produce an extra 220 million tonnes of coal (You 2022). As such, the PRC government had to relax coal mining operation regulations, reform power pricing, and mandate coal-fired power plants to increase their output to ensure that the PRC has enough energy to operate its economy (Xue and Ng 2021). Although the PRC had previously announced its plan to phase out coal-fired power plants in the future, the immediate power crisis has led its government to ramp up coal production for now. ADBI Working Paper 1438 Y. Lixia 11 5. GOVERNMENT’S EFFORTS TO ADDRESS CHALLENGES IN RENEWABLE ENERGY ADOPTION Intermittent renewable energy sources create challenges for users, which is a hurdle for phasing out coal power. Large-scale production of power from intermittent renewable resources such as solar and wind creates challenges for the stability of the electricity grid. Further, big growth with limited utilization harms the rate of return for renewables projects. System inflexibility and transmission bottlenecks are the main causes of the curtailments. One big challenge lies in the connection of electricity produced by renewables to the power grid. Since there is a time lag between the output of renewable electricity and grid companies obtaining permits to build local grid facilities, there is significant wasted solar and wind power (Chen 2017). To solve this problem, the PRC government has suspended approval since March 2016 for new wind farms in provinces where annual wind curtailment4 rates have exceeded 20%. Since June 2018, this threshold has been further tightened from 20% to 5% (Guo et al. 2023). The development of energy storage is another strategy aimed at tackling the curtailment problem. As outlined in the 14th FYP on Energy Storage Development, the PRC would achieve large-scale commercialization of new energy storage technologies with more than 30 GW of installed nonhydro energy storage capacity by 2025. As of 2021, there were 146 approved energy storage projects inside the PRC (Bian 2023). Another challenge in adopting renewable energy comes from the reluctance of local companies to use these intermittent sources. For example, power grid companies in different provinces work collectively to buy electricity generated from renewable energy, in accordance with the requirement of the Renewable Energy Law that obliges them to purchase renewable electricity. However, the power grid companies appear to give priority to locally generated and more price-competitive electricity. Some even doubt the safety of long-distance transmission lines, as the intermittent power flows may cause system instability and major power outages (Chen 2017). Overcoming these challenges requires the government to develop prudent policies and to be strict with implementation. In particular, given the decelerating economy, the adoption of renewable energy could be challenging and difficult. It is an energy problem, but solutions can be found outside the energy sector itself. The government has issued policies to encourage energy consumers to use more renewable energy. These policies include the Clean Energy Consumption Action Plan, and an obligation to use renewable energy for provinces, grid companies, and large energy consumers (Hove 2020). However, many of these policies are government mandates, whereas few market incentives are created. To address these challenges, market incentives, particularly for energy storage investment, are needed. The market mechanism for energy storage is still in its infancy. The current electricity pricing mechanism does not fully reflect the value created by new energy storage, which discourages investment in new energy storage projects. Hence, improvements in the pricing mechanism are necessary, which would to some extent support the commercialization of new energy storage technologies (S&P Global 2023). 4 The phenomenon that some electricity cannot be integrated in the power grid is called “curtailment.” ADBI Working Paper 1438 Y. Lixia 12 6. CONCLUSIONS AND POLICY IMPLICATIONS The PRC has the potential to develop renewable resources on a large scale, yet it still has a long way to go to achieve carbon neutrality. There is still a risk that the PRC’s growing coal capacity may harm the country’s efforts to decarbonize its energy mix. The fossil fuel phase-out progress may face a setback due to the power shortages in 2021 that prompted the PRC government to take measures to increase coal production to safeguard energy security. Despite having announced the country’s willingness to phase out coal-fired power plants, the PRC has recently increased its coal production to mitigate its power crisis, which caused many incidents of blackouts across the PRC (You 2022). After this power crisis, the PRC announced plans to construct new coal-fired power plants. In the first six weeks of 2022, a total of 7.3 GW across five new coal-fired power plants were approved for construction (You 2022), 90 GW of new coal-fired power plants were under construction, and 160 GW of coal-power projects were in earlier development stages (Tay 2022). To facilitate these new projects, the PRC’s economic planners have approved a state investment of more than 24.1 billion yuan (USD3.8 billion) to produce more than 19 million tonnes of coal annually. As a result of these policies, Chinese coal production in January and February 2022 reached 690 million tonnes, which was a 10.3% year-on-year increase (You 2022). Moreover, the PRC has a plan to retrofit 200 GW of coal-fired power plants during the period 2021–2025 to enhance the flexibility of its electricity production, which will increase the grid’s capability to rapidly ramp up its transmission in the case of low production of renewable energy resources (Yin 2022). This move was motivated by the decision of the PRC’s political leaders to assert that the significance of coal power in the PRC’s energy mix will not change in the short term to accommodate the demands of the economy. Consequently, the PRC has been burning more coal to drive its economic goal. In particular, its coal consumption in 2021 increased by 4.6% compared to the 2020 level, which was the strongest growth rate in the last decade (Ferris 2022). The construction of 33 GW of new coal-fired power plants in 2021 and increasing coal production in existing power plants have led to an increase of 4% compared to the 2020 level in the PRC’s carbon dioxide emissions (Ferris 2022). There have been various concerns over the implications of the PRC’s renewed interests in coal-fired power plants for its previously announced fossil fuel phase-out goals. As coal-fired power plants are still needed for the PRC’s industrialization, the country may face problems in reaching its decarbonization targets by 2025 and 2030, and the additional coal-fired power plants that may render the PRC unable to make its coal consumption peak by 2030. Some observers express different concerns, such as over the life span of the PRC’s coal-fired power plants that are expected to last until 2040 before being mostly phased out, which will result in the prolonged use of coalfired power plants in the PRC’s energy production (Xie 2021). Hence, although the PRC has announced various goals and strategies with a view to phasing out fossil fuels, its recent interests in coal-fired power plants have prompted concerns about whether its goals can be fulfilled by their stipulated deadlines. Given the above restraining factors and the PRC’s enormous coal-dependent infrastructure and large heavy-manufacturing base, transitioning away from fossil fuels will be challenging. The success of the renewable energy plan relies on large-scale renewable energy bases and supportive schemes to deploy renewable technology. The growing penetration of renewable energy in the PRC’s electricity mix requires effective ADBI Working Paper 1438 Y. Lixia 13 policy tools and appropriately designed market signals. The market-based schemes need time to be mature enough to support renewable development. Yet despite the challenges, the PRC is seriously making its way toward decarbonization. It is currently the top global producer of renewable energy power, and a leading manufacturer of electric vehicles. It has initiated a carbon trading scheme, and it has improved energy efficiency dramatically across multiple sectors. Having said that, the PRC should invest in the necessary infrastructure, particularly advanced power grids, as future deployment of thousands of solar and wind facilities will increasingly require flexibility in power grids. The PRC should also focus on institutional reforms that could facilitate faster deployment of low-carbon technologies within the decade (Lee and Schrag 2022). More importantly, the PRC could prioritize the pursuit of short-term mitigation targets that can take effect as soon as possible, as opposed to long-term ambitions that may appear unrealistic to the public. This also requires the relevant institutional reforms to be in place to facilitate the realization of the short-term targets. As far as institutional factors are concerned, the role of centralized government planning, standards, regulations, subsidies, and other supportive schemes have made impressive contributions to the country’s low-carbon success. Large state-owned companies may continue to play an important role in building and operating the PRC’s electricity system. National energy infrastructure projects always involve high costs that take years to recover. For example, huge projects such as long-distance transmission lines will need longer time and more expense than local-level small projects (Lee and Schrag 2022). Therefore, it could be expected that strong state intervention and financial support are still needed for renewable energy development in the PRC. Further, market forces are key to solving today’s problems. As for the supportive schemes, the PRC has carried out the EET pilot projects in several provinces, including Henan, Zhejiang, Fujian, and Sichuan, since 2017. Large energy-intensive enterprises are covered by the EET system. Since the PRC’s EET system and ETS overlap as far as the coverage of enterprises is concerned, Li et al. 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