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The Stumbling Blocks That May Be Encountered In China's "Energy Transition"

Summary: It is not easy for China to seek to establish a "green and low-carbon power system.
It is not easy for China to seek to establish a "green and low-carbon power system." Today, China is the world’s largest energy consumer, accounting for 23% of global primary energy demand, and it is also the largest coal consumer, which poses a huge challenge to its green transformation.

To balance this situation, China is actively investing in renewable energy and establishing economic incentives for non-public sectors to change their consumer culture. China is already a major investor in renewable energy worldwide. In 2015, China surpassed Germany as the country with the largest installed capacity of solar energy in the world. It also invested in more than 4,000 projects involving energy conservation and structural adjustment, and supported renewable energy producers through on-grid tariff (TiF) and low-interest loans. China plans to invest another 360 billion U.S. dollars by 2020 and strive to implement the goals of the Paris Agreement.

Despite these efforts, China still faces innumerable inconsistencies affecting the implementation of policies. The following will analyze: market forces, technical constraints, social stability and physical environment and other related constraints.

First, market forces

First, due to low coal prices and relatively stable grid purchase prices, the profitability of thermal power generation has increased in recent years. This may in the near future stimulate private capital to reinvest in coal production rather than renewable energy.

Second, in China, “the complex network of cross-subsidies and local protectionism means that the actual cost of industrial energy may be lower than it should be”. Chinese industry relies heavily on coal and does not have infrastructure that is compatible with other energy sources. This will "need a different approach to managing China's energy consumption," which is a disadvantage for the new energy market.

Third, in many cases, it is cheaper to implement additional energy-saving solutions by paying extra costs for pollution or violation of environmental regulations.

Second, technical constraints

Technical restrictions are one of the important factors that prevent further investment in renewable energy. Over the past few decades, renewable energy technologies have experienced exponential improvements, but there are still differences between these technologies and infrastructure. This is not only a technical issue involved in the development of renewable energy, but also an adaptability issue for these new energy sources.

In China, “the development of power dispatch and renewable energy sources does not match” because they are “affected by traditional power trading methods.” For example, Xinjiang lost 38% of its wind power energy in 2016. Abandoned electricity from wind power across the country has been increasing since 2014. In addition, it is still common for Chinese industrial companies to rely on coal instead of electricity to maintain daily operations.

China's energy production requires more technical improvements. However, the development of renewable energy technologies in the market has far overestimated the actual situation.

social stability

The transition to the “green low-carbon power system” is also facing a social compromise. The precondition for greening China is to have a suitable social living environment. In fact, the rapid changes in the country’s energy profile may not be followed by social models.

For example, the establishment of a new electricity energy structure and complete marketization of electricity may lead to a surge in residential electricity prices. At present, the average electricity price of Chinese residents is much lower than that of OECD countries. China’s residential electricity price is US$0.074/kWh, less than half the OECD average of US$0.158/kWh. The price reform of the power sector will directly affect the disposable income of residents and affect their purchasing power and savings.

In addition, there are two major shortcomings in the government's decision to shut down coal-fired power plants to achieve pollution reduction targets. On the one hand, this has led to continued high unemployment and deteriorating quality of life in the area. The fact that coal-fired power plants were closed near Beijing in the past winter and the prohibition of residential heating systems on coal can illustrate this point, which has exacerbated unemployment pressure and prevented rural residents from heating homes during the cold winter months.

On the other hand, local fiscal revenue has dropped significantly. Since the last tax reform, local governments have been burdened with public spending, and their weak sources of income have failed to make up for the fiscal deficit. In this case, losing another source of income for the coal-fired power industry will only encourage local governments to assume more debt.

Environmental adaptability

The positive results of the transition to clean energy are obvious. However, it is worth mentioning that there are two implications: the interrelationship between geographical suitability and environmental issues.

Renewable energy depends on a good geographical location, where the potential for electricity generation exceeds installation and operating costs. For example, in China, this situation has become a focus of power plants in specific areas - such as wind and solar energy, which are more favorable in grasslands and deserts, respectively - which causes secondary problems in areas that have suffered from soil degradation, erosion and water scarcity. "damage".

Although renewable energy has a reversible impact on the environment, the scale of its centralized production and installation exacerbates these problems. China's renewable energy sources are increasingly relying on degraded land to expand their production scale. This green transformation has physical hazards.

Looking to the future

The transition to a "green, low-carbon energy system" is not only feasible but also desirable. However, by introducing more environmentally friendly technologies and reforming economic models, China faces structural constraints. The most significant of these is the profitability of clean energy investments and their ability to adapt to China's social development.

The so-called "energy revolution" does not mean that China will get rid of its coal-based economic status. Industrial and market forces will continue to play an important role in determining the sustainability of coal as one of China's economic growth drivers. However, in the foreseeable future, the development of renewable energy sources is indeed crucial to solving the urgent environmental problems around China.

But as mentioned above, this complex transition must be careful.