Polaris Power: China has led the world in investment in renewable energy generation and installed capacity over the past few years. In fact, between 2010 and 2015, China invested $377 billion in the industry, more than the second and third-place countries, the United States and Germany, combined. China currently has 150GW of wind power installed capacity and 77GW of solar photovoltaic power generation installed capacity, which is larger than countries such as the United States (80GW and 35GW, respectively).

In the World Bank's RISE study, China performed far better than the global average, becoming the leader in East Asia and matching, if not surpassing, OECD countries in many areas. Many OECD countries have significantly lower investment and installed capacity than China, but they score higher than China on many renewable energy indicators.

So why is there such a disparity?

The Bank’s Regulatory Indicators for Sustainable Energy (RISE) study provides some insight into why.

Released in February 2017, RISE is a policy scoring system of unprecedented breadth and depth that rates 111 countries on energy access, energy efficiency and renewable energy. The system focuses on countries’ regulatory frameworks and measures taken within the direct responsibility of policymakers. The scores are based on data provided to the indicator team at the end of 2015 and are fully and rigorously validated. RISE finds that China’s challenges are partly beyond the control and explanation of energy policy. China is the world’s second-largest economy, and its massive growth in electricity demand has created opportunities. A large skilled workforce and large supply chains have created conditions for cost-effective wind and solar farms. In addition, the Chinese government has taken important steps to attract private investment in various sectors.

Parts of the policy framework, if strengthened, could further exploit China's renewable resources. In 2016, the national average curtailment rate was 17%, meaning that 17% of wind power was not delivered to end consumers and was wasted.

China could strengthen the following aspects of its renewable energy regulatory framework:

1. Unified generation and transmission planning framework. We found that China has neither a power sector expansion plan nor a transmission plan that considers the expansion of renewable energy. However, this finding does not take into account the upcoming "13th Five-Year Plan". The plan will systematically address generation and transmission planning and renewable energy development. In addition, the energy sector planning departments (National Development and Reform Commission, National Energy Administration, Ministry of Industry and Information Technology, Ministry of Environmental Protection) still need to coordinate to identify the regions or industries with the greatest power demand. As with other policies in China, the key is effective implementation of planning policies at the local level.

2. Priority dispatch of renewable energy generation. Although renewable energy power plants have priority access to the grid, power generation is not dispatched based on operating costs (i.e., economic dispatch mode). China still implements an "equal distribution of power generation" dispatch mode, that is, all power plants are allocated the same operating time (hours) each year, regardless of their actual operating costs. In addition, since utilities do not need to pay compensation for any form of power abandonment or the required sales infrastructure is not built in time, the relevant risks are borne entirely by the project construction units. Although this situation is not enough to constrain total investment, it may lead to greater uncertainty and fewer financially viable projects.

3. Regional power trading and grid connection. Power trading between provinces is still limited due to the lack of power markets that can aggregate power generation and facilitate trading between provinces. This is important because increasing the proportion of variable renewable power generation connected to the grid will reduce power supply fluctuations. Expanding the scope of power coordination will help increase system stability. In addition, administrative barriers and competition between Chinese provinces also hinder power trading.

What can China do to close these gaps and more effectively deliver clean electricity to end users?

China’s latest round of power sector reforms is designed to meet this challenge head-on. The overall idea is to allow the market to play a decisive role in resource allocation. With GDP and electricity demand growth slowing, it is critical to shift the focus from adding capacity to delivering clean energy to consumers. The following measures, if strengthened, can help deliver more green electricity to Chinese consumers and further reduce CO2 emissions:

1. Open up wholesale and retail power markets and adopt an economic dispatch model. This will help deliver more clean energy because it helps prioritize renewable power, which often has the lowest marginal generation cost.

2. Strengthen regional coordination systems and increase grid management flexibility. As intermittent renewable energy generation is more connected to the grid, expanding the scope of power coordination will help increase system stability.

3. Setting feasible targets and timelines for reducing curtailment will help end users use more clean energy. Provinces with relatively low curtailment rates should start setting such targets first. For example, it is much more difficult for Xinjiang to reduce its curtailment rate from 40% to 10% in three years than it is for Hebei to reduce it from 9% to 3%.

4. Decouple grid company revenues from electricity sales, allowing them to charge fixed grid usage and maintenance fees. Previously, China's grid company revenues were tied to their electricity sales. Decoupling the two could encourage China's powerful utilities to gradually shift to supporting end-users in using clean energy, improving energy efficiency, and distributing renewable energy generation. The pilot project in Shenzhen is seen as a model for China to further develop its renewable energy generation industry.

As more renewable energy generation enters the grid system, many challenges and opportunities will coexist. The more renewable energy generation is used, the lower the price of electricity generation from other energy sources will be. Chinese planners and regulators would be wise to seize this momentum that has already occurred in Europe and some states in the United States.