Industry Trend Analysis - 13th Five-Year Plan: Cementing China's Power Mix Transition - NOV 2017

BMI View : China's 13th Five- Y ear P lan aligns with s trong er rhetoric on environmental policy over the past year and reiterates the government's commitment to reduc ing coal use and boost ing alternative fuels in the power mix. Provincial power integration, shifting power consumption patterns, a focus on 'green tech' and power pricing reforms are the key themes we highlight for the power sector over the five-year timeframe.

The release of China's 13th 'Five-Year Plan' (5YP), which guides China's economic and social development over 2016 to 2020, aligns with many of our underlying views of the evolving power and renewables market in China. We highlight six key themes for the power sector over the five-year timeframe, as outlined in the 5YP.

Environmental Policy To The Fore

One central theme that dominates China's 5YP is growing concern about environmental stewardship and the implementation of environmental policies - most notably to curb coal consumption, whilst at the same time boost the clean energy sector. This has been a key theme in our analysis, as pressure has mounted on the government to reduce air pollution and take a more central role in climate change negotiations ( see 'China And India Fundamental To Climate Change Negotiations', July 2 2015).

The 5YP reflected the government's ongoing commitment to diversifying its power mix away from coal towards cleaner energy sources: highlighting plans to invest USD6.6trn on low-carbon technology, renewables, energy efficiency and emissions reduction products. China increased use of non-fossil fuels so that they grew from 9.4% of primary energy consumption in 2010 to 12% in 2015, over-achieving against the 12th FYP target of 11.4% by 2015. The new target aims to increase non-fossil energy to at least 15% by 2020, and at least 20% by 2030.

China's Evolving Power Mix
China - Total Power Generation By Type
f = BMI forecast. Source: EIA, BMI

China has registered significant success in tackling coal consumption and promoting the use of cleaner fuels such as nuclear, hydropower, renewable energy and gas - and we have adjusted our forecasts accordingly to represent this power mix shift ( see 'Evolving Power Sector: Coal Slowly Edging Out', February 15 2016). We expect additional policies to be implemented over the 2016-2020 timeframe (including the introduction of a carbon cap and trade scheme in 2017) to both discentivise the use of coal in the power sector and also to support the clean energy sectors. This creates downside risks to our coal-generation forecasts and upside to our hydropower, renewables, nuclear and gas forecasts.

Shifting Power Consumption Patterns

We have previously mentioned in our analysis that China's power consumption had started to decouple from economic growth - indicators that previously aligned relatively closely to one another ( see 'Coal: Down But Not Out', September 11 2015). This continues to be the case, as China's economy moves away from energy-intensive manufacturing and construction (highlighted in the chart by steel production growth during the 2000s) to a more consumer-led expansion, resulting in muted power consumption forecasts over the coming decade. This shift to a consumer economy was reiterated in the 5YP, as a focus was placed upon supporting the development of the services sector and its expanding role in the economy.

Shifting Patterns In Power Consumption
China - Real GDP, Power Consumption Growth & Steel Production Growth
e/f = BMI estimate/forecast. Source: EIA, BMI

Focus On Green Technology

A section of the 5YP was dedicated to innovation and technology, including the development of frontier technology and scientific research projects. In particular, China views green technology as a crucial pillar of future growth and it features prominently in the 13th Five-Year Plan, a marked change of tone to heavy industrial development of the past ( see '13th Five-Year Plan: Innovation And Green Tech Prominent In Infrastructure', March 23 2016 ). Specifically for the power sector, this could help to support funding for technologies such as battery storage and clean coal technology, improving the chances of a global breakthrough in the deployment of these technologies (see 'Clean Coal: No Silver Bullet For Asia's Emissions Woes', February 19).

Again, this is a continuation of rhetoric we've already heard from the Chinese government over the last year, as opposed to a fundamental shift in viewpoint. This was evidenced in August 2015 when China signed an agreement between the US Department of Energy (DOE) to jointly develop 'clean coal' technologies for commercial use.

Expansion Of DES

China's plan to expand its network economy - improving the information network system, enhance the technology and promote the use of big data will help drive the expansion of distributed energy solutions (DES) in China. DES is small, on- or off-grid generation capacity that is close to the point of consumption - and the growing penetration of such systems results in the power grid shifting from a centralised structure to a more fragmented operating model ( see 'DES: The Future Of Power Provision', September 3 2014).

Power Sector Interconnections
Simplified Illustration Of A Smart Grid
Source: BMI=-

Energy demand-response services, 'smart technology', big data and cloud computing all facilitate the uptake of DES, as it enables the two-way communication between consumer and producer. As such, we expect the competitive landscape of the Chinese power sector to diversify over the coming years as innovative technology companies, software manufacturers and energy management firms gain market share ( see 'Smart Operators To Challenge Power Generation Model', June 3 2015).

Provincial Power Sector Integration

Regional development and the integration of provinces is a key theme throughout the 5YP. We believe this will extend to the increased integration of the provincial power sectors - particularly considering the diverging trends in supply and demand at the provincial level ( see 'Provincial Power Landscape: Diverging Trends', January 11). There is a mismatch between electricity supply and demand in some regions, leaving a number of provinces with significant generation surpluses and others with deficit.

Uneven Power Supply-Demand Trends
Generation Surplus By Province, 2014 (100mn kWh)
Source: National Bureau of Statistics, BMI

Inner Mongolia, Sichuan and Yunnan are the provinces with the largest electricity surpluses in China, as ample wind generation in Inner Mongolia (largest wind output by province in China) and sizeable hydropower resources in Sichuan and Yunnan (first and second largest hydropower output provinces in the country, respectively) result in power supply outstripping demand. In light of these dynamics, we have seen concerted efforts by the government to develop grid infrastructure - specifically, ultra-high-voltage (UHV) transmission lines - which will connect these electricity provinces with surpluses to centres of high power demand.

Reforms Aimed At T&D Sector

Rhetoric surrounding deeper reforms was another area of focus for the 5YP, which is undoubtedly a positive, but we maintain our view that much will depend on the implementation of such reforms (see 'Economy Takes Centre Stage At NPC', March 18).

China's Competitiveness Growing Concern
Electricity Prices By Country, Industrial (LHS) and Residential (RHS), USD/KWh
Source: BMI Research

One segment of the power sector that we flag as having the most potential for reform over the 2016-2020 timeframe is the transmission and distribution (T&D) sector, specifically pricing reforms - as the government becomes increasingly concerned about China's competitiveness and rising power costs.

Plans to deregulate the segment, and encourage competitive power prices have been mooted over the last year, but reform has been slow; however, we expect momentum to build during this 5YP time period. In fact, a trial project was underway in 2016, with 12 provincial-level power grids piloting price reform - which will be expanded during 2017 and 2018. The country's two dominant grid operators - the State Grid Corp of China and China Southern Power Grid - will be the primary target for a shake-up over the coming years.