Industry Trend Analysis - Power Dispatch Reform Key To Decarbonisation Efforts - JAN 2018

BMI View: Provincial-level p ower dispatch regulation will be a key area of Chinese power sector reform over the coming decade, in line with plans to decarbonise the power sector and reduce excessive reliance on coal-fired power. As greater flows of intermittent renewable energy penetrate the power mix, we expect ancillary services to present significant opportunit ies for companies that support power supply balancing efforts.

A key focus of Chinese power sector reform over the coming five years will be reducing the arbitrary dispatch of power at provincial level. As vested interests often lead local governments to dispatch coal over renewables due to cost and socio-economic concerns, we expect Beijing to push to reduce renewables costs and consolidate the coal power sector over the coming years. This would address overcapacity in the coal sector, and make renewables more attractive at provincial level, supporting the country's ambitious decarbonisation efforts. Despite having the world's largest installed renewable capacity base by a substantial margin, we stress that wastage of wind and solar power is rampant in the country.

In many Chinese provinces, the decision to prioritise coal over renewables is underpinned by several factors:

  • Transmissions constraints to integrating intermittent renewable energy to the grid, with coal providing a stable baseload source of electricity that is easier to deal with.

  • The fact that renewables feed-in-tariffs are expensive relative to coal-fired electricity tariffs. This means renewables generation costs more to offtake, often meaning that the renewables grid priority access is ignored.

  • Coal power plays a more important socio-economic role at the provincial level due to large numbers of people being employed in mining and power generating activities. Furthermore, relevant state-owned enterprises have substantial footprints in provincial economies.

Low Renewables Utilisation Rates In China
Wind And Solar Capacity And Generation By Country, 2017f
f = BMI forecast. Source: EIA, BMI.

Arbitrary Dispatch Of Power Represents Big Challenge...

In previous analysis we have highlighted that China is investing heavily in its west-to-east power interconnections in order to connect inland wind, solar and hydropower supplies with power demand hubs closer to the east coast ( see ' UHV Expansion Drive To Offer Opportunities, Fuel Export Aspirations ' , April 27 2016). While this will reduce some of the wastage of wind and solar power in the country - we believe that those with a vested interest in the offtake of electricity at a provincial level will remain a pertinent challenge to increasing renewables utilisation rates, and thus to power sector decarbonisation.

In China, power plants are allocated a certain amount of annual operating hours - with power dispatch often being undertaken in order to hit such targets, undermining the merit order of dispatch (where clean renewables and nuclear power are given priority access to the grid over thermal power according to the Renewable Energy Law of 2010). As such, fossil fuel plants that run behind on their annual operating targets are often prioritised in the provinces. This represents another challenge that needs to be overcome in order to reduce coal's dominance in the Chinese power mix.

Coal Has Been Key To Meeting Power Demand Surges
China - Power Consumption And Coal Generation y-o-y % Growth
e/f = BMI estimate/forecast. Source: EIA, BMI.

...Reform To Focus On Renewables Cost Deflation, Coal Consolidation

We expect the Chinese government to focus on tackling this imbalance. We highlight two key reform initiatives that are currently being undertaken:

  • Renewables Cost-Reduction: the introduction of competitive auction pilots for renewable energy will help push the price down for wind and solar power - and stop cost from preventing dispatch of electricity. As wind and solar power facilities will get less money per unit dispatched to the grid, it will be essential to ensure their grid access is less of a cost burden for provincial governments. However, we still believe Beijing would need to take a stauncher top-down approach in order to stop preferential grid access being given to thermal generators. This could include elevating the standing of regional dispatch centres, which would determine power dispatch on a cost and CO2 emissions basis, as opposed to vested provincial government interests which often determines dispatch at the provincial level.

  • Coal Sector Consolidation: The Chinese government is actively seeking to rein in overcapacity in the coal sector - and plans to shut-down or stop the construction of many of 50GW of coal facilities that were announced in March 2017 ( see ' Project Cancellations Erode Coal ' s Power', march 7). We see the merger of state-owned enterprises Shenhua Group and China Guodian as a step towards reform - as the former's heavy coal sector footprint will be combined with the latter's more diversified project portfolio ( see 'Coal Power Consolidation Under Way, More To Follow', August 9). This will mean that Shenhua can diversify its investments to sectors outside the coal sector, as the coal sector's relative importance in the Chinese power mix slips over the coming decade. This will help reduce overcapacity in the coal sector, which in turn would reduce the amount of facilities aiming to meet their annual generation targets. We forecast coal-fired power generation to make up 52% of electricity generation in 2026, compared to 65% in 2017. The official Chinese target is to reduce this share to 42% by 2030.

Thermal Overcapacity To Hamper Decarbonisation
China - Power Generating Capacity By Type, MW
f = BMI forecast. Source: EIA, NEA, BMI.

That said, we do stress that the provincial government holds a substantial amount of authority in these matters; as such, progress will likely be gradual. We also expect the central government to take a pragmatic approach to reform, particularly considering the impact of heavy-handed mining reform in 2016, when coal-power tariff cuts and increasing coal prices hit utilities active in the segment. Beijing eventually backtracked and eased restrictions in order to reverse the coal price spike. This will inform a more cautious approach to reform.

Greater Renewables Penetration To Unlock Ancillary Service Market

We expect intermittent renewables to expand their importance in the Chinese power sector from 8% in 2017 to 12% in 2026. This forecast reflects our cautious outlook towards the government's ability to alleviate all of the aforementioned structural hurdles. As more intermittent renewables power supplies flow into the Chinese power sector and interprovincial trading ticks up, there will be greater demand for China to expand its ancillary services capacity. This means boosting real-time power supply balancing such as storage and spinning reserves. To date, ancillary services have been of less importance given the high penetration of base-load fossil-fuelled power in the Chinese power mix. As intermittent power supplies gain a greater footprint in the power mix, actors that operate in the ancillary service segment will be able to tap into substantial opportunities in China.

Wind And Solar Still Below Potential
China - Capacity Factor By Technology
e/f = BMI estimate/forecast. Source: EIA, NEA, BMI.