What Happened:

• On March 22, China released its 14th Five-Year Plan (FYP) for a Modern Energy System. It puts forth a blueprint for the energy sector to implement targets outlined in China’s overall 14th FYP released last year covering the period from 2021 to 2025. A guideline with annual energy goals for 2022 was subsequently released.
• These documents provide China more near-term flexibility in achieving its climate policies, coming after widespread power shortages in the second half of 2021 exposed the need to ensure a steady and affordable supply of energy, and following the recent adoption of an ambitious ~5.5% economic growth target for 2022. They also come against the backdrop of Western sanctions against Russia, a supplier of Chinese energy.
• Renewable energy is set to continue expanding and to become China’s dominant power source by 2035. Yet the new documents also double down on energy security and solidify a role for coal to “ensure basic energy needs” in China’s transition.
• Chinese President Xi Jinping has remarked that decarbonization “should be neither too fast nor too slow; rather, it should progress steadily.” He has indicated that China must not dismantle its existing energy sources before new, cleaner sources are fully built out.

Go Deeper:

• China’s “dual carbon” goals announced in September 2020 to peak its carbon emissions before 2030 and achieve carbon neutrality by 2060 have become the driving impetus behind China’s vast network of climate and energy policies.
• China has recently shifted its rhetoric and policy to further emphasize energy security as a precondition for low-carbon development. This includes ramping up domestic production of fossil fuels, especially coal, and ensuring the power sector has sufficient capacity and flexibility to guard against shocks as it decarbonizes.
• Recent documents shed light on how China’s energy transformation will play out in the near term, with core updates as follows:
  • Clean energy will continue to expand steadily, with a new target for 39% of power generation to come from non-fossil sources by 2025, up from 34.6% in 2021.
  • To integrate more renewables without hampering economic growth, new targets emphasize increasing power generation, with installed capacity to reach 3000 gigawatts (GW) by 2025—a massive jump from the current 2380 GW. A previous limit on total energy consumption from the 13th FYP has been scrapped.
  • Around 24% of all generation shall become “flexible power sources” by 2025, including by retrofitting at least 200 GW of existing coal power.
  • The documents do not specify limits on coal power consumption or installed coal power capacity, thus enabling both to expand. Some experts had been calling for caps on both especially after they were not included in the overall 14th FYP.
  • China has reformed its “dual control” system limiting total energy consumption and energy intensity to provide more flexibility, including by dropping annual energy intensity targets to focus on its five-year goal of 13.5% reductions by 2025.

Between the Lines:

• China’s overall commitment to its carbon peaking and neutrality goals has not changed. However, its doubling down on coal for power sector stability may cause China’s emissions to peak later and/or at a higher level than predicted, thus complicating global climate efforts. China’s increase in emissions over the past two years has already more than offset the total decline in emissions from the rest of the world during the pandemic.
• China’s clean energy targets are sufficient to achieve its commitments under the Paris Agreement, though less ambitious than what the market has anticipated. China will struggle to peak emissions until coal growth is also contained. For instance, in 2021, renewables met only 40% of energy demand growth, while coal accounted for 56%.
• A rhetorical shift from “energy development” to building a “modern energy system” reflects that China’s energy transformation is maturing. On April 2, officials released another FYP outlining a roadmap for innovation in the energy sector. China also issued respective plans last month on new energy storage and hydrogen, both of which could eventually displace coal as cleaner means of flexible power if they grow to scale.
• Although China’s energy security imperative began well before Russia’s invasion of Ukraine, the war has heightened China’s need to ensure that its power sector has enough capacity to weather geopolitical shocks. The political need for stability will be magnified in the lead-up to China’s 20th Party Congress in fall 2022 when Xi’s leadership will likely be reaffirmed.

What to Watch:

• China’s ability to peak its emissions by 2030 and ideally sooner depends largely on the scale of energy demand growth and the extent to which this can be met with clean sources. A continued industry-powered stimulus and construction boom would complicate efforts.
• As the global energy security consequences of the Russian invasion of Ukraine play out, watch for China to move toward protecting itself from the potential impact of secondary sanctions. This likely means securing ample alternate fuel supplies to Russia and ideally those that can be obtained domestically at a stable price, i.e. coal as opposed to gas.
• China will come under renewed pressure ahead of COP27 in Egypt later this year to once again consider what more it can do this decade to reduce emissions.