2. Industrial and market drivers and constraints
2.1 China’s economic dependence on coal
Heat and power provision is the foundation of both economic and social stability. As of 2021, coal still accounted for 60 percent of China’s power generation. Coal is even more critical for China’s grid stability, accounting for 70 percent of peak load provision.
Meanwhile, China’s economy is highly dependent on industrial production and construction. The former is fueled by coal, while the latter is built on steel – which is fueled by coal.
In 2021, the secondary sector29 accounted for roughly 40 percent of GDP.30 Steel production, while perennially subject to official curbs due to overcapacity, remains a mainstay of the economy – and given its geographic concentration, it engenders fierce lobbying by cities like Tangshan that are highly dependent on steel plants for employment.
Renewables can displace coal on the grid, but only to the extent that market pricing mechanisms and physical infrastructure enable it (see section 2.2). But electrifying key industrial applications is extremely difficult – particularly in steel and other domains of heavy industry.
Industry actors have more interest in maintaining low-cost, coal-fired production than making massively expensive investments in electrification. Economic officials have more interest in keeping industry productive than in enforcing heavy costs that could inhibit output. Neither have strong interests in more ambitious climate-friendly reform, and, by and large, environmental officials have insufficient carrots or sticks to change the situation.
Under current FYP and “1+N” plans, China aims to both lessen its dependence on heavy industry and decarbonize heavy industry. But practically, short-term change happens when the State Council or the NDRC get involved. And during economic crises – e.g., in 2022 – they tend to set climate on the backburner.
2.2 Power market and infrastructure inhibitors
China already leads the world in renewable energy installations. But that capacity is only as useful as the potential for transmission and distribution, which are hindered by two factors:
First, China’s power system is designed around coal. Its power pricing mechanisms undervalue electricity to keep prices low and support the economy (and avoid complaints from residential users), which keeps coal entrenched. Meanwhile, the market is not well set up to handle variable supply and demand, as is inherent to renewable energy.
Second, China’s power markets are designed around provincial boundaries – interprovincial trading is limited and structurally difficult, with ongoing reforms still struggling to make progress. The issue is that China’s greatest renewable resources lie in inland provinces, like Gansu, which, due to both market and infrastructure limitations, are unable to export large quantities of renewable energy to demand hubs along the coast.
Economically, the kind of market-oriented reforms needed to phase out coal are difficult to implement – chiefly because they will tend to increase power prices and decrease their predictability. Regulators are tasked with stability, first and foremost; it is, unsurprisingly, difficult for them to remove the guardrail of reliable coal-fired baseload power.
Who will resolve these problems? Provincial actors are hesitant to be held responsible for increased power prices, as further market liberalization entails. And what of long-distance transmission to unlock renewables’ full potential? Trading between contiguous provinces is one thing, but there is no compensation mechanism for intermediary provinces that must maintain long-distance transmission infrastructure to help other provinces trade.
Beijing has plans to develop a unified national power market,31 but such a system is extraordinarily difficult to establish because provincial power markets are so fragmented. Meanwhile, eight existing spot market pilots have all failed to live up to expectations of finding a solution that can be copied in other provinces – and eight more pilots announced last year are nowhere near launching.
The challenges were already high. However, with 2022 dominated by short-term economic concerns – as Premier Li Keqiang confirmed at the Two Sessions, in the 2022 Government Work Report32 – some power market reforms may return to the backburner yet again. Instead, the NDRC is, in general, turning to coal to bandage economic woes.