Does a 2023 5% growth target for China mean renewable energy investment in the world’s second biggest economy is seeing a reset? Or even suggest a bout of new ‘realism’ after decades of out-performance?

The advantage of lowered expectations means disappointment risk can be better managed. Especially after a chronically bad hangover. Chinese growth in 2022 was just 3% as it crawled its way out of COVID-19 lockdowns. Even that figure is open to question, some think.

Dr Hongyi Lai, Associate Professor of Politics and International Relations at the University of Nottingham, says any close reading of China’s economy must absorb contradictory signals. As far as hydro, wind and solar investment and production goes, the world’s biggest CO₂ emitter is robustly lashed to its five-year plan.

Power mix: over-achieve or underwhelm?  
Lai comments: ‘Fulfilment is another matter. But much of the [five-year] plan remains ambitious. Renewable energy should account for half of the growth in electricity consumption by the end of the plan.’

Pressure for impressive data means ‘sometimes GDP looks better than the reality', he continues. ‘So some energy consumption data by analysts show that at the end of last year-this year, we went flat compared to the previous year.’

There’s a second issue. Officials don’t want economic growth to tank suddenly. ‘So some infrastructure projects may be put into the pipeline which may also have an adverse effect on energy consumption,’ adds Lai.

For Andrew Lane, CEO of Acuity Trading, the picture is still about balancing inputs. Natural gas is a big part of China’s energy transition and China is still the world’s largest gas importer, he notes.

‘The markets were typically envisioning an uptick in LNG demand after China opened up post-COVID-19. But what we have seen in fact is more investment in local gas production and talks about extending piped supplies from Russia,’ Lane says.

China, he adds, has established long-term contracts for the import of gas ‘and these prices are typically lower than spot prices at the moment’. He continues: ‘And they are certainly lower than the internal gas prices in China. So, China would in fact see a benefit of offloading gas into the spot market in Europe than consuming it itself. Add to that the price of coal and it makes sense that any marginal increases in demand are met as much as possible from coal.’

Decoding two sessions  
The Oxford Institute for Energy Studies (OIES) says nuance around China’s economic growth target and climate and energy policy did change in March when China’s ‘two sessions’ annual gathering laid out its major policy announcements and revisions framework – which reflect government thinking.

Jinping emphasised energy security, with refreshed language around coal as a mainstay. This was ‘a departure from previous policy documents that discussed coal’s gradual transition to a supplementary energy source’, according to OIES.

China’s 2030 and 2060 carbon peaking and neutrality targets remain in place but ‘the policy stance on coal’, the OIES adds, ‘will limit the space for raising China’s climate ambitions or accelerating the low-carbon transition in industry.’

Some natural caution is at play. The Chinese government is new. Any targets can err on the pragmatic side as incoming premier Li Qiang, a trusted Xi Jinping ally and ex-Shanghai Communist Party chief, eases into position. Much of China’s economic recovery is linked to the housing market which remains a major structural anxiety. In the background, relations with the West continue to deteriorate.

‘The policy stance on coal will limit the space for raising China’s climate ambitions or accelerating the low-carbon transition in industry.’ – Oxford Institute for Energy Studies

New macro-economic normal?  
Micah Hostetter from Intralink, a consultancy helping Western firms expand in the Asian energy sector, thinks low-carbon energy investment will be resilient, even if growth remains under pressure and the Chinese policy language twists. Xi has given renewables priority to an unusually personal degree. Think legacy.

Most wind farm developments are state-owned enterprises, notes Hostetter, so market forces aren’t a consideration. ‘But nearly two thirds of solar capacity in 2022 was distributed. It was on rooftops. This caused a frenzy of installation in Shandong Province in Eastern China.’

Thousands of private companies sprouted up to take advantage of China’s Whole Country Rooftop Solar programme. When so much solar comes online it can lead to overcapacity issues, putting greater stress on the grid. Other frailties keep anxiety alive. ‘In summer 2021 China had huge blackouts. In response to that I think the government were spooked,’ Hostetter reflects.

‘China also has a massive electric vehicle (EV) programme. There could be concerns in the short-term about whether it can still produce electricity for this influx of cars. But that’s not going to dampen renewable investment. It just means more [emphasis on] coal, short-term,’ he adds.

Subsidy suspicion lingers  
While China’s National Development and Reform Commission (NDRC) has indicated most coal, wind and solar projects will participate in the wholesale power market, capacity relies on a quota system driven by longer term infrastructure planning as well as inter-provincial politics.

Power prices remain mostly controlled by longer-term contracts. Price fluctuations are managed by regulators inside a tight band to reflect break-even costs for coal power generators linked to coal prices.

Sydney-based Sophie Lu from research firm Rhodium Group, which focuses on climate-based trade and industrial policy, says China’s energy infrastructure planning typically lags on-the-ground economics by two to three years. Beijing hasn’t accepted that a longer-term growth trajectory beyond 2023 may be lower, but more mature green tech is being weaned off support.

‘I think there’s a misconception China has subsidies for everything. To a certain degree it can be true and it’s also what your definition of what a subsidy is, official or ‘unofficial’, central or local. Official feed-in-tariffs for wind and solar projects were discontinued in 2021. But wind and solar projects in China are economical and power generators do make back their money. Investors in China aren’t just chasing subsidies,’ she says.

Grid fixing  
Less mature green technology projects look more vulnerable given the infrastructure spending pressure on decarbonisation. Local debt restructuring plus austerity measures add to the economic pressure. Consumer demand remains weak; imports fell 8% in April, according to Bloomberg NEF.

Meanwhile, the massive growth of renewable installations has not seen upgrades to existing transmission grids. Curtailment and transmission bottlenecks remain, and inter-province connection challenges loom. Dr Chunping Xie, Senior Policy Fellow at the Grantham Research Institute on Climate Change, says grid management plus market and storage issues still grind on the gears.

‘It’s how the grid system works. It’s not efficient, in particular the electricity market design.’ But is it changing? Xie points to a new 15 May NDRC document on power transmission and distribution (T&D) tariffs, effective 1 June, aiming to improve price transparency and more reasonable cost recovery.

Where things remain frustratingly slow is storage. ‘If the value of flexibility got recognised in the electricity pricing mechanism, there would be more providers of energy storage – which can support the integration of renewables into the grid. So we don’t need to rely on fossil fuels for that security. The current market doesn’t provide enough economic incentives to energy storage, he says.

Xie considers that caution remains overshadowed by the Ukraine war, Europe’s energy crisis and an internal energy security mindset that can’t shake off fossil fuels.

Meaningful structural change would mean less inter-province pressure as supply flexibility gets worked in – buying in power when needed. But the scale of the challenge is never far off. ‘The whole of UK’s electricity demand is, like, one province in China!’ notes Xie.