The Chinese energy transition is driven by a combination of policy support, technological advancements and economic incentives aimed at reducing the nation’s carbon footprint and enhancing energy security. As of early 2024, non-fossil fuel energy, including renewables like wind, solar and hydro, constitutes close to 55% of the total installed power generation capacity in China. This shift marks a substantial increase in renewable energy capacity, which now stands at 1.1bn kW. In contrast, coal-fired power plants have seen their capacity share decrease to 39.3%. However, despite this impressive growth in capacity, non-fossil energy still accounts for around 30% of power generation, according to Ember analysts.

Overcapacity is now a significant challenge in China’s power sector. This problem arises when the total installed power generation capacity exceeds the actual demand for electricity, leading to inefficiencies and economic losses. Over the past decade, China has dramatically expanded its power generation infrastructure to meet projected economic growth and energy demands. However, this expansion has often outpaced actual consumption, resulting in substantial idle capacity.

It is important to note that overcapacity is a nuanced term. The point here is that it’s not just that there is overcapacity but rather that the capacity between different types of energy needs to be better managed. It is necessary to distinguish between overcapacity for baseload fossil fuels – which is very costly – and overcapacity for renewables, which is largely inevitable due to their low-capacity factor.

Several factors contribute to this overcapacity. The central and local governments’ push for economic growth has led to the construction of numerous power plants, often without adequate demand forecasting. The rapid build-out of renewable energy sources has also created challenges in integrating these intermittent power supplies into the grid, further complicating capacity management.

While there is ample capacity overall, the distribution and reliability of energy supplies can be inconsistent, leading to real energy security concerns. There is a need to balance overall capacity with effective, reliable distribution and storage to ensure consistent energy availability where and when it is needed.

The implications of overcapacity are multifaceted. Economically, maintaining and operating underutilised power plants is costly, leading to inefficiencies and financial losses for power generation companies. Environmentally, the continued reliance on coal-fired power plants, even at reduced capacity, contributes to greenhouse gas emissions (GHG) and air pollution, undermining China’s climate goals.

Beijing’s blueprint 
In response to these challenges, China’s government has been reforming its power sector. At both a domestic and international level, the conversation of accelerating progress in renewables and reforming current energy mixes has been building momentum.

On 14 May 2024, the National Development and Reform Commission (NDRC) and the National Energy Administration (NEA) issued the ‘Basic Rules for the Operation of the Power Market’ that will come into effect on 1 July 2024 . The Rules look to strengthen expectations on power market participants, increase regulatory measures to negate market monopolisation, and emphasise the need to ensure output capacity can meet demand needs by generating units and storing energy. These changes are the first reforms to power market operation in 20 years, signalling China’s understanding of its need to double down on increasing its energy storage.

President Xi Jinping’s remarks are a major signal of what direction China’s domestic policy will take. They also reveal what is being prioritised and where efforts will be concentrated. In July 2023, President Xi reinforced the desire for China to prioritise power sector reform.

Against the backdrop of continued uncertainty and geopolitical instability with the Russia-Ukraine War, as well as energy security challenges from hydro droughts and poor coal supply forecasting during COVID-19, Xi wishes to accelerate China’s construction of a power system that is ‘green and low-carbon, secure and abundant, economically efficient, flexible, and intelligent in supply and demand coordination’. This serves a dual purpose: to build up China’s own resiliency in its power sector, to reduce reliance on external supply chains and to accelerate its own domestic climate agenda and the international community’s goals.

In addition to Xi’s own remarks, the Two Sessions, which is the annual joint meetings of China’s top political advisory body, the Chinese People’s Political Consultative Conference (CPPCC), and the country’s legislature, the National People’s Congress (NPC), provides insight into what will be prioritised in the upcoming year. Despite not many new or targeted policies being identified, some specific power sector reform steps were mentioned for the first time in the 2024 Work Report delivered in March by Premier of the State Council Li Qiang, including increasing grid transmission and storage units.

On grid capacity, the Work Report mentioned that ‘China’s installed renewable energy capacity surpassed its thermal power capacity for the first time in history’, and ‘China accounted for over half of newly installed renewable energy capacity worldwide.’ Despite that ambiguity in the Work Report’s statements, just before the Two Sessions, the NDRC and NEA released new guidance for increasing grid capacity, energy storage capacity and developing smart grids to better meet demands.

What’s the balancing act? 
As China continues to solidify its leadership in the global renewable energy sector, the focus shifts to the challenging balancing act required to ensure stability and efficiency in its energy supply. A critical component is the role of energy storage in modernising China’s energy infrastructure as the country seeks to increase its reliance on renewable energy sources like wind and solar, which are intermittent by nature.

As of early 2024, China has made significant strides in deploying various forms of energy storage, including lithium-ion batteries, pumped hydro storage and emerging technologies such as compressed air energy storage (CAES). As part of the 14th Five-Year Plan, China has set ambitious targets for expanding storage capacity, aiming to add 30 GW of new storage by 2025. This expansion is essential for balancing supply and demand, reducing the need for fossil fuel-based peaking power plants and enhancing grid resilience.

Integrating renewable energy into China’s existing grid presents several challenges.

The current grid infrastructure was primarily designed for centralised power generation from coal and other fossil fuels, making it less suitable for the decentralised and variable nature of renewable energy sources. This mismatch can lead to issues such as curtailment, where excess renewable energy is wasted because the grid cannot accommodate it.

Additionally, the high cost of energy storage systems remains a significant barrier. Despite the rapid growth of China’s energy storage industry, it is still in its infancy and faces a price war and overcapacity issues that weigh on profits. If battery installations do not expand rapidly enough, China might resort to more investment in inefficient coal as flexible power, which would require expensive capacity payments or LNG peaking plants, exacerbating fuel import dependencies.

To address these challenges, China needs to invest heavily in grid modernisation and expansion. The development of ultra-high voltage (UHV) transmission lines is a key component of this strategy. These lines can allow power generated from renewable sources in remote areas, such as wind farms in Inner Mongolia and solar plants in the Gobi Desert, to reach major urban centres efficiently.

As part of the 14th Five-Year Plan, China has set ambitious targets for expanding storage capacity, aiming to add 30 GW of new storage by 2025. This expansion is essential for balancing supply and demand, reducing the need for fossil fuel-based peaking power plants, and enhancing grid resilience. 
 

In addition, China is exploring integration of smart grid technologies to improve the efficiency and reliability of electricity delivery, and enhance the country’s ability to accommodate variable output from renewable energy sources.

To comply with the Paris Agreement, China will be working on its 2035 nationally determined contributions (NDC), which will take stock of where the country currently stands with respect to its climate agenda but also where it looks to make adjustments and new policies going forward.

Amid ongoing domestic challenges for China, increased climate ambition is necessary in its power sector as it endeavours to meet its goals of peaking carbon emissions by 2030 and achieving carbon neutrality by 2060. The next round of NDCs is not due until early 2025, but understanding what approach China will take is important, as the strength of China’s action has a direct impact on how the international community will achieve the outcomes of the Paris Agreement.

China must increase its grid and storage capacity alongside its production of renewables. While production is important, ensuring the growth of installed capacity will accelerate China’s diversification of its energy mix and further its leadership on climate change. The real challenge lies in how swiftly and effectively China can deploy storage solutions. Without rapid advancements in this area, the country risks increased investments in coal and LNG peaking plants, undermining its climate goals and economic efficiency.

*Taylah Bland is also a Fellow, Climate and the Environment, with the ASPI Centre for China Analysis.

• Further reading: ‘Exploring China’s enormous green energy shift’. Discover why the energy transition in China is critical to its future and to the success of the global energy transition.
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