General Structure and Ownership of the Power Industry
China’s power industry has achieved remarkable progress, particularly in the scale of investment and construction, and it has increased the security and stability of power supply. A well-established legal system, underpinned by laws and supported by administrative regulations and departmental rules, has taken shape in the industry.
Generally, the power industry covers generation, transmission, distribution and supply of electric power. Over more than a decade of reform, the industry has seen an improved ownership structure where the generation and supply of power are opening deeply to the market, while the transmission and distribution business is mainly operated by the state-owned power grid companies.
As the ownership of China’s power industry transformed from state-owned monopoly to market liberalisation, the power market has been improving. With the introduction of the Plan for Electric Power System Reform in 2002, China deepened its reform in the industry. In the power generation market, the five state-owned power producers are the main players, supplemented by private and foreign power companies. The transmission and distribution business is mainly operated by state-owned power grid companies to ensure electric grid security, and the power sale market is gradually opening to private investors.
In 2015, the CPC Central Committee and the State Council released Several Opinions on Further Deepening the Reform of the Electric Power System, unveiling a new round of market-oriented reform of the power industry. The focus of the reform was to further open up power generation and the sale of electricity while adhering to the state-operation approach in transmission and distribution.
Laws and Regulations
The power industry is regulated by the Electric Power Law of the PRC as well as the supporting administrative regulations and departmental rules including the Regulation on Electric Power Supervision, the Regulations on Supply and Use of Electric Power, and the Measures for the Supervision of the Electric Power Market.
China’s power generation and supply are open to private investors while transmission and distribution are mainly operated by state-owned power grid companies. The major legal bases are the Electric Power Law of the PRC, the Several Opinions of the CPC Central Committee and the State Council on Further Deepening the Reform of the Electric Power System, and the Guiding Opinions on Accelerating the Construction of a National Unified Electricity Market.
The main power producers in China include state-owned, private and foreign-funded enterprises. Those in tier 1 are known as “the Big 5” – China Huaneng Group, China Datang Corporation, China Huadian Corporation, China Energy Investment Corporation (China Energy) and State Power Investment Corp (SPIC). There are also four smaller generation enterprises – SDIC Power Holdings Co., Ltd. (SDIC Power), China Shenhua Group Guohua Power Branch (China Shenhua), China Resources Power Holdings (CR Power) and China General Nuclear Power Group (CGN). As the reform in China’s power market continues, private power producers and foreign investors are becoming more active as market participants.
Transmission and Distribution
To ensure sustainable and stable supply of electricity to the public and ensure the security of power supply, the construction and operation of transmission and distribution services in China are mainly controlled by three state-owned enterprises, namely State Grid Corporation of China (State Grid), China Southern Power Grid Company Limited (CSG) and Inner Mongolia Power (Group) Co., Ltd. (IMPC).
The main players in the market are power producers, power grid companies and power sales companies. Power producers sell their electricity to registered large consumers, grid companies or power sales companies through power exchange centres, while grid companies and power sales companies act as purchasers in the wholesale market and sellers in the retail market. By the end of 2020, the total number of power sales companies registered in power exchange centres nationwide reached 4,829.
Foreign investors in China are mainly regulated by the Foreign Investment Law of the PRC as well as other supporting regulations, the Regulation for Implementing the Foreign Investment Law of the PRC, the Special Administrative Measures (Negative List) for Foreign Investment Access (2021) and the Negative List for Market Access (2022). China implements pre-establishment national treatment plus a negative list for the administration of foreign investment.
The National Development and Reform Commission (NDRC), jointly with the Ministry of Commerce of the PRC (MOFCOM), periodically update catalogues of sectors subject to special administrative measures for foreign investment. In accordance with the currently effectiveSpecial Administrative Measures (Negative List) for Foreign Investment Access (2021), the special administrative measures in the power sector only relate to the construction and operation of nuclear power plants – ie, the construction and operation of nuclear power plants must be controlled by a Chinese party.
Pursuant to the currently effectiveNegative List for Market Access (2022), a company engaged in power generation and supply must obtain an electric power business permit from the Electricity Business Qualification Management Centre of the National Energy Administration (NEA).
National Security Review
China has established a security review system for foreign investment. Under the Foreign Investment Law of the PRC and the Regulation for Implementing the Foreign Investment Law of the PRC, foreign investment that affects or may affect national security may trigger a security review.
To prevent and curtail monopoly, protect fair market competition, improve the efficiency of economic operation and safeguard the interests of public consumers, the Anti-Monopoly Law of the PRC defines the concentration of undertakings that has or may have the effect of eliminating or restricting competition as one of the monopolistic acts and imposes regulatory measures. If an M&A activity constitutes concentration of undertakings and reaches the threshold prescribed by the Provisions of the State Council on the Standard for Declaration of Concentration of Business Operators, such M&A activity must be declared with the anti-monopoly law enforcement authority under the State Council in advance – otherwise, the concentration is not allowed.
Reporting of Foreign Investment Information
China implements an information reporting system for foreign-funded enterprises. For foreign investors investing directly or indirectly within the PRC, the foreign investor or the foreign-funded enterprise shall report and file investment information to the commerce departments through the enterprise registration system and the National Enterprise Credit Information Publicity System.
Corporate M&As in China are mainly regulated by the Company Law of the PRC, the Securities Law of the PRC, the Foreign Investment Law of the PRC and the relevant supporting rules and regulations.
Notably, if a “sale of power industry assets” involves the sale of state-owned assets, to prevent the loss of state-owned assets, the transaction is also subject to the Law of the PRC on the State-Owned Assets of Enterprises and the Measures for the Supervision and Administration of the Transactions of State-Owned Assets of Enterprises. The transaction should be conducted in public through an equity exchange centre incorporated in accordance with laws. The transaction must be conducted transparently, fairly and justly.
The power industry includes many aspects such as power generation, transmission, distribution and supply, therefore there is no central planning authority for the power industry in China. The main authorities in charge of the power industry in China include the following.
National Development and Reform Commission (NDRC)
The NDRC is responsible for:
Ministry of Ecology and Environment (MEE)
The MEE undertakes the tasks of:
National Energy Administration (NEA)
The NEA, under the NDRC, undertakes specific tasks assigned by the NDRC. The NEA is responsible for:
Amid energy transition, the goals of achieving “carbon peak”, “carbon neutrality” and electric power system reform, there are changes in China’s laws and regulations recently, as subsequently detailed.
Promotion of the Renewable Energy Development
In order to promote the development of renewable energy, the Notice of the NEA on Matters Concerning Easing Burden on Enterprises in the Field of Renewable Energy, the Measures for the Administration of Additional Subsidies for Renewable Energy Power Prices and other regulatory documents set norms for the renewable energy industry, which reduces the operating burden of renewable energy enterprises. The Working Guidance for Carbon Dioxide Peaking and Carbon Neutrality in Full and Faithful Implementation of the New Development Philosophy proposes that the power grid should boost and prioritise its capacity to uptake and accommodate renewable energy. Please refer to 3.3 Principal Laws and/or Policies to Encourage the Development of Alternative Energy Sources for details.
Operation and Supervision of the Wholesale Electricity Market
The Basic Rules for Medium- and Long-term Electricity Transactions and the Measures for Information Disclosure in the Electricity Spot Market (for Interim Implementation) and other norms set forth the market operation rules and supervision modes, and medium-term and long-term electricity trading and electricity spot trading are thus carried out in an orderly manner. Please refer to 2.1 Imports and Exports of Electricity for details.
On 15 March 2021, General Secretary Xi Jinping formally proposed the construction of a new power system with new energy as the mainstay at the ninth meeting of the Central Finance and Economics Commission. The policy was included in the Working Guidance for Carbon Dioxide Peaking and Carbon Neutrality in Full and Faithful Implementation of the New Development Philosophy, marking a key step in transforming the energy and power sectors in China.
Integrating the new digital intelligent technology and traditional technology, the new power system takes ensuring energy and electricity security as the basic premise, meeting the electricity demand of economic and social development as the primary goal, and maximising the uptake of new energy as the main task.
China reached tremendous progress in its active reform of the energy supply system. Major changes are witnessed in the energy supply system, including prioritising non-fossil energy and promoting clean and efficient development and utilisation of fossil energy. The rapid growth of renewable energy in China, which leads the world in the scale of development and utilisation of renewable energy, is a unique aspect of the PRC power industry.
The scale of renewable energy development and utilisation in China has been rising year by year. By the end of 2020, China’s total installed capacity of renewable energy power generation was 990 million kW, ranking first in the world, of which the installed capacity of hydropower, wind power, photovoltaic power and biomass power generation reached 370 million kW, 280 million kW, 250 million kW and 29.87 million kW respectively.
The basic principle of wholesale power trading in China is to open the transmission and distribution grids without discrimination. On this basis, medium- and long-term trading and spot trading are carried out between power producers, power grid companies, power sales companies and major power consumers through power exchange centres.
At present, China has 35 power exchange centres, 33 of which are provincial power exchange centres and two are regional ones. In 2020, China’s market-based power trading scale reached 3.17 trillion kWh, an increase of 11.7% year-on-year. Among them, about 260 million kWh of electricity was traded in the provincial market, and about 60 million kWh was traded in the inter-provincial market. In order to ensure the fairness of power trading, China has started the shareholding reform of power exchange centres to make them “operate independently from the grid enterprises” since 2020. As of June 2021, the shareholding of grid enterprises in 16 power exchange centres had been reduced to less than 50%.
The trading rules followed by the Chinese electricity market were jointly developed by the NDRC, the NEA and the Ministry of Finance (MOF). Each province has introduced more detailed and targeted trading rules based on the rules set by the state. Power exchange centres usually provide services for electricity market transactions in accordance with the government-approved charter and market rules, including managing the registration of market players, organising medium- and long-term transactions, co-operating with the organisation of spot transactions, and managing settlement and trading contracts.
At power exchange centres, the main players in wholesale power trading are divided into power generation enterprises (on the power generation side), as well as power grid companies, power sales companies, and power consumers (on the power purchase side).
By the end of 2020, there were about 30,500 power generation enterprises registered at the power exchange centres, up by 2% year-on-year. On the power purchase side, power sales companies and power consumers need to meet certain access thresholds to enter the wholesale market.
Wholesale electricity trading can be divided into medium- and long-term trading and spot trading. The NEA has set corresponding operating rules and regulatory models through the Basic Rules for Medium- and Long-term Electricity Transactions and the Measures for Information Disclosure in the Electricity Spot Market (for Interim Implementation).
Medium- and Long-term Trading
Medium- and long-term electricity trading is the main trading method in China’s wholesale electricity market, which is divided into market-based medium- and long-term electricity trading and plant-grid trading, which differ in operation mode and pricing.
Plant-grid trading is a bilateral transaction between power plants and grid companies for ensuring uninterrupted electricity supply for residents and agriculture through the signing of plant-grid electricity purchase and sale contracts for trading priority power generation and base power allocated to coal-fired (gas) units at government-set prices.
Since the forecast and balance of the supply and demand of the medium- and long-term electricity are uncertain, power generation and consumption entities have an increasing demand in the spot market as the market-based scale of medium- and long-term electricity trading expands. China has been implementing a spot market pilot programme since 2017, and 13 provinces as well as one autonomous region have already successfully implemented the pilot programme. Inter-provincial electricity spot trading is also making progress.
In China, the Department of International Cooperation of the NEA is responsible for promoting international energy exchange and co-operation, negotiating and signing agreements with foreign energy authorities and international energy organisations, drawing up strategies, plans and policies on energy opening–up, and co-ordinating energy development and utilisation abroad.
In 2020, China and its neighbours exchanged 8.7 billion kWh of electricity, including an import of 4.5 billion kWh, up 1.4% year-on-year, and an export of 4.2 billion kWh, up 2.2% year-on-year.
According to the China Power Industry Statistical Yearbook 2021 compiled by the China Electricity Council (CEC), China’s supply mix for the year of 2020 is as follows:
The legal basis for regulating monopolistic conducts and safeguarding fair market competition is mainly the Anti-Monopoly Law of the PRC. The law defines:
Where the concentration of undertakings has attained the standard for which a declaration is required to be made pursuant to the stipulation of the State Council, an undertaking shall make a declaration to the anti-monopoly enforcement agency of the State Council in advance – otherwise, such concentration shall not be implemented.
The Anti-Monopoly Committee of the State Council, whose composition and working rules are determined by the State Council, is responsible for the supervision of anti-competitive behaviour. Its main duties include:
On 22 September 2020, General Secretary Xi Jinping announced at the General Debate of the 75th Session of the United Nations General Assembly that China will scale up its Intended Nationally Determined Contributions by adopting more vigorous policies and measures and aim to have CO₂ emissions peak before 2030 and achieve carbon neutrality before 2060 (“dual carbon targets”).
Laws and Regulations
To address climate change, China has established a sound legal system with the Constitution of the People’s Republic of China as the core, complemented by separate laws and supporting policies and regulations. To achieve this, China has promulgated laws covering energy utilisation, environmental protection and other aspects. For example, the Law of the PRC on the Coal Industry, the Electric Power Law of the PRC, the Circular Economy Promotion Law of the PRC, the Law of the PRC on Promotion of Cleaner Production, the Law of the PRC on Energy Conservation and the Renewable Energy Law of the PRC are aimed at strengthening climate change governance by regulating energy utilisation.
The Environmental Protection Law of the PRC, the Agricultural Law of the PRC, the Grassland Law of the PRC, the Forestry Law of the PRC, the Law of the PRC on the Prevention and Control of Desertification, the Water Law of the PRC, the Marine Environment Protection Law of the PRC, the Law of the PRC on the Prevention and Control of Atmospheric Pollution and other laws aim to cope with climate change by regulating the use of natural resources and strengthening environmental protection.
Chinese ministries and commissions have also developed a large number of departmental rules to boost efforts to address climate change. For example, the MEE, the NDRC, the People’s Bank of China (PBC), the China Banking and Insurance Regulatory Commission (CBIRC), and the China Securities Regulatory Commission (CSRC) jointly issued the Guiding Opinions of the Ministry of Ecology and Environment on Promoting the Investment and Financing to Address Climate Change and the Measures for the Administration of Special Investment within the Central Budget in Pollution Control and Energy Conservation and Carbon Reduction to provide financial support for activities to address climate change.
The Measures for the Administration of Trading of Carbon Emission Rights (for Trial Implementation), the Rules for the Administration of Registration of Carbon Emission Rights (for Trial Implementation), the Rules for the Administration of Trading of Carbon Emission Rights (for Trial Implementation) and the Rules for the Administration of Settlement of Carbon Emission Rights (for Trial Implementation) provide market support for activities in response to climate change.
The Measures for the Supervision and Administration of Energy Measurement and the Guidelines for the Verification of Enterprises’ Greenhouse Gas Emission Reports (for Trial Implementation) have been introduced to strengthen the supervision and administration of climate change activities.
China has established a policy system guided by the Outline of the 14th Five-Year Plan for National Economic and Social Development of the PRC and the Long-Range Objectives through the Year 2035 and complemented by the supporting documents for national plans. The 2021 white paper titled Responding to Climate Change: China’s Policies and Actions proposes climate change, puts in place a “1+N” policy framework for carbon peak and carbon neutrality and increases support for addressing climate change.
The “1+N” policy framework constitutes the top-level design for China to achieve the “dual carbon targets” and is an important initiative to address climate change. The “1” in the “1+N” policy framework refers to the Working Guidance of the CPC Central Committee and the State Council for Carbon Dioxide Peaking and Carbon Neutrality in Full and Faithful Implementation of the New Development Philosophy. The “N” covers all other supporting policies issued in the process of achieving the “dual carbon targets”.
Although thermal power plants (including coal-fired generators) remain an important source of energy in China, thermal power generation accounts for a decreasing proportion of the total power generation in China year by year, and the proportion of new energy generation is increasing. In 2020, thermal power generation made up 67.9% of China’s total, down 1% year-on-year, and had been below 70% for two consecutive years.
Laws and Regulations
Provisions on early retirement of carbon-based generation in China can be found in the Law of the PRC on Energy Conservation, which provides that the “building of new coal-fired or gasoline-fired generating units or new coal-fired thermal power generating units is prohibited”, the Circular Economy Promotion Law of the PRC and other separate laws.
President Xi Jinping stated at the 2021 Leaders Summit on Climate that China will strictly control coal-fired power generation projects, and strictly limit the increase in coal consumption over the 14th Five-Year Plan period and phase it down in the 15th Five-Year Plan period. The General Plan for Energy Conservation and Emission Reduction during the 14th Five-Year Period specifies China’s main energy conservation and emission reduction targets. By 2025, non-fossil energy will account for about 20% of total energy consumption.
China’s hydropower, wind power, photovoltaic power and other renewable energy power generation is developing rapidly, making up an important part of China’s energy restructuring and transformation. By the end of 2020, the installed capacity of renewable energy in China reached 934 million kW.
Laws and Regulations
China has formed a relatively complete system of laws and regulations on renewable energy, with the Renewable Energy Law of the PRC as the core, supplemented by other supporting rules and regulations. Supporting regulations and rules cover the business environment, supporting facilities, price control, guaranteed purchase, fiscal subsidies and other aspects involved in the renewable energy sector, including:
The Renewable Energy Law of the PRC establishes the system of guaranteeing the purchasing of electricity generated by using renewable energy resources in full amount and the price control principle of on-grid electricity prices for projects of electricity generation. It has established the renewable energy development fund mechanism, aiming to compensate and fund for electricity generated by using renewable energy resources, subsidies for renewable energy development and utilisation projects.
In December 2020, China proposed at the Climate Ambition Summit that it would bring its total installed capacity of wind and solar power to over 1.2 billion kW by 2030. In October 2021, the CPC Central Committee and the State Council issued theWorking Guidance for Carbon Dioxide Peaking and Carbon Neutrality in Full and Faithful Implementation of the New Development Philosophy, proposing that CO₂ emissions per unit of GDP will be lowered by 18% from the 2020 level by 2025 and more than 65% from the 2005 level by 2030; the share of non-fossil energy consumption will have reached around 20%, 25% and over 80% by 2025, 2030 and 2060 respectively.
China’s legal framework for the construction and operation of power generation facilities is mainly composed of the Electric Power Law of the PRC and its supporting laws and regulations, including the Provisions on the Administration of Electric Power Business Permits, the Regulation on the Administration of Power Grid Scheduling, the Regulation on Electric Power Supervision and the Rules on Operation of Power Grids (for Trial Implementation).
In addition to the aforesaid general provisions, the power generation projects of renewable energy resources such as wind, solar and biomass energy shall comply with the special provisions on the construction planning, grid-connected power generation, operation supervision and other aspects of renewable energy power generation projects under the laws and regulations, such as:
Besides, enterprises investing in the construction and operation of power generation facilities shall also comply with other relevant laws and regulations that generally apply to the construction and operation of real estate properties, such as the Land Administration Law of the PRC, the Law of the PRC on Urban and Rural Planning, the Construction Law of the PRC, the Regulations on the Administration of Approval and Filing of Projects Invested by Enterprises, the Administrative Regulations on the Environmental Protection of Construction Projects, and other laws and regulations on land administration, engineering construction, enterprise investment and environmental protection.
For the construction and operation of a nuclear power plant, China has also formulated the Nuclear Safety Law of the PRC, the Regulations of the PRC on the Safety Supervision and Administration of Civil Nuclear Facilities, and other laws and regulations to regulate the site selection, construction and operation of nuclear power plants.
In accordance with the Regulations on the Administration of Approval and Filing of Projects Invested by Enterprises and the Catalogue of Investment Projects Subject to Government Approval, enterprises shall obtain the approval of or file with the competent authority prior to investing in the business of power generation facilities. Wind power plants, hydropower plants, pumped storage power plants, thermal power plants, thermal power plants, etc, are subject to the approval system. For the development of Photovoltaic power plants, filings with the competent authority is required in advance.
Land Use and Project Construction Permit
Upon the completion of the approval/filing process, and before the commencement of project construction, project developers shall obtain permits in respect of land use and project construction.
Environmental Impact Assessment
In accordance with the Administrative Regulations on the Environmental Protection of Construction Projects, the environmental protection of construction projects shall be categorised and managed according to their impact on the environment, and environmental impact assessment reports shall be prepared for those that may cause a significant impact on the environment.
According to the Catalogue of Classified Management of the Environmental Impact Assessment for Construction Projects (2021 Edition), thermal power, hydraulic power, biomass power, onshore wind power, solar power and other power generation industries are construction projects that require the completion of environmental impact assessment.
Electric Power Business Permits for Power Generation
Upon the construction completion of power generation facilities and before they are put into operation, the acceptance of construction projects, acceptance of power grid access, and other acceptance procedures shall be gone through, and the electric power business permit for power generation shall be obtained. The authorities approving and issuing the electric power business permit for power generation are the NEA and its dispatched offices.
Approval of Nuclear Power Plants and Relevant Permits
In accordance with the Catalogue of Investment Projects Subject to Government Approval, the development of nuclear power plants is subject to the approval of the State Council. In accordance with the Nuclear Safety Law of the PRC, the operators of nuclear power plants shall apply to the National Nuclear Safety Administration (NNSA) for permission before carrying out activities such as site selection, construction and operation of nuclear power plants.
In addition to the permits and approvals required for the construction and operation of power generation facilities as mentioned in 4.2 Regulatory Process for Obtaining All Approvals to Construct and Operate Generation Facilities, the operators of power generation facilities shall also perform the obligations specified in the appendix of the electric power business permit and the operational requirements specified in the Electric Power Law of the PRC and relevant laws and regulations, which mainly include:
In China, the development and construction of power generation facilities shall, similar to the development and construction of other projects, comply with the general land use principle as stipulated in the Land Administration Law of the PRC, which means developers shall comply with the land-use regulation system of China. In principle, construction projects shall preferably be carried out on land for construction purposes and shall refrain from using agricultural land given the special protection and reservation accorded to agricultural land.
Generally, for a project that uses agricultural land for the development and construction of power generation facilities, the process of converting the agricultural land into that for construction purposes shall be done in advance. For the purpose of converting the land use, developers shall prepare a plan for land requisition for approval (including the purpose, scope, area of the land to be requisitioned and the compensation standard, the measures for the resettlement of agricultural personnel and the formalities concerning land requisition compensation).
Although there is no specific legislation on the decommissioning of power plants other than nuclear facilities in China, all power plants shall, prior to decommissioning, ensure that all wastes and materials will not cause environmental damage, safeguard public health and maintain ecological safety in accordance with the Law of the PRC on Prevention and Control of Environmental Pollution by Solid Waste and other legislation on environmental protection.
The decommissioning of nuclear power plants shall comply with the Nuclear Safety Law of the PRC. In principle, operators of nuclear facilities shall carry out shutdown management in a safe manner, ensure safety during the shutdown period, and ensure that basic functions, technical personnel and documents required for decommissioning are in place.
As described in 4.1Principal Laws Governing the Construction and Operation of Generation Facilities, the legal system for the construction and operation of electric power facilities in China mainly consists of the Electric Power Law of the PRC and its supporting regulations. Electric power construction projects (including transmission facilities) shall conform to the electric power development plan. Enterprises investing in the construction and operation of electricity transmission facilities shall comply with the laws and regulations on land management, engineering construction, enterprise investment and environmental protection.
In accordance with the Catalogue of Investment Projects Subject to Government Approval, different power grid projects need to be approved by or filed with different levels of authorities depending on their transmission voltage.
Land Use and Project Construction Permit & Environmental Impact Assessment
Similar to power generation facility projects, the construction of electricity transmission facilities should also obtain land use and project construction permits and complete the environmental impact assessment. Please refer to 4.2Regulatory Process for Obtaining All Approvals to Construct and Operate Generation Facilities for specific regulations.
Electric Power Business Permits for Power Transmission
After the transmission facilities are completed and before they are put into operation, they have to go through construction completion inspection and acceptance procedures and obtain an electricity transmission business permit. In accordance with the Provisions on the Administration of Electric Power Business Permits, when applying for such permit, enterprises should pay attention to whether the transmission project meets the relevant regulations and requirements for environmental protection and whether the quality of electricity and service meets the standards.
In addition to the permits required for the construction and operation of transmission facilities as mentioned in 5.1.2Regulatory Process for Obtaining Approvals to Construct and Operate Transmission Facilities, the construction and operation entities of transmission facilities shall also comply with the Electric Power Law of the PRC, the Construction Law of the PRC, the Measures for the Supervision and Administration of the Construction Safety of Electric Power Projects and relevant supporting laws and regulations.
In China, the development and construction of electricity transmission facilities should comply with the general land use principles established by the Land Administration Law of the PRC, similar to those of other development and construction projects. Please refer to 4.4 Proponent's Eminent Domain, Condemnation or Expropriation Rights for specific regulations.
State Grid Corporation of China (State Grid), China Southern Power Grid Company Limited (CSG) and Inner Mongolia Power (Group) Co., Ltd. (IMPC) are mainly responsible for the construction and operation of China’s transmission and distribution networks.
State Grid supplies power to over 1.1 billion people in 26 Chinese provinces, autonomous regions and municipalities, covering 88% of the country’s territory.
CSG takes charge of investment, construction and operation of the power grids in the southern parts of the country, participates in the funding, constructing and operating of related cross-regional transmission and networking projects, and provides electricity for Guangdong, Guangxi, Yunnan, Guizhou, Hainan, Hong Kong and Macao.
IMPC is responsible for the construction and operation of the central and western power grids in Inner Mongolia Autonomous Region, and supplies electricity to 14.29 million residents in urban and rural areas of eight cities and leagues in the Autonomous Region for industrial, agricultural and pastoral production and household consumption.
As discussed in 1.2Principal State-Owned or Investor-Owned Entities, the construction and operation of transmission and distribution services in China are mainly provided by State Grid, CSG and IMPC.
These three state-owned grid companies, subject to government regulation, attach importance to public power supply and electricity market construction while providing transmission services. Power grid enterprises’ transmission services are mainly regulated by the Electric Power Law of the PRC, the Regulation on Electric Power Supervision, the Regulations on Supply and Use of Electric Power, the Measures for the Supervision of the Electric Power Market and the Measures for the Supervision of the Fair and Open Access to Power Grids.
In accordance with the Several Opinions on Further Deepening the Reform of the Electric Power System, the government shall separately determine the transmission and distribution charges, allowing such charges to be determined by voltage levels in the principle of “permitted cost plus reasonable profit”. Power consumers or sales entities shall make payment according to the transmission and distribution charges corresponding to the voltage level of the grid they access, and power grid enterprises shall collect wheeling charges in accordance with the power transmission and distribution charges determined by the government.
In 2015, the NDRC and the NEA issued the Supporting Document for the Reform of the Electric Power Systemto implement the reform of the electric power system in various aspects, such as transmission and distribution charges and electricity market construction. The Document clarified that the government, in determining the transmission and distribution charges, should meet the reasonable investment needs of the grid to ensure stable revenue sources and income levels of grid enterprises, and strengthen cost control to strictly monitor the transmission and distribution costs, in a bid to promote the enterprises to strengthen management, reduce costs and improve efficiency.
According to the principle of “permitted cost plus reasonable revenue” in setting transmission and distribution charges, China is establishing sound supporting cost supervision and examination measures and price formation mechanisms, carrying out cost monitoring and pricing work in a detailed and strict manner and regulating fee charging in the transmission and distribution industry.
Measures for Cost Supervision and Examination
In accordance with the Measures for Cost Supervision and Examination, the cost of transmission and distribution pricing includes depreciation and operation and maintenance fees.
Price Formation Mechanism
China’s transmission and distribution pricing system includes transmission and distribution prices for provincial power grids, transmission prices for regional power grids and cross-provincial and cross-regional special projects and distribution prices
In order to improve grid access services and strengthen the regulation of fair and open access to power grids, the NEA issued the Measures for the Supervision of the Fair and Open Access to Power Grids. In addition to the relevant prohibited behaviours, the NEA specifies in the Measures that grid enterprises shall provide grid access services to power project owners and grid interconnection services in a fair and non-discriminatory manner.
As described in 4.1 Principal Laws Governing the Construction and Operation of Generation Facilities, the legal system for the construction and operation of electricity facilities (including electricity distribution facilities) in China mainly consists of the Electric Power Law of the PRC and its supporting regulations, as well as laws and regulations on land management, engineering construction, enterprise investment and environmental protection.
Land Use and Project Construction Permit & Environmental Impact Assessment
Similar to generation and transmission facilities projects, the construction of distribution facilities shall obtain land use and project construction permits and complete environmental impact assessment. Please refer to 4.2Regulatory Process for Obtaining All Approvals to Construct and Operate Generation Facilities for specific regulations.
Electric Power Business Permits for Power Distribution
After the distribution facilities are completed and before they are put into operation, they have to go through construction completion inspection and acceptance procedures and obtain an electricity distribution business permit.
In addition to the permits required for the construction and operation of the distribution facilities as mentioned in 6.1.2Regulatory Process for Obtaining Approvals to Construct and Operate Distribution Facilities and the relevant operation requirements mentioned in 4.3Terms and Conditions Imposed in Approvals to Construct and Operate Generation Facilities, the construction and operation entities of the distribution facilities shall also perform the obligations stated in the appendix of the electric power business permit and the construction and operation requirements of the Electric Power Law of the PRC and related laws and regulations.
In China, the development and construction of distribution facilities should comply with the general land use principles established by the Land Administration Law, similar to other development and construction projects. Please refer to 4.4Proponent's Eminent Domain, Condemnation or Expropriation Rights for specific regulations.
In the context of deepening electric power system reform, the distribution business is opening to the market gradually. Private enterprises are encouraged to invest in the field and the incremental distribution investment business will be opened to eligible market players. The government also encourages the development of distribution business by mixed ownership.
The distribution network is an important public infrastructure for national economic and social development, and is the “finale” of the power supply process. Guided by the principle of “strengthening regulation over power grids, transmission and distribution and opening power generation, sales and consumption to the market” of the new electric power system reform, the Several Opinions on Further Deepening the Reform of the Electric Power System explicitly requires that private enterprises are encouraged to invest in the distribution business, and the incremental electricity distribution business shall be open to qualified market players.
As of 30 December 2021, the NDRC and the NEA have carried out five batches of pilot projects of incremental distribution business reform in China and approved 459 pilot projects, of which 185 have obtained electric power business permits for power generation.
The NDRC and the NEA formulated the Guiding Opinions on Determining the Distribution Prices for Local Power Grids and Incremental Power Distribution Networks, providing principle guidance.
Measures for Cost Supervision and Examination
Please refer to 5.2.2 Establishment of Transmission Charges and Terms of Service.
Price Formation Mechanism
In accordance with the Guiding Opinions on Determining the Distribution Prices for Local Power Grids and Incremental Power Distribution Networks, local grids and incremental distribution networks are required to determine separate distribution charges. Distribution charges are reviewed and adjusted by provincial price authorities and reported to the price authorities of the State Council for the record. All provinces shall, when determining their distribution charges, fully solicit the opinions of the relevant enterprises and the public, and select a proper method for distribution pricing.
In September 2020, China announced its commitment to peak carbon emissions by 2030 and to become carbon neutral by 2060. Apart from the existing energy-related laws and regulations, pathways to achieve decarbonisation goals are set out in a number of national policy documents. The Working Guidance for Carbon Peaking and Carbon Neutrality released by the State Council provides principles for reaching the 2030 and 2060 targets, while a set of policies are made by various ministries focusing on different industries and sectors. Among which, the 14th Five-Year-Plan 2021–2025 (the “14th FYP”) will be critical, and certain key areas have been identified including the alternative energy industry.
This article aims to analyse the relevant policies and discuss alternative energy trends and developments in China in the near term.
Leading Energy Transition: Solar PV and Wind
As the cost of solar PV and wind has declined rapidly over the past few years because of technology advancements and government support, renewable energy in China entered an era without feed-in tariffs in 2021; the generation costs of solar PV and onshore wind are lower than coal in the majority of China.
Given the government’s 1200 GW of installation capacity target by 2030, solar PV and onshore wind projects will continue to expand. The National Development and Reform Commission (NDRC) announced 450 GW of additional large-scale onshore wind and solar PV megaprojects, mostly in the desert areas in the north-west part of China, known as “mega-hubs”, with 100 GW starting development at the beginning of 2022.
With increasing deployment of variable renewable generation and anticipated significant growth, “renewable plus storage” and integrated energy mix are encouraged to be built to improve the reliability and resilience of the power system and further consumption of renewable energy. Hybrid renewable energy complexes – combining solar, wind, CSP, thermal, hydro or storage – would be a mainstream of greenfield development, instead of a pure solar or wind project.
While new investment is poised to accelerate in 2022, the M&A market of renewable assets is about to cool off. State-owned enterprises (SOEs) have been active (some of them aggressive) players in the renewables M&A market since 2018. While state-owned power utilities continue to have a major presence in renewable energy procurement, others – such as oil and gas giants, and infrastructure companies – are entering the market to meet their energy transition targets. However, there are signs that SOEs are increasing their M&A threshold in terms of compliance and IRR requirements, which might slow down their pace of acquisition.
At the end of May 2022, NRDC and National Energy Administration (NEA) released the implementation plan to promote the high-quality development of alternative energy to further respond to the State Council’s action plan for reaching CO₂ peak before 2030 – this was in the midst of the Chinese government taking measures to stabilise the economy which had been hit by the Omicron wave. Among the 21 actions to be taken, a wind project will no longer require approval for its investment but registration instead; there is the same requirement for solar projects. A hybrid energy mix project with renewables as the mainstay can be treated as a whole when it comes to approval/registration. When the said measures are put in place, the process for new investment in wind projects should be further simplified.
Critical Technology: Energy Storage
A massive increase of the share of variable renewables in the generating mix will call for new ways of ensuring the flexibility and robustness of the power system. Energy storage technologies are considered critical by the Chinese government for a safe and reliable green energy transition.
Energy storage can be divided into several categories by their technology, including:
Except for pumped hydropower, which is the most widely deployed storage system in the world, other energy storage technologies are categorised as alternative energy storage. In March 2022, NDRC and NEA released the implementation plan setting out a roadmap to accelerate market growth of alternative energy storage.
Pumped storage hydropower
Pumped storage hydropower (PSH) is the most mature technology and the dominant form of energy storage on the electric grid today. PSH systems allows excess power to be saved by pumping water from lower to upper reservoirs when electricity demand is low, then releasing it back down to generate electricity when consumption is high.
In December 2021, the 3.6 GW Fengning pumped-storage power station was commissioned by the State Grid Corporation of China. The facility is the world’s biggest pumped-storage hydroelectric power plant and will operate as a peaking power plant for the safe and stable operation of the grid while balancing the intermittent power supply from large wind and solar parks in northern Hebei and the Inner Mongolia regions.
PHS had been part of China's hydropower planning for the past decades, and it is the first time that a separate long-term target was created for PHS projects. The government aims to achieve 62 GW of commissioned capacity of PHS project by 2025 and 120 GW by 2030.
A pricing policy in relation to PSH was released by NDRC in April 2021, according to which the energy tariff will be competition-based and the capacity tariff can be recovered from the grid. This change is made to reduce uncertainty over the availability of revenue schemes and, hopefully, to stimulate private sector investment.
Alternative Energy Storage
Today, alternative energy storage technologies exist at many levels of development, from the early stages of R&D to mature, deployed technologies. In China, lithium-ion batteries used in energy storage is the fastest-growing sector and have been successfully adopted on a commercial scale. Meanwhile, the government encourages technological diversification of alternative energy storage. Through demonstration projects deploying various types of technology, varying targets – such as reduction of cost, commercialisation, innovation and development of current technologies – are expected to achieve for different paths.
Alternative energy storage can be deployed across the supply, grid and demand side, considering factors in terms of output, duration of service, response time, density, etc. In response to national policies on decarbonisation, many provincial governments now mandate that newly invested renewable energy projects should be equipped with energy storage systems with 5% to 20% of its generation capacity. Lithium-ion batteries, already in wide application on the supply side, should extend their leading position with the mandate. Apart from existing mature types and their innovation, top players in the industry also invest in a subset of batteries which are in the early stages of developments.
It is worth mentioning that stand-alone energy storage systems, paired with distributed solar, deployed in internet data centres, 5G base stations, industrial parks and by other end users with large demand, are gaining in momentum.
Hydrogen: Playing a Larger Role in the Energy System
While it has long been used in the chemical and petroleum industries, and has also featured as an emerging fuel cell technology, hydrogen is being evaluated by the Chinese government for a wider energy portfolio.
Hydrogen and fuel cells can provide energy for use in diverse applications, including:
While hydrogen production from natural gas and coal is a well-established technology, it also generates significant carbon emissions and is not considered to be green. With declining costs for renewable electricity, clean hydrogen produced through water electrolysis seems to be commercially available and can help balance the electricity system by deploying solar and wind power.
Baofeng Energy Group, a coal-based chemicals manufacturer, started to operate the world largest green hydrogen plant with a 150 MW alkaline electrolyser powered by a 200 MW solar array. In December 2021, Sinopec announced its construction of a 260 MW development which will be the world's largest solar-to-hydrogen project when it comes online in mid-2023.
While green hydrogen production with renewables presents a good example of China’s efforts to reduce carbon footprint, the country’s abundant renewable energy resources are often located in regions far away from large industrial clusters, which makes it difficult for the cost of deploying solar and wind technologies to decline. Therefore, storage and long-distance transmission technologies are critical to make hydrogen play a meaningful role in China’s energy transition systems. In the medium and long-term planning for hydrogen energy, advanced technologies allowing the smooth operation of large-scale storage and long-distance transmission, together with clean hydrogen production, are expected to shape hydrogen supply chains by 2025.
Inclusion of Clean Energy in Pilot REITs
In the implementation plan announced on 31 May 2022, NDRC says it will explore adding renewable energy projects into the investment scope of pilot infrastructure real estate investment trust funds (infrastructure REITs) to channel capital for the industry. After China initiated a pilot scheme on infrastructure REITs to support the economy, there has been 12 REITs listed; projects range from tollways to sewage plants, without any clean energy projects as yet.
Unlike their counterparts in other jurisdictions, China infrastructure REITs are structured like publicly offered funds that invest in asset-backed securities, which indirectly hold the underlying assets. For REITs which indirectly own renewable projects, dividends should come from a tariff collected from the grid.
At present, several public companies (including Goldwind, TBEA and Huadian) have announced their plans to apply REIT listing with wind, solar, or natural gas heat and power co-generation projects as the underlying assets. According to the REITs requirements, in a nutshell, selected renewable projects for the application should be the ones with subsidy (from an economic perspective) and also that are fully compliant with relevant regulations during their construction and operation.
China continues to be the fastest growing market for renewable energy, and the trend toward clean energy is irreversible. Nonetheless, it is also a relatively policy-driven industry. At the moment, recent policies are rather general in terms of financial incentives and benefit-sharing mechanisms, which means investors are in a wait-and-see mode.
Furthermore, newly invested projects, as well as existing ones, are still facing challenges regarding land-related or environmental compliance issues which can significantly impact the balance sheet. It is advisable for stakeholders to keep a close eye on policy changes in the industry at both national and provincial levels.