Flexible energy governance is key to China’s decarbonisation efforts

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Xunpeng Shi, Principal Research Fellow, Australia-China Relations Institute, University of Technology Sydney

Muyi Yang, Adjunct Fellow, Australia-China Relations Institute, University of Technology Sydney

This article appeared in East Asia Forum on October 30 2021.

The world is now battling a major energy crisis. Gas and oil price spikes are raging across Europe and the United States, as are coal and power shortages in China and India. While these crises have a common cause — maintaining reliable energy supply during energy transition — China’s power crisis, which has resulted in rationing and industrial production cuts affecting two-thirds of the country’s provinces, is the consequence of unique circumstances.

China’s crisis reflects the inability of its energy governance regime to deal with the complexity of decarbonisation and energy transition while maintaining sufficient supply and reliability.

Despite the progressive demise of the planned economy, formal planning still retains a central place in the governance of China’s energy sector. The Five-Year Plans are important tools for this purpose. The Plans translate long-term strategic decisions into short-term national targets, which are then decomposed into specific targets, typically expressed in the form of quantitative indicators, for provincial-level governments to implement.

This regime is praised for its ability to provide policy certainty and mobilise large amounts of resources for decarbonising the energy sector. This praise is further substantiated by China’s declining energy intensity, which has significantly slowed the growth of energy demand, and together with an inexorable march of new clean energies, reduced the share of coal in the energy mix to 56.8 percent in 2020, down from a peak of 70.2 percent in 2011.

Notwithstanding these achievements, China’s target-based governance approach is inflexible and does not deal well with the complexities and uncertainties of its energy transition.

Energy transitions are not only about phasing out coal and other fossil fuels, but also entail necessary system-wide changes to support the uptake of their clean replacements. The ramifications of these changes and their interdependencies create a proliferation of complexity, spanning individual lives to local and national economies. They cut across diverse policy domains including energy security, economic development and social wellbeing.

China’s current power crisis is driven by a widespread coal shortage due to factors affecting domestic production. A key factor is the coal production capacity cuts implemented since 2016 as part of China’s supply-side reform aimed at reducing inefficient productive capacity. This reform is a key component of the economy-wide reform agenda to sustain growth against a backdrop of excessive productive capacity, declining prices for industrial products and falling profits.

Other factors include tighter mining safety regulations, the implementation of ‘energy dual control’ policy to cap energy consumption and intensity and corruption probes affecting mining activities in Inner Mongolia, China’s second largest coal producer.

The coal shortage has put upwards pressure on coal prices. Given China’s tight control of electricity prices, for many generators the current record high coal prices mean it is unprofitable or even loss-making to operate. Despite being required to continue operating, generators are less willing to produce and, in some cases, find ways to circumvent the mandate.

The coal shortage has coincided with the occurrence of extreme weather conditions — a very hot summer boosting demand for air conditioning, a drought in southwest China affecting hydropower production, and windless weather in northeast China which has cut back wind power generation.

Meanwhile, strong industrial growth fuelled by rising demand for exports, partly due to the reduced manufacturing capacity in Southeast Asia following the introduction of lockdown measures to contain COVID-19, has pushed up demand for electricity.

Dealing with this complexity requires a more flexible approach to energy governance that can quickly respond to changing circumstances. China’s energy governance regime fails to meet this requirement.

Although some provinces in southern China (Guangdong and Zhejiang, for example) have already seen signs of power shortages earlier this year, the pursuit of coal phaseout and the energy decarbonisation agenda has continued. In August, China’s macroeconomic planner — the National Development and Reform Commission (NDRC) — issued warnings to 19 provinces for failing to meet their targets on energy intensity reduction. Later in September, the Central Disciplinary Commission issued instructions with a view to incentivise more active local decarbonisation efforts.

In such a setting, a ramp-up of coal production and generation appears to be an unattractive short-term option to alleviating supply shortfalls, making the power crisis inevitable.

Improving the flexibility of China’s energy governance regime is key to sustaining its decarbonisation efforts. One key improvement may involve the creation of mechanisms for adjusting pre-determined targets and their implementation in ways that better reflect changing circumstances. It seems that China is already working on this, as the NDRC released a scheme on 16 September to avoid the ‘one-size-fits-all’ approach to the dual-control targets on energy consumption and intensity — a key driver in China’s decarbonisation process.

Authors

Associate Professor Xunpeng Shi is Principal Research Fellow at the Australia-China Relations Institute, University of Technology Sydney.

Dr Muyi Yang is a researcher at the Australia-China Relations Institute, University of Technology Sydney.