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Update on China’s Power Sector: Focus on clean energy mix and grid integration [free access]

June 8, 2018

China is changing and its energy future promises to be quite different from its energy past. Against a background that includes increasing energy demand driven by economic growth and a population that is increasingly concentrated in cities (urbanisation), China needs to strengthen its energy supply capacity while also protecting the environment. The country is quickly changing course to become a more services-based economy with a much cleaner energy mix.

 

Under its 13th Five-Year Plan, China plans to add around 2,000 GW of new capacity during 2016-20. As per the plan, China aims to cap coal-based power generation capacity at under 1,100 GW by 2020, thus reducing coal’s share in China’s total energy mix to not more than 58 per cent in 2020 from over 64 per cent in 2017. Also, China has set a target to increase renewable capacity to around 485 GW by 2020.

 

In line with the new energy transition, the country is also planning to significantly boost grid capacity, mainly by adding ultra high voltage (UHV) alternating current (AC) and direct current (DC) lines along with developing cross-border links as part of its Belt and Road Initiative (BRI). The initiative plans to restore the ancient Silk Road to promote trade and economic integration between Asia, Europe and Africa.

 

China’s ambitious renewable energy targets are expected to drive the smart grids market in the future. The Chinese government has announced an investment of USD96 billion between 2010 and 2020 to accelerate smart grids deployment. In addition, the growing urbanisation of the country is speeding up the introduction of electric vehicles (EVs). It is estimated that by 2020, there will be around 5 million EVs on the road in China. The country’s 13th Five-Year Plan aims for EVs to hold a domestic automotive market share of 5 per cent in 2020 and 20 per cent in 2025.

 

In addition, China’s state-owned grid developers State Grid Corporation of China (SGCC) and China Southern Power Grid (CSG) are focusing on increasing their footprint in international markets, especially in Latin America and Europe. With bottomless wallets, the two developers hope to create a large portfolio of international grid assets over the next few years to help extend their economic footprint and expand global trade. 

 

Grid expansion

The country’s electricity demand is expected to rise at a compound annual growth rate (CAGR) of 4 per cent between 2018 and 2020. In the remaining years of the 13th Plan Period (2016-2020), it is estimated that around 253 GW of new generation capacity will be added to China’s power grid. Majority of these new additions will be based on wind (38 per cent) and solar (32 per cent) energy. As per the country’s 13th Plan, around 20 GW of less efficient capacity will be shut down by 2020, while old coal-fired power plants are required to undergo strict efficiency upgrades.

 

Going forward, the country’s two grid operators, SGCC and CSG, are planning to significantly increase transmission capacity, with a special focus on the promotion of UHV technologies. Between 2018 and 2020, China will add an estimated 244,620 km of line length and 1,269,753 MVA of transformer capacity at the 110 kV and above voltage levels.

 

One of the largest UHV DC projects presently under construction is the 3,284-km-long, 1,100 kV Changji–Guquan line project, which involves Changji in the Xinjiang region in the northwest and Guquan in Anhui province in eastern China. The project has a transmission capacity of 12 GW.

 

In addition, the country is working on significantly boosting its ties with neighbouring countries by establishing cross-border links. China is part of Japan-based SoftBank Group Corporation’s Asian Super Grid (ASG) project, which will connect the power grids of six countries across Asia, namely, Mongolia, India, Japan, China, Russia and South Korea. The ASG project envisions sourcing electricity from wind farms in Mongolia and solar panels in India. As of 2017, SoftBank is working on a plan to create a multinational power supply network that will evacuate electricity generated in Mongolia and India to Japan, China, Russia and South Korea by using overhead transmission lines and submarine power cables. The total length of the proposed transmission lines and cables involved, including 600 km of submarine cables between China and South Korea, Japan and South Korea, and Japan and Russia, could be as much as 36,000 km.

 

SGCC is also involved with the development of the 400 kV Rashuwagadi (Nepal)–Kerung (Tibet) cross-border transmission project as part of the country’s proposed BRI. Presently, the Nepalese government-owned Nepal Electricity Authority is reviewing SGCC’s proposal for the preparation of the detailed project report.

                                         

Smart grids and EVs

China plans to invest significantly in building a safe and environmentally friendly smart-grid system by 2020. To expand capabilities, it will accelerate the construction of micro grids and promote the development of energy sources that do not need transmission lines, including distributed solar projects and power from micro gas generators. In 2016, China Electric Power Research Institute (CEPRI) and OSIsoft agreed to collaborate in a joint venture for the China Smart Grid Substation Operations and Communication project. The project serves as the basis for China to develop relevant new standards for future smart grid operations and communication architectures and deployment.

 

State-owned SGCC has also established a high-end research unit, State Grid Smart Grid Research Institute (SGRI), which is the first specialised unit engaged in the development of key technology and equipment for smart grids. In recent years, SGRI has realised a series of major research and development (R&D) achievements in the construction of high-power corridors and smart grids. In addition, SGCC aims to establish a Global Energy Interconnection (GEI), which will serve as a platform for the extensive development, deployment and utilisation of clean energy globally through the building of interconnected smart grids using UHV technology. In line with this, China has incorporated the Global Energy Interconnection Development and Cooperation Organization (GEIDCO) to bring together national governments, grid operators, academic institutions, development banks and United Nations agencies to launch the global renewable energy grid. Recently, in March 2018, GEIDCO gathered delegates from countries as far-flung as Argentina and Egypt to work together to realise the vision of globally interconnected clean energy.

 

In May 2018 Hainan Power Grid Company, a wholly owned subsidiary of CSG, started planning for smart grid construction during the 14th Five-Year Plan period (from 2021 to 2025). Under the plan, the company has proposed the enhancement of the existing technology platform and monitoring system in Hainan, building a digital and visual smart grid and promoting a smart grid index system, which is adapted to the Hainan pilot free trade zone (port). There are also plans to build a smart micro grid and AC/DC hybrid distribution grid to greatly improve the reliability of power supply and anti-interference of important and sensitive users. The draft plan is expected to be submitted to the Chinese government by December 2018.

 

China has also started investing significantly in the EVs market. Policy support is playing a major role in developing and deploying EVs in China. During 2016, the country witnessed around 336,000 new EV registrations. However, the EV market is still at a nascent stage (including E-buses and E-trucks) as it presently comprises only a small fraction of China’s automotive market (representing a 1.8 per cent market share in 2016). Going forward, the country is taking more aggressive actions to encourage EV purchases. EVs were exempt from purchase taxes from 2014 to 2017 and the government has renewed the exemption through 2020. In addition, the central government has initiated a consumer subsidy programme, which is renewed every two or three years, decreasing the subsidies and raising the eligibility threshold. China plans to phase out the subsidy entirely by 2020. In addition, local governments in China are also supportive of EVs. For example, Beijing and Shenzhen started a programme to provide the same amount of subsidies as the central government.

 

As per the 13th Plan, China has set a target of putting 5 million battery-electric and plug-in hybrid electric vehicles (PHEVs) on the road by 2020. SGCC plans to set up a nationwide charging network along all highways and within cities. By 2020, it aims to build 10,000 rapid charging stations and 120,000 charging posts across 202 cities and 36,000 km of expressways. By 2020, CSG aims to construct 674 centralised charging stations and 25,000 distributed public charging posts. In addition, it will accelerate the development of the intelligent EV charging service platform both at the provincial level and across the whole power grid.

 

Expanding international footprints

China’s vast experience in the development of UHV projects has proved that technology can be applied to enhance the efficiency of large-scale and long-distance transmission. This has helped it become a dominant player in the energy sector overseas. The presence of China’s grid operators in Latin American countries like Brazil has been to the former’s advantage as they can utilise their expertise in advanced technologies such as UHV. One such example is the Belo Monte transmission line project in Brazil, which is being implemented by State Grid Brazil Holding S.A. (SGBH), a Brazilian subsidiary of China’s SGCC.

 

As per a recent analysis conducted by RWR Advisory Group, Chinese companies have announced investments of USD102 billion in building or acquiring power transmission infrastructure across 83 projects in Latin America, Africa, Europe and beyond during 2013-17. In addition, USD21 billion worth of loans have been extended by Chinese institutions for overseas power grid investments during this period.

 

With a total overseas investment of over USD15 billion so far, SGCC operates the major energy networks in the Philippines, Brazil, Portugal, Australia and Italy. SGCC aims to make all projects profitable with an annual return on investment of more than 10 per cent.

 

In addition to operating as a developer, SGCC is constructing key national grid projects in Ethiopia, Poland, Myanmar and Laos. The total value of engineering, procurement and construction (EPC) projects, equipment exports and technical consulting contracts signed in 2016 was USD3.3 billion, of which USD2.3 billion came from markets along the BRI route.

 

In recent years, China’s grid operators have focused on countries and regions to expand their global business by implementing market-oriented projects and have actively promoted energy infrastructure asset mergers and acquisitions (M&A).

 

In June 2017, Shanghai Electric Power Transmission and Distribution Engineering (SPTDE) signed a preliminary agreement with Eletrosul Centrais Elétricas S.A. (Eletrosul), a subsidiary of Eletrobras, to transfer control of transmission system development for the Rio Grande do Sul project.

 

Further, in March 2018, CSG received final approvals from the Government of China to purchase Canada-based Brookfield Infrastructure’s stake in Chile’s largest electric transmission system, Transelec. 

 

The country is also focusing on securing transmission assets in European countries. In June 2017, State Grid International Development Limited (SGID) of China, a subsidiary of SGCC, concluded the acquisition of a 24 per cent stake in Greece’s Independent Power Transmission Operator SA (IPTO) or Anexartitos Diacheiristis Metaforas Ilektrikis Energeias (ADMIE).

 

In addition, SGCC is in talks to acquire a 20 per cent stake in Germany’s electricity grid operator 50Hertz, after Belgium-based shareholder Elia exercised its first right of refusal to acquire shares being put up for sale by Australia-based fund IFM. A final decision on the acquisition is still pending.

 

Way forward                                                              

China’s growing energy needs are being increasingly met by renewables and natural gas while the share of coal in the energy mix is reducing. Strong deployment and policy support continue to bring costs down for renewables, and solar photovoltaic (PV) has become China’s cheapest form of electricity generation. Therefore, the country must focus on facilitating the rapid development of renewable energies to guarantee the stable supply of energy. Future grid investments will be driven by the need to boost grid capacity to connect new generation capacity, mainly renewable and hydro located in the remote northwest and northeast regions, which are being developed to achieve the country’s renewable mix target. Also, China has set ambitious reform plans for its electricity power system and aims to reduce power transmission barriers among provinces to boost energy consumption. In recent years, grid operators have steadily sought overseas assets, and this trend will help establish them as dominant energy sector players.