BEIJING – China is setting out how it will prevent bottlenecks as it prepares for another record year of renewable power installations.

In recent weeks, national and local governments have announced a slew of proposals to prevent blackouts, support energy storage, bolster grid operator finances and create more flexible pricing.

The payoff could be a more efficient power system that can absorb a bigger share of clean energy, according to Bank of China International (Boci) Research.

Most residents and businesses in China pay electricity rates tied to government-set benchmarks, counter to the arguably more robust free market models that prevail in Europe and America.

But the latest moves are still important – if small – steps in the reforms that China has been discussing for over two decades, as it aims to build an integrated power trading market by 2025 that will let supply and demand play a bigger role in setting prices. 

One of the problems plaguing China’s power system is that more instances of extreme heat and rising use of air-conditioning are driving a surge in peak demand.

The government has offered several responses, including a massive expansion of new coal-fired power plants, even though it knows they may be operating only at partial capacity.

Beijing is also working on the other side of the equation.

Known as demand response, the idea is to find users who can quickly turn off the lights when demand is rising, saving electricity for others, usually in return for lower rates or other benefits. 

The National Development and Reform Commission (NDRC), China’s top planning agency, asked local governments in May to establish demand response plans that cover at least 3 per cent to 5 per cent of peak use, and more if the swings between peak and trough are particularly large.

The city of Chongqing recently proposed a pricing model that would let residents pay less for electricity when demand is low, and more during peak hours. 

It will not be cheap for China to reach its eventual goal of a post-carbon society.

BloombergNEF estimates that spending will need to average US$136 billion (S$184 billion) a year until 2050 to reach net-zero emissions by then, compared with a US$75 billion outlay in 2022.

Power grid investment alone will cost US$3.8 trillion by 2050 – or US$2.5 trillion under a less policy-driven transition that puts economics first.

To that end, the government may be trying to help out its two massive state-owned utilities, State Grid Corporation of China and China Southern Power Grid Company.

On May 15, the NDRC amended power transmission and distribution fees to allow grids to pass through certain costs for the first time. The change should help the operators boost revenue and be able to afford more investments in grid upgrades, analyst Tony Fei said in Boci Research’s report. 

Energy storage 

The NDRC has also set a fixed fee on capacity for 56 gigawatts of pumped hydropower energy storage projects that took effect on June 1.

The charges are meant to keep the projects profitable even when they are not being used, which could boost investor confidence and accelerate construction, according to BloombergNEF. 

While energy storage is viewed as necessary to help balance out intermittent wind and solar generation, much of China’s current fleet of batteries paired with renewables projects is underutilised, operating on average only 6 per cent of the time in 2021.

That is because power markets are not established in most places, so there is no price signal for storage projects to buy when there is excess power and sell when demand is high.

Some areas are experimenting with changing that.

A pilot project in solar-rich Shandong province allows power prices to go negative, theoretically incentivising energy storage projects to get paid to buy electricity. BLOOMBERG