China’s climate and energy policies present something of a paradox: while expanding clean energy at breakneck speed, China has also been building new coal power plants.
In 2023 alone, 70 gigawatts (GW) of new coal-fired power capacity was constructed in China, up four-fold since 2019 and accounts for 95% of the world’s new coal power construction activity in that year.
This surge of coal capacity raises concerns about China’s carbon dioxide (CO2) emissions and climate goals, as well as the risk of stranded assets down the line.
Coal is being pitched by the Chinese government as the means to guarantee energy security and to meet rapidly-rising peaks in electricity demand, because solar and wind output is variable.
At the same time, China’s electricity sector is seeing major changes in terms of costs, demand patterns, regulation and market operation. Our new study indicates that the traditional economic calculus used to justify new coal capacity may be outdated.
Using a simple, analytical metric for evaluating the most economic way to meet peak demand, we show that a combination of solar plus battery storage may be a more cost-effective option than new coal.
- How has China’s electricity landscape changed?
- How does an alternative metric evaluate the cost?
- What is the most economic way to meet peak demand?
- How can our solution help China with its climate goals?
How has China’s electricity landscape changed?
Over the past decade, the costs of renewables and battery storage have decreased substantially, peak-time residential and commercial demand has surged, and wholesale electricity markets have gained greater traction.
Meanwhile, China also announced “dual carbon” goals of peaking CO2 emissions before 2030 and reaching carbon neutrality by 2060. Given these transformations, building more unabated coal power conflicts with China’s long-term climate commitments and may no longer be the most cost-effective option to meet demand growth. It also diverts much-needed capital from the transition toward a clean power system.
How does an alternative metric evaluate the cost?
Our study introduces an alternative metric for calculating the cost-optimal investments needed to meet rising peak electricity demand.
This metric, “net capacity cost”, is the annualised fixed costs of investment in infrastructure needed to meet peak demand minus electricity market revenues earned by this infrastructure, or its “system value”. In this metric, a negative figure means that instead of a cost, such investments would turn a profit.
To explore this metric in a Chinese context, we use a simple example of a 1,500 megawatt (MW) increase in peak electricity demand and a 6,570 gigawatt hour (GWh) rise in demand across a full year, in a hypothetical province.
We then outline five strategies (cases) for meeting these peak and annual energy demands, ranging from heavy reliance on coal through to a combination of solar and battery storage.
In the different cases, resources are sized based on how much they can reliably contribute to peak supply needs and annual energy needs:
- Case 1: New coal power capacity meets all of the growth in both peak and annual energy demand.
- Case 2: Solar meets 70% and coal meets 30% of annual energy demand growth; solar contributes 525MW to peak supply needs – based on a “capacity credit” to discount solar capacity because it may not generate during peak periods – while coal provides the remaining 975MW.
- Case 3: Solar meets all annual energy demand growth; solar and coal both contribute 750MW to peak supply needs, again discounting solar with a capacity credit.
- Case 4: Solar meets all annual energy demand growth; solar and batteries both contribute 750MW to peak supply needs; batteries provide frequency regulation reserves (backup power for managing minute-to-minute differences between supply and demand).
- Case 5: Solar meets all annual energy demand growth; solar and batteries both contribute 750MW to peak supply needs; batteries provide energy arbitrage (charge when prices or costs are low, discharge when they are high).
For each case, shown in the table below, we calculated the annual net cost for both the individual resource (coal, battery or solar), as well as for the system as a whole for securing one kilowatt (kW) of power generation capacity in yuan per year.
The resource net capacity cost in the top half of the table is the net cost of that resource (i.e., the annualised fixed cost minus annual revenue that resource earns from providing energy and ancillary services, such as frequency regulation). Positive numbers show a net cost to the grid operator in adding or procuring that resource.
The total system net capacity cost, in the second half of the table, is the net cost of meeting peak demand growth with the combination of resources in each case.
The weighting that we used to calculate system net costs is based on the ratio of installed capacity and peak demand growth.
Cost of different combinations of energy sources to meet electricity demand
| Case 1 | Case 2 | Case 3 | Case 4 | Case 5 | |
|---|---|---|---|---|---|
| Resource net capacity cost (yuan per kW per year, per kW of installed capacity) | |||||
| Coal | 424 | 424 | 512 | ||
| Battery | 248 | 781 | |||
| Solar | -128 | -128 | -128 | -128 | |
| System net capacity cost (yuan per kW per year, per kW of capacity used to meet peak demand, after capacity credit) | |||||
| Coal | 471 | 306 | 236 | ||
| Battery | 138 | 434 | |||
| Solar | -223 | -319 | -319 | -319 | |
| Total | 471 | 83 | -83 | -181 | 115 |
Cost of capacity with different combinations of coal, solar and storage for meeting peak demand. Source and credit: Lin and Kahrl (2024)
In order to stress-test this simple analysis, we looked at sensitivities of a variety of prices for different sources.
With solar prices in China already very low, our sensitivity analysis focused on the price of coal, batteries and other inputs to the analysis.
What is the most economic way to meet peak demand?
Our results indicate that when battery storage provides frequency regulation reserves (case 4), a combination of solar and storage is the most cost-effective option for meeting peak demand growth.
This combination could cost grid operators -181 yuan (about -$25 or -£20) for each kilowatt of capacity added.
In contrast, building new coal capacity to meet peak demand growth (case 1) is the most expensive option, with a net capacity cost of 471 yuan (about $65 or £52) for securing one kilowatt of capacity per year.
Case 3, in which large coal power plants are only used for backup power (little to no generation), may not be politically feasible in China, at least in the near term.
The other two cases (case 2 and case 5) are more comparable, but given that battery prices have fallen by more than 30% since this analysis was performed – to about 1 yuan (about $0.14 or £0.11) per watt-hour (Wh) of capacity – the batteries in case 5 are likely more economically attractive than the coal in case 2.
How can our solution help China with its climate goals?
To navigate this changing landscape, our analysis suggests that a near-term strategy for meeting China’s rising energy demand while also working towards its climate goals involves enabling battery storage participation in electricity markets.
Currently, the Chinese government allows “new energy storage”, including batteries, to participate in the electricity market. However, the detailed regulations are ambiguous and battery participation could be made simpler.
For example, battery storage is not allowed to provide “operational reserves” referring to capacity that is held in reserve to manage unexpected differences between supply and demand. Making battery storage eligible for this would enhance its business case.
Allowing greater market participation for battery storage would foster continued innovation and cost reductions in battery storage systems, while offering valuable operational experience for system operators.
Such a strategy would be consistent with market outcomes and reflects recent electricity market experience in the US and Europe.
It would also help to resolve near-term capacity and energy needs, as batteries and solar generation can typically be built more quickly than coal-fired power plants.
Moreover, it would help to alleviate future conflicts between new coal generation and renewable energy. New coal generation built mainly as a backup for renewable generation will either rarely operate or encroach on operating hours and net income for other existing coal generators, creating new stranded asset risks.
Continued electricity market reforms would also facilitate more efficient investments in renewable generation and electricity storage.
Allowing wholesale electricity prices to be set by the market and allowing renewable generation and electricity storage to participate in wholesale markets can enhance their revenue and profits.
Furthermore, the reforms would encourage the efficient utilisation of electricity storage, which is our key finding. Electricity storage can provide a variety of functions for the electricity system; wholesale prices can help to guide the operation of storage toward those functions that have the highest value at the lowest cost.
The recent directive from China’s national energy administration (NEA) that integrates new types of storage facilities (non-pumped hydro) into grid dispatch operation is a step towards the reforms we outline.
Appropriate compensation mechanisms, such as capacity payments in some provinces, for all the services that such storage facilities provide, may need to be further defined to promote the sustainable development and integration of these storage facilities into the grid.
Finally, additional supply alone is unlikely to be the lowest-cost way to meet growth in electricity demand in China. Improving end-use efficiency and “demand response” can also help to reduce the overall cost of supplying electricity.
As China continues its electricity market reforms, regional market designs linking multiple provinces, as well as and regional approaches to resource adequacy that encourage resource sharing among provinces, could also help to meet China’s rising electricity use and peak demand in the most cost-effective and lowest-carbon way possible.
The post Guest post: Solar plus batteries ‘cheaper than new coal’ for meeting China’s rising demand appeared first on Carbon Brief.
Guest post: Solar plus batteries ‘cheaper than new coal’ for meeting China’s rising demand
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With the U.S. bombing Iran and the Strait of Hormuz closed, energy experts say countries transitioning to renewables will be more resilient in the “face of the shock.”
The United States’ war on Iran could fundamentally alter how countries consume and generate energy and hamper international progress in combating climate change, a panel of energy experts said today.
The Global Energy Supply in a Decade ‘Is Not a World We’re Going to Recognize’
One month into the US and Israel’s war on Iran, at least 60 countries have taken emergency measures in response to the subsequent global energy crisis, according to analysis by Carbon Brief.
So far, these countries have announced nearly 200 policies to save fuel, support consumers and boost domestic energy supplies.
Carbon Brief has drawn on tracking by the International Energy Agency (IEA) and other sources to assess the global policy response, just as a temporary ceasefire is declared.
Since the start of the war in late February, both sides have bombed vital energy infrastructure across the region as Iran has blocked the Strait of Hormuz – a key waterway through which around a fifth of global oil and liquified natural gas (LNG) trade passes.
This has made it impossible to export the usual volumes of fossil fuels from the region and, as a result, sent prices soaring.
Around 30 nations, from Norway to Zambia, have cut fuel taxes to help people struggling with rising costs, making this by far the most common domestic policy response to the crisis.
Some countries have stressed the need to boost domestic renewable-energy construction, while others – including Japan, Italy and South Korea – have opted to lean more on coal, at least in the short term.
The most wide-ranging responses have been in Asia, where countries that rely heavily on fossil fuels from the Middle East have implemented driving bans, fuel rationing and school closures in order to reduce demand.
‘Largest disruption’
On 28 February, the US and Israel launched a surprise attack on Iran, triggering conflict across the Middle East and sending shockwaves around the world.
There have been numerous assaults on energy infrastructure, including an Iranian attack on the world’s largest LNG facility in Qatar and an Israeli bombing of Iran’s gas sites.
Iran’s blockade of the Strait of Hormuz, a chokepoint in the Persian Gulf, is causing what the IEA has called the “largest supply disruption in the history of the global oil market”.
A fifth of the world’s oil and LNG is normally shipped through this region, with 90% of those supplies going to destinations in Asia. Without these supplies, fuel prices have surged.
Governments around the world have taken emergency actions in response to this new energy crisis, shielding their citizens from price spikes, conserving energy where possible and considering longer-term energy policies.
Even with a two-week ceasefire announced, the energy crisis is expected to continue, given the extensive damage to infrastructure and continuing uncertainties.
Asian crunch
Carbon Brief has used tracking by the IEA, news reports, government announcements and internal monitoring by the thinktank E3G to assess the range of national responses to the energy crisis roughly one month into the Iran war.
In total, Carbon Brief has identified 185 relevant policies, announcements and campaigns from 60 national governments.
As the map below shows, these measures are concentrated in east and south Asia. These regions are facing the most extreme disruption, largely due to their reliance on oil and gas supplies from the Middle East.
Nations including Indonesia, Japan, South Korea and India are already spending billions of dollars on fuel subsidies to protect people from rising costs.
At least 16 Asian countries are also taking drastic measures to reduce fuel consumption. For example, the Philippines has declared a “state of national emergency”, which includes limiting air conditioning in public buildings and subsidising public transport.
Other examples from the region include the government in Bangladesh asking the public and businesses to avoid unnecessary lighting, Pakistan reducing the speed limit on highways and Laos encouraging people to work from home.
Europe – which was hit hard by the 2022 energy crisis due to its reliance on Russian gas – is less immediately exposed to the current crisis than Asia. However, many nations are still heavily reliant on gas, including supplies from Qatar.
The continent is already feeling the effects of higher global energy prices as countries compete for more limited resources.
At least 18 European nations have introduced measures to help people with rising costs. Spain, which is relatively insulated from the crisis due to the high share of renewables in its electricity supply, nevertheless announced a €5bn aid package, with at least six measures to support consumers.
Many African countries, while also less reliant on direct fossil-fuel supplies via the Strait of Hormuz than Asia, are still facing the strain of higher import bills. Some, including Ethiopia, Kenya and Zambia, are also facing severe fuel shortages.
There have been fewer new policies across the Americas, which have been comparatively insulated from the energy crisis so far. One outlier is Chile, which is among the region’s biggest fuel importers and is, therefore, more exposed to global price increases.
Tax cuts
The most common types of policy response to the energy crisis so far have been efforts to protect people and businesses from the surge in fuel prices.
At least 28 nations, including Italy, Brazil and Australia, have introduced a total of 31 measures to cut taxes – and, therefore, prices – on fuel.
Even across Africa, where state revenues are already stretched, some nations – including Namibia and South Africa – are cutting fuel levies in a bid to stabilise prices.
Another 17 countries, including Mexico and Poland, have directly capped the price of fuel. Others, such as France and the UK, have opted for more targeted fuel subsidies, designed to support specific vulnerable groups and industries.
These measures are all shown in the dark blue “consumer support” bars in the chart below.
Such measures can directly help consumers, but some leaders, NGOs and financial experts have noted that there is also the risk of them driving inflation and reinforcing reliance on the existing fossil fuel-based system.
Christine Lagarde, president of the European Central Bank, spoke in favour of short-term measures to “smooth the shock”, but noted that “broad-based and open-ended measures may add excessively to demand”.
Measures to conserve energy, of the type that many developing countries in Asia have implemented extensively, have been described by the IEA as “more effective and fiscally sustainable than broad-based subsidies”.
So far, there have been at least 23 such measures introduced to limit the use of transport, particularly private cars.
These include Lithuania cutting train fares, two Australian states making public transport free and Myanmar and South Korea asking people to only drive their cars on certain days.
Clean vs coal
At least eight countries have announced plans to either increase their use of coal or review existing plans to transition away from coal, according to Carbon Brief’s analysis. These include Japan, South Korea, Bangladesh, the Philippines, Thailand, Pakistan, Germany and Italy.
These measures broadly involve delaying coal-plant closure, as in Italy, or allowing older sites to operate at higher rates, as in Japan – rather than building more coal plants.
There has been extensive coverage of how the energy crisis is “driving Asia back to coal”. However, as Bloomberg columnist David Fickling has noted, this shift is relatively small and likely to be offset by a move to cheap solar power in the longer term.
Indeed, some countries have begun to consider changes to the way they use energy going forward, amid a crisis driven by the spiralling costs of fossil-fuel imports.
Leaders in India, Barbados and the UK have explicitly stressed the importance of a structural shift to using clean power. Governments in France and the Philippines are among those linking new renewable-energy announcements with the unfolding crisis.
New renewable-energy capacity will take time to come online, albeit substantially less time than developing new fossil-fuel generation. In the meantime, some nations are also taking short-term measures to make their road transport less reliant on fossil fuels.
For example, the Chilean government has enabled taxi drivers to access preferential credit for purchasing electric vehicles (EVs). Cambodia has cut import taxes on EVs and Laos has lowered excise taxes on them.
Finally, there have been some signs that countries are reconsidering their future exposure to imported fossil fuels, given the current economics of oil and gas.
The New Zealand government has indicated that a plan to build a new LNG terminal by 2027 now faces uncertainty. Reuters reported that Vietnamese conglomerate Vingroup has told the government it wanted to abandon a plan to build a new LNG-fired power plant in Vietnam, in favour of renewables.
The post Iran war analysis: How 60 nations have responded to the global energy crisis appeared first on Carbon Brief.
Iran war analysis: How 60 nations have responded to the global energy crisis
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