First 30 Days: China’s REC Market Saw Weak Demand

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China’s governmental voluntary REC market or ‘green certificates’ was officially launched on July 1st, 2017. About 230,000 RECs from 20 utility-scale wind and solar projects (only one solar) have been listed on the official trading platform (www.greenenergy.org.cn) amounting to 230 million kWh of renewable energy, tiny when compared to the 20 billion kWh of renewable power that was curtailed in 2016, but still a good start.

Compared with the supply, market demand for RECs has been very weak. Up to July 31th, 6,681 RECs were sold, among which 6,726 are from wind and 116 from solar, about 0.5% and 1.5% of their total supply respectively. The buyers were mainly SOEs, who might be acting out of goodwill to support the government initiative or to create demand for their own projects. It is obvious that wind RECs outnumbered solar RECs both in supply and sales. “Zero Sale” of solar REC was all over news headlines on the first day of the launch. The first solar RECs were not traded until the third day.

We believe there is low demand mostly because these RECs are only from existing projects and don’t create additionally. Moreover these RECs tend to be coming from projects in western china that are very far from the load centers of the east coast, and lastly the uncertainty of the evolution of the Green certificate market towards a mandatory market is encouraging some to wait and see how things play out. As Seeder said in our February post, companies prefer to support the construction of new renewable projects to maximize their environmental impact — in other words, to create “additionality”. They also like to receive economic returns and financial savings in such investments and projects, while RECs can only be a cost.

Multi-national companies, such as Apple and Google and other members of the RE100 (corporations that have committed to go 100% renewable), have become increasingly aggressive in renewable energy procurement in recent years. In comparison, their Chinese counterparts, even if of the same size, may be reluctant to commit to renewable energy without a clear financial benefit. But it is not unexpected. Voluntary-based REC markets are an intermediate trading platform. It’s not likely to scale up to a level large enough to replace subsidies. In the U.S., after 10 years of practice, still only 1/3 of renewable energy deals are realized with non-mandatory REC sales.

China’s Wind REC is much more popular than the solar REC because it is much cheaper. A wind REC costs about 200 RMB in avarage while a solar REC around 500 RMB. This is because REC costs are capped at the project’s eligible subsidy, which in general is lower for wind projects and higher for solar. A smaller reason might be the total wind capacity is the double size of that of solar.

Sometime in 2018, the government will make REC purchase mandatory.  By then, additional policies and market rules will be needed to define the actors under such a mandate, and ensure that the price of RECs can help achieve the policy’s ultimate goal, which is to support renewable energy development and integration.  We expect the government’s green certificates to continue to only be offered on utility-scale renewable energy projects (projects above 20MW) and see an opportunity for other private REC programs to develop in the China market, specifically to serve distributed solar projects and to create more accountability and tracking mechanisms for renewable energy generation.

In conclusion, the launch of REC does not aim at creating strong social impact, but rather at raising awareness to the environment and clean energy among Chinese companies and citizens. REC alone is unlikely to achieve the clean energy transformation we need. On-site projects, whether financed through a PPA or corporate investment, and perhaps paired with RECs for accountability, are still the most concrete way to build new renewable energy resources. Meanwhile, companies can purchase certificates to fulfill the rest of their commitments to renewable energy.