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Large-Scale Renewable Energy Procurement Opportunities

Lately, the China power market has made global headlines for the massive volume of distributed generation (DG) solar installed in 2017: 13 GW through July. However, in certain circles, another electricity supply mechanism is generating greater buzz: renewable energy direct purchase (REDP). 

In fact, at a recent “China Renewable Energy Buyer & Suppliers’ Workshop” in Beijing organized by Rocky Mountain Institute, DG solar was seldom mentioned by the Fortune 500 MNC representatives. (Many corporations already understand this solution and are executing large-scale procurement programs.) The discussion instead was focused on power sector reform, newly-established Power Trading Centers, and the outlook for large-scale RE solutions over the grid, known as renewable energy direct purchase (REDP).


So, what should corporations interested in pursuing the 100% RE goal in China be aware of regarding REDP? Here are a few thoughts:


As a brief background, China power sector reform kicked off in 2015 and has commanded the attention of energy market participants. The means by which electricity is scheduled, generated, transported, and transacted are changing quickly and significantly. One mechanism that has emerged is known as “direct energy purchase”, which allows for an industrial consumer to purchase electricity directly from a power generator (or intermediary electricity retail company) through a provincial Power Trading Center. This new mechanism has empowered customers with greater electricity supply options. Renewable energy is available via this mechanism in select provinces (REDP). Where available, REDP offers up to 20% discounts from local grid rates, is transacted via low-risk 1-year tenor purchase agreements, and allows for a claim on electricity generated from a specific power asset. This sounds too good to be true—why aren’t all factories buying cheap wind power around the country?


Currently, REDP is available in fewer than 10 of the 34 provinces of China. These provinces border China’s north, northwest, and southwest, where wind, solar and hydro (respectively) are installed in abundance and significantly curtailed. Although these outer provinces host far fewer industrial zones compared with the developed east coast attractive REDP opportunities exist there and can even allow for reduced electricity costs.


So what are the prospects for REDP in eastern provinces spanning Beijing to Guangdong? We must first consider the objectives of power sector reform set forth by the relevant administrative bodies, and then examine the conditions that allow for REDP. These objectives include the competitive unlocking and sale of curtailed power capacity and the reduction of grid transmission and distribution costs. Both aims are being pursued across the country: once-curtailed power is being traded via new Power Trading Centers in nearly every province, and provincial grid companies are receiving less revenue for their transmission and distribution services [Z1] (specifically for power transacted via Power Trading Centers). “Missing” in east coast power pools, however, is locally-curtailed renewable power capacity. In fact, multiple NDRC and NEA policies issued in 2016 and 2017 require that grid companies prioritize consumption of renewables over coal generation. Due to these policies, and in combination with continued power demand growth, official NEA data indicates near-zero curtailment rates for renewables along the east coast (excepting 9% curtailment for wind in Hebei, a figure on a downward trend). Therefore, with little-to-no curtailed renewables near eastern industrial zones, availability of REDP appears limited to pilot projects and special one-off demonstration transactions.


Despite that, there are today several options and mechanisms corporations might explore in pursuit of the 100% RE goal:


(1)    Pilot projects. Pilot projects are a hallmark of Chinese policy rollout. The government’s pragmatic approach is to first test policy measures in small scale, in what may be considered as “policy R&D”. Successful measures continue with refinement and broader implementation. Pilot REDP projects are emerging around the country. For example, in Zhangjiakou, a city nearby Beijing that will host the 2022 Winter Olympics, wind and solar power are on offer to local consumers as an incentive to attract new industry. Chinese power sector stakeholders across the country recognize: renewable energy is a central piece of the power sector’s future; power trading from intermittent sources is a practical reality which must be prepared for; and that direct procurement of renewable energy is increasingly important to large, influential corporations. Provincial grid companies, Power Trading Centers, NRDC and NEA stakeholders are open to structuring pilot REDP solutions with motivated industrial consumers.


(2)    Cross-province REDP. Cross-province, or inter-provincial REDP, is another current hot topic. This is a mechanism via which power generators with otherwise-curtailed power sell wholesale to power-hungry eastern provincial grid operators, or even directly to large industrial consumers, via one of the two national-level Power Trading Centers. For instance, hydropower from southwestern Sichuan is increasingly making its way eastward, the buyer typically being a provincial grid operator (e.g., Zhejiang State Grid Company). But perhaps most interesting is the January 2016 case of 30 Shandong large industrial power consumers that purchased 9,000 GWh from 824 power generators—58% solar, 33% wind, 8% coal—from Shaanxi, Gansu, Qinghai, and Ningxia via the Beijing Power Trading Center. This transaction served as a pilot for how to structure delivery of low-cost clean power from resource-rich western regions to the east coast of China. In a similar vein, in late 2018 a 1100 KV ultra-high-voltage DC transmission line will connect the northwestern Xinjiang province—rich in solar and wind resource and installed generation capacity—to the eastern and industrialized Anhui province. This power transmission project, with a cost of ¥41 billion RMB, is the highest voltage, largest capacity (24,000 MW), and longest distance (3,324 km) of its kind in the world. Once operating this transmission line will send large volumes of solar and wind power across the country for consumption.


(3)    Creative solutions & re-bundling. Last, there are other intermediary solutions that corporations might consider on the path to 100% RE in China. To share one simple idea: if REDP is not available in a specific province (e.g., Jiangsu), but there are significant savings to be achieved via direct fossil purchase, industrial consumers are going to transact simply for economic reasons. Why not have Sustainability leadership and China Procurement leadership coordinate to funnel direct purchase cost savings toward the purchase of China Green Certificates (or a different green token), thereby re-bundling the green attribute to form a cost-neutral “synthetic REDP” solution? Re-bundling in this manner can allow for significant percentages of RE purchase, and several multinational corporations are currently investigating this option.


In conclusion, there is much reason for optimism for the RE 100 goal in China. Given the magnitude of power sector reform, the market has progressed at lightning speed over the past two and a half years, along with it opening new possibilities for RE procurement. There are significant cost savings and new green energy options available in every province today, and opportunities to achieve 100% RE in a handful of provinces. Creative solutions and pilot REDP initiatives are inline with stakeholder interests and are open to first-moving corporations wanting to seize the opportunity.