With a capacity of 3,300 MW, Sichuan’s Ertan Hydropower Plant—once China’s largest—promised to alleviate provincial energy shortages and spur economic growth when it began generating electricity in 2000. However, in what came to be known as the “Ertan Incident,” provincial officials halted all clean energy generation in Sichuan soon after the plant came online. The Sichuan power company was obligated by law to buy half of its power from coal-fired power plants, regardless of their inefficiency or environmental impacts. To keep the coal burning, the dam was forced to operate at a major financial loss.

Such inefficiencies prompted central party officials to launch reforms of China’s electricity regulatory structure. In 2002, the State Council unveiled the “Electrical Power System Reform Scheme” to create a more market-based power system. Since then, China’s power sector has rapidly expanded greener generation sources. In 2016 alone, China installed 34.2GW of solar PV  and 23.4GW of wind capacity – nearly 50 percent of the world’s new solar and wind capacity. Yet, many of these renewable energy sources remain untapped as provinces continued to build their own local coal-fired plants.

China’s wind curtailment rate (the percentage of wind energy that is not used) doubled from 2014 to 2017, reaching 17 percent—meaning that almost one-fifth of the energy generated by wind farms was “wasted” due to grid failure, lack of storage, or local government policies favoring other types of energy, particularly coal-fired power. The solar curtailment rate may be as high as 30 percent in some provinces.

To decrease the growing amount of wasted wind and solar, the national government has pushed utilization of renewable energy in its new pollution control policies and regulations. The 2015 update to the Air Pollution Prevention and Control Law specifies renewable power generation as a method for improving air quality. Meanwhile, provincial and local governments continue to invest in coal-fired plants because existing tax and other regulations incentivize fossil fuels.

Before his presentation at the Wilson Center on June 12, we interviewed Christopher James on China’s energy and electrical grid reforms and how energy regulation impacts the environment in China. As a principal with the Regulatory Assistance Project (RAP), an NGO dedicated to increasing economic efficiency and reducing environmental impact in the power sector, James has worked over the last nine years with government agencies in China to improve air quality and energy planning processes and regulations.

Q: When people hear the word “power grid reform” they may think this is a real snoozer of a topic. What do you tell to help people to help them understand the importance of your work in China?

A: China and India are unique in the world: They are the only countries that do not have economic dispatch of energy resources. China had a policy where all thermal plants received the same number of operating hours, regardless of their heat rate or economics. We have been witness to the problems this has caused, which we see in the rapid decline in operating hours. Additionally, you’ve got quite an overhang in the capacity, where there’s very much more capacity needed than is required to keep the lights on.

If China actually moves to an economic-based power system, it would achieve a number of benefits. First, it would advantage the cleanest and most efficient units because they tend to have the lowest operating costs, whether we’re talking about coal, wind, or solar. This will also result in a decline and shutdown of older, inefficient units. We’re really talking about getting rid of the old, dirty plants that really shouldn’t be operating anymore. There’s no need for them; they create local air pollution, and China has the most efficient plants in the world that they aren’t using. They’re also not using their wind and solar. It’s an opportunity to improve the economics for consumers, whether you’re a residential or industrial customer, as well as to use good energy policy as part of the way that you will achieve improved air and water quality.

Q: How does China’s most recent update to its energy law and five-year targets change the landscape for reforming the power grid and shift energy production and consumption to cleaner sources?

A: The 13th Five-Year Plan energy targets include an element that says provinces are supposed to start pilots where large energy consumers can contract directly with load-serving entities (LSEs). The LSE is the company that contractually buys the electricity, not the generator itself. Industrial electricity prices are very high in China relative to residential prices and to that of other countries and this is disadvantaging Chinese industry. There’s a danger however, that large consumers will just go to the lowest common denominator and contract directly with the cheapest and dirtiest energy producer, which could exacerbate air and water pollution.

At RAP, we are recommending that, as part of the eligibility criteria to participate in these contracts, there be some sort of environmental performance standard that is placed upon the LSE or is done at the provincial levels so that you have an output emissions standard that applies to CO2, NOx, SO2, etc.

Q: What about China’s updated air pollution law?

A: China’s air law, which was strengthened and has been in effect since January 2016, has the legal underpinnings necessary to accentuate that environmental performance standard recommendation. Article 32 of the new air law states that air quality plans must contain clean energy policies to also help improve air. Article 42 directs the grid companies to do green dispatch. The law, as is typical in China, defines neither clean energy policies nor clean dispatch, but I think it’s incumbent upon folks like us to help define what we’d think those terms mean.

Clean energy policy does not mean just burning clean coal. We’re talking about using China’s excellent wind and solar resources to full utilization as we’ve seen in places like Texas and Denmark, and having the air regulators understand the importance and the contribution that these clean energy policies can make towards improving local and provincial air quality. Doing so in these air plans means that you’re not just relying on end-of-pipe controls, which are expensive to build and maintain; you also continue to use assets that may not be necessary. Today, these air quality plans have not included a lot of cost-effective emission reductions that could be achieved were they to include things like solar and wind, as well as energy efficiency projects and programs.

Q: China is working towards “green dispatch,” as opposed to the current “equal-shares dispatch,” which will de-incentivize inefficient and expensive coal-fired generation that leads to curtailment of wind, solar, and other renewables. How successful has China been so far in making these reforms, and is there momentum behind this effort?

A: On the air quality side, we are seeing some improvements in the overall level of pollution. There’s still a lot of air pollution episodes that occur, but one can say that there’s a general trend of improving air quality, even though it’s still unhealthy to hazardous in most cities.

On the energy side, it’s been kind of uneven. There’s some excellent policies on building wind and solar. But they’re not using it. They’ve also built more power plants. Now, we’ve seen some retrenchment from that as the approval of many of these power plants has been removed, just at the end of 2016, but the national level government needs to have strong oversight of local and provincial level officials. Local officials look at building more power plants as economic development, even if the power plants aren’t used. There really needs to be much stronger oversight by the central government to remove this market distortion of building these plants that aren’t used.

Q: What else can be done to ensure a smoother and quicker transition to greener energy generation?

A: There also needs to be strong oversight to work on the economics, so local officials have the ability to tax electricity whether it’s generated in the province or not. Right now that’s another barrier because local officials can tax generation that occurs within the provincial boundaries, but they can’t tax imports or exports. But the successful model everywhere else in the world is to have larger balancing areas that make for a more reliable grid. It uses your resources most effectively, prevents brown outs and black outs, and avoids the need to have a lot of unnecessary power plants around.

It’s also a money issue. How much money does the province need, how much is it getting right now, and how can we preserve our revenue source while also moving towards a market-based electricity system that utilizes resources more effectively and also avoids the need to build these expensive power plants?

Q: What’s the role of Chinese consumers in the process? How do they engage (or not) in pushing forward a market-based power grid?

A: This is a good question, because right now the role for consumers is being carved out at the large industrial consumer level. To date, China’s electricity tariff structure has largely protected residential consumers. They have very low electricity rates relative to industrial customers and even relative to other jurisdictions. So there haven’t been a lot of incentives for residential consumers to play a role in what this might look like and also to encourage more efficiency. We know that China has put solar thermal on many apartment buildings and installed LED lightbulbs and those kind of things, but at the individual consumer level, I think that is still an open question.

So the question is definitely not a stale one, or not worthy of discussion. I think at this point the individual consumer’s level of responsibility is still something that’s being worked out and that’s something we’ll see over the next several years.

Q: China’s coal sector employs something like 50 million-plus people, but we have seen numbers that China’s renewable sector now employs more than 3.5 million, and is expected to employ 13 million by 2020. Are there any provinces or areas in China that are aggressively working towards depending on renewables for jobs and economic growth?

A: That’s definitely one of the reasons why China has committed to additional renewables; they see this as economic development, and privately–and now perhaps publicly–they have applauded the announcement by the U.S. government to withdraw from Paris because, at a certain level, it removes the U.S. as a competitor. China sees clean energy as an economic development tool and the fact that a large competitor may be not at the same level as it was before [is seen as a good thing for China]. Clearly, states are drivers, but we certainly won’t see the national level commitment in the U.S. over the next 3.5 years that we had before, so I think the Chinese government is quite happy about that, and I think they see that also as an opportunity to export their technologies to other countries.