The Power Sector Reform guidance issued in March recognizes the need for a major revamp of power sector planning, and official announcements indicate that the 13^th Five-Year Plan is taking up the task. This will be very important for reaching the Chinese government’s goals for the power sector—including goals for emissions reduction—at reasonable cost.

Over the past decade, the power sector in China has become the world’s largest. Electricity consumption has grown at a remarkable pace—10 percent or more per year—and capacity additions have run at a similar rate. Between 2010 and 2013, for example, China added 80 GW of new generation annually, and investment continues to grow.

Despite this success, China has had difficulties with power sector planning and has struggled with the challenge of coordinating investments across different types of resources. The most recent five-year plans (the 11^th and 12^th) did not include a national plan for the electricity sector, as was previously done. Instead, in the 12^th FYP, national plans were prepared separately for hydro, nuclear, coal, wind, solar, biomass, gas, and regional grids. Without an overarching plan, acquisition of these resources was poorly coordinated.

There have also been problems with coordination between national level and local plans. Finally, the power sector plans that do exist have only a weak connection with actual resource investment decisions, which are instead driven by an opaque and decentralized project approval process.

The consequences of these shortcomings are considerable, including:

• Significant curtailment of renewables production (“wasted” renewable energy, chiefly wind and hydro). This has beenpartly because of mismatches of generation investments with the grid, including poor geographic dispersal of investments in wind, and also due to growing numbers of inflexible combined heat and power plants.
• Overinvestment in coal-fired capacity and underinvestment in flexible resources and peaking capacity.
• Missed opportunities to reduce emissions in a low-cost fashion, such as through investments in end-use energy efficiency and distributed renewables.

Because the government has recognized these problems and is working toward practical solutions, RAP offers a brief review of relevant international experience and suggestions for further reading. In the best practice cases from other countries, electricity planning identifies a least-cost mix of investment in resources—demand-side resources, generation resources, and transmission resources—that will meet reliability and environmental goals. Even where governments have “liberalized” the power sector, detailed planning is crucial in order to design markets to deliver desired outcomes and also to test whether existing market designs are producing those outcomes.

In the United States, integrated resource planning (IRP) began in the 1980s and a majority of states now utilize it in various forms. Under IRP, the utility prepares a cost-effective plan for meeting customer demand by evaluating available supply-side and demand-side resources on an equal basis. Inclusion of demand-side resources—particularly end-use energy efficiency—into the process is crucial as energy efficiency is typically a less expensive and cleaner alternative to new power plants. The basic components of IRP are:

1. Forecasting baseline peak and energy demand.
2. Determining available resources and costs. Resource options include conventional power plants and end-use energy efficiency, as well as investments in distribution and transmission lines. Costs may include externalities such as carbon and conventional emissions costs.
3. Finding the most cost-effective mix to meet forecasted needs.
4. Analyzing risks through scenario and sensitivity analysis. Risks may include variation in factors such as fuel prices, externality costs, load growth, and hydro conditions.
5. Collecting and adjusting for stakeholder input through various stages of the planning process.

The Northwest Power and Conservation Council (NPCC) engages in a good model of IRP. The NPCC leads the planning efforts in the region consisting of four U.S. states: Washington, Oregon, Idaho, and Montana. The region’s planning approach has gradually become more sophisticated since the NPCC’s creation in 1980, but, from the beginning its work has been based on the legal requirement to consider the full costs associated with various resource options, including environmental costs. In addition, the planning process is required by law to treat energy efficiency not just as a resource, but a “priority” resource.

Since its creation, the NPCC has issued six plans. The 2010 Northwest Power Plan (the latest completed plan) looks at thousands of different possible resource combinations and considers the total (internal and external) costs of each of these. To deal with risk, the NPCC evaluates how the costs would vary under hundreds of hypothetical scenarios—all over a 20-year planning horizon. The 2010 plan concluded that 85 percent of baseline demand growth could be met through energy efficiency.

International best practices in planning offer some examples from which China can draw. Some important first steps that China can take include:

• Clarify planning roles, responsibilities, and functions and ensure that these roles are coordinated. Government agencies could take a more active role in overall demand forecasting (not just peak forecasting) and identifying resource needs, or power sector companies could do so with effective government oversight. Planning processes could be national or regional in scope.
• Integrate environmental goals into planning processes. Environmental goals should be well integrated into electricity planning so that the electricity sector contributes an appropriate amount to overall emission reductions.
• Implement transparent and accurate valuation of different resource options, including the full social cost of emissions. Within planning processes, it is important to accurately determine the value of different kinds of resources and technologies, based on their function in the power system and their contribution to air quality and CO₂ goals. In general, developing analytical tools to support more transparent and accurate valuation of different resources should be a priority for Chinese planners. It is important to have greater regulatory oversight of grid company transmission plans, with plans evaluated on the basis of their impact on reliability, cost-effectiveness, and emissions. We also recommend better efforts to evaluate the costs of demand response and energy efficiency, particularly the costs of investments made by grid companies under the end-use energy efficiency obligation imposed by the government. For all resources, valuation should take into account the need for flexible resources to support the significant planned scale-up of wind,solar, and nuclear generation in China.
• Establish a level playing field for different resource options. To achieve a least-cost resource mix, demand-side, generation, and transmission resources should be able to “compete” against each other, based on their different emissions, costs, and other characteristics. Planning should allow for comparison across different resource options. This will require more coordinated planning processes, so that, for instance, the generation planning process incorporates information on potential demand-side and transmission investments.
• Ensure that planning is connected to investment. The desired resource mix identified in power sector plans should guide investment decisions. Carefully‑designed mechanisms—including competitive mechanisms, where appropriate—are needed to mobilize investment in a cost-effective, timely, and reliable manner.

More effective planning will help China achieve its emissions and other power sector objectives. It will enable China to better harness market forces to produce the kinds of investments—in clean resources and end-use efficiency—that will lower the costs of electricity, protect the environment, and create a more reliable and flexible power sector. International examples, adapted to meet China’s particular conditions, offer intriguing possibilities. We look forward to helping Chinese policymakers in this effort.

Additional Resources:

• Low-Carbon Power Sector Regulation: International Experience from Brazil, Europe, and the United States (for World Bank)
• Recommendations for Power Sector Policy in China
• Efficiency Resource Acquisition Program Models in North America
• Best Practices in Electric Utility Integrated Resource Planning
• The Treatment of Energy Efficiency in Integrated Resource Plans: A Review of Six State Practices
• 10 Questions to Ask About Integrated Resources Planning
• PacificCorp Integrated Resource Planning
• Effective Mechanisms to Increase the Use of Demand-Side Resources