The electricity sector components of China’s 13^th Five Year Plan reaffirm and strengthen previous commitments to establish electricity markets and to eliminate the generation quota system. The Chinese government has also committed to further reducing air pollution and greenhouse gas emissions, as with the target to reduce JingJinJi PM_2.5 emissions in 2020 by 25 percent. A GDP growth target of 6.5 percent per year has been set, with increased economic contributions from the service sector, continuing a 15-year trend of producing more GDP while burning less fuel. At the same time, Chinese policymakers are deciding how to deal with excess coal-fired capacity.

We have written and will continue to write about the multi-faceted challenge of generation overcapacity and its effects. In addition to our earlier recommendations, we suggest one additional policy to help address overcapacity—a national emissions performance standard (EPS), not only for CO₂, but also for NO_X, SO_2, and mercury, as provided by the model EPS rules developed for the New England region of the United States.

An EPS is a performance-based emission limit (in kg/MWh) for specific pollutants, such as NO_X, SO₂, CO_2, and mercury emissions. EPSs are applied to retail suppliers who sell electricity into designated geographic regions (and, similarly, to large end users who buy electricity directly from the generator), regardless of the age of particular plants or the type of fuel or technology used. In other words, as each retailer and large end user goes about buying a portfolio of output assembled from contracts with various generators, the EPS requires that each retailer’s (or large end user’s) portfolio meets a standard.

California’s EPS, emissions trading system (ETS), and renewable portfolio standard (RPS) are backbone policies to help the state to comply with its legislative requirements to reduce greenhouse gas emissions to 1990 levels by 2020 and then, per Gov. Jerry Brown’s Executive Order, to 40 percent below 1990 levels by 2030. California’s EPS of 500 kg CO₂ per MWh ensures that electricity consumed in the state is at least as clean as that produced by a new combined cycle natural gas plant. The EPS applies to in-state electricity contracts and to the first seller of imported electricity, and is designed to work with California’s ETS serving, in effect, as an emissions ceiling for all electricity generated in-state or imported from other states, Canada and Mexico. Qualifying renewable energy imported into California is also eligible to help meet the state’s recently enacted renewable portfolio standard of 50 percent by 2030. The RPS serves as an emissions floor for in-state and imported electricity. Together, the EPS and RPS provide certainty to future emission trajectories to help meet California’s greenhouse gas goals in 2020, 2030, and beyond.

How Could an EPS Work?

Chinese policymakers could initially set the EPS at a level based on modeling performed by, say, one of the many excellent research universities that work with energy and environmental agencies. Once set, the EPS would decrease by 2 to 3 percent each year to help accelerate retirement of inefficient thermal plants and reduce curtailment of renewable energy. Fixing this for a significant period (ten years perhaps) into the future provides a clear signal to guide generator investments and energy planners.

Once an EPS is established, each retailer (or large end user) would have to show that the portfolio of contracts it has assembled with various generators meets a standard overall in order to be eligible to sign and implement a bilateral contract with an industrial end-user. Additional policy considerations include:

• At what point(s) is the EPS applied—to fleets of thermal power plants, province-wide, or in some other manner?
• What agencies are responsible for designing, implementing, and enforcing the EPS? The Ministry of Environmental Protection (MEP) and National Development and Reform Commission (NDRC) are the prime agencies responsible. But local Environmental Protection Bureaus (EPBs) and local Development and Reform Commissions (DRCs) would also play an important role.
• What additional or upgraded information systems are required to ensure compliance? The existing continuous emissions monitoring systems (CEMS) could form the backbone to compliance determinations, and one could also see linkages to the national greenhouse gas trading system that will be implemented during 2017.
• How does the EPS work in conjunction with other emissions requirements, such as cap-and-trade programs? (This is a question we’ll take up in a later post.)

Modeling by China’s research institutions could help coordinate the EPS with other air quality policies and determine potential air pollution reductions and compliance costs. Ambient air quality models could be used to assess the degree to which an EPS could help to achieve State Council air targets, such as the 25 percent reduction in PM_2.5 in Beijing by the end of 2017.

To ensure effectiveness, the process to set the EPS should be analogous to how New Source Performance Standards (NSPS) are set in the United States, or Best Available Technique (BAT) levels are set in the European Union. These are output-based emission standards that reflect end-of-pipe abatement techniques. California’s EPS was set at the level of the best-performing natural gas plant, reflecting the dominant fossil fuel mix in that state. For China, which has many fewer natural gas plants, the EPS could be set at a level reflecting a mix of the most efficient thermal plants and zero-emissions renewables, hydro, and nuclear. This recommendation contrasts with China’s current heat-rate-based policy, whereby the level is set where approximately one-half the existing plants are able to meet the standard without further abatement.

EPS Complements Power Sector Reform Efforts

China adopted world-class emission standards for power plants in 2012, and closed more than 100 GW of older, inefficient power plants smaller than 200 MW through its上大压小 (Shang Da Ya Xiao) policy, (which calls for building large-capacity, high-efficiency plants and closing small plants) during the 11^th and 12^th FYPs. And NDRC’s “Document 9” (2015) sets out a broad vision for power sector reform. However, several competing factors hinder China’s ability to meet these policy goals:

• Although old plants have been closed, 54 GW of new thermal plants were built in 2016;
• The generation quotas for existing thermal plants have decreased from an average of 5,865 hours in 2005 to 4,739 hours in 2014, and then decreased further to less than 4,000 hours in 2015.
• Overcapacity in thermal power and balancing areas limited to provincial boundaries have led to higher curtailment rates for wind generation, of 26 percent in the first quarter of 2016, with rates in Jilin, Xinjiang, and Gansu approaching 50 percent.
• Generation quotas are expected to disappear by 2020, leaving generating companies seeking new avenues to ensure utilization of their existing plants. Ending this system alone will not ensure closure of inefficient plants or reductions in overcapacity. An EPS can help to bridge this gap and encourage fuller utilization of newer, more efficient plants.

One concern is that sellers may proffer, or purchasers may prefer to contract with, the least efficient thermal plants because they may have the lowest direct costs. Such an outcome further strands use of the newest and most efficient plants, and does not help to address the significant curtailment of renewable energy. It also continues to impose high external costs on consumers and the environment, in the form of increased air pollution and environmental damages, whose value is estimated at 3.5 to 8.0 percent of GDP. By discouraging use of the least efficient thermal plants, the EPS drives those units out of the market and enables greater utilization of more modern, efficient thermal plants and renewable resources.

The EPS bridges the environment-energy “seam,” is consistent with Document 9’s vision to have the power sector support environmental progress, and helps to overcome the limitations imposed by the existing provincial balancing area structure. Today, little electricity is imported/exported across provincial boundaries, which makes it difficult for renewable generation in the north and west to reach population centers in the east and south. Bilateral contracts can be agreed upon by entities in any jurisdiction; applying an EPS to the contracts would help to unlock the renewable energy that is currently curtailed due to the provincial boundary conditions. Larger balancing areas in Europe and the United States have helped to improve reliability and sends a strong message to grid companies to invest in the resources needed to more fully integrate renewable resources into the grid.

An EPS Locks In Environmental Progress

An EPS can help to guarantee that the 13^th FYP’s objectives (and targets in later years) will be achieved by locking in the environmental benefits from increased utilization of renewable and non-emitting generation. By compelling coordination between energy and environmental planning agencies, an EPS can help to break down China’s existing siloed levels of responsibility, which have impeded integration of these disciplines.

Achieving goals to aggressively reduce air pollution and to fully utilize China’s cleanest power generation sources requires multiple policies and strengthened inter-departmental coordination. An EPS is an additional tool that China can deploy to ensure that its power sector reform efforts complement those to improve air quality. As demonstrated by California, an EPS can also work to ensure progress to reduce greenhouse gas emissions. And, by discouraging use of inefficient thermal power plants, an EPS can help to alleviate China’s serious power plant overcapacity by accelerating the retirement of these units.