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China's policymakers are focusing on energy security and
economic stability rather than decarbonization in the short term as
the country faces heightened uncertainty arising from the
Russia-Ukraine war.
With strong economic headwinds amid rising inflation and
geopolitical tensions, Beijing has forsaken a national energy intensity
target for 2022 while asking local governments to ensure
energy supply to Chinese businesses in recent weeks.
"The COVID-19 pandemic has continued globally and there is a
lack of momentum in the world's economic recovery," Chinese Premier
Li Keqiang said at the opening of the National People's Congress 5
March. "There are obviously more risks and challenges to our
national development this year."
"We must ensure that Chinese businesses and households have
normal access to electricity," said Li, adding that China will have
"appropriate flexibility" for its energy intensity target this
year.
In 2020, China also refrained from establishing an annual energy
intensity target due to the pandemic. Government figures showed the
world's largest energy consumer and GHG emitter achieved a 0.1% reduction that
year.
Nevertheless, the government has maintained its target to cut
energy consumption per unit of GDP by 13.5% in 2021-2025. The
decarbonization process will be monitored in "a comprehensive way"
for the five-year period, according to the latest policy
documents.
"Not setting an energy intensity target for 2022 … is in line
with the national policy priority to stabilize economic growth this
year," said S&P Global Commodity Insights' Lara Dong, ENR
research and analysis director for power.
China, which relies on fossil fuels for over 80% of its primary
energy supply, has long adopted the "dual-control" policy of
capping energy intensity and overall energy consumption in each
province to cut CO2 emissions. The limits are related to the
national energy intensity target.
But analysts said the policy contributed to the widespread power
shortages in the latter part of last year, when many local
governments rationed electricity to stay
within their full-year quotas.
The electricity supply disruptions were partly to blame for
China's economic slowdown. The world's second largest economy
registered a 4% growth in the fourth quarter of last year, and Li
said the government is aiming for a full-year expansion of 5% for
2022—the lowest in decades.
China targeted a 3% cut in energy intensity last year and
eventually achieved a 2.7% reduction. Without a
definite goal this year, China is hoping to reduce disruptions to
economic activities by enabling more flexibility in the
dual-control policy implementation, Dong said.
Threats from rising prices
Separately, the government has vowed to control inflation and
ensure the security of energy and food supplies this year. China is
the world's largest importing nation of grains, coal, oil, and
natural gas, whose prices have soared in international markets amid
supply disruptions arising from the Russia-Ukraine war.
China's national emissions trading
scheme currently covers the power sector, and observers believe
it could be expanded to include the building materials, nonferrous
metals, and refining and petrochemicals sectors in the next phase.
But Dong suggested this might not happen this year as the
government will be reluctant to add carbon cost burden to
enterprises.
Analysts also believe the government will control electricity
tariffs despite its recent efforts in liberalizing China's power market, where
utilities are experiencing rising fuel costs.
"There is a limit to the extent to which the Chinese government
will allow markets to play [its] role," said Michal Meidan, gas
research director at the Oxford Institute for Energy Studies.
"Ultimately … the Chinese leadership wants to retain its ability to
control outcomes of the pricing mechanism."
Having committed the country to peak CO2 emissions by 2030 and
carbon neutrality by 2060, Chinese President Xi Jinping is widely
expected to seek and claim a third term in the Communist Party
Congress this autumn.
"2022 is a politically important year, and nothing can go wrong
this year," Meidan told a virtual forum earlier this week. "So the
stability, security, reliability of supplies, and the affordability
of energy are things that the Chinese leaders need to deliver well
before the 2060 target."
Political will intact
However, Li also promised that China will continue to push for
aggressive expansion of renewable power generation capacity in his
speech.
"We will plan and build more large wind and solar projects, and
we will construct the supplementary infrastructure to increase the
ability of our grid in absorbing renewable electricity," he
said.
Official figures showed China
renewable capacity additions totaled 134 GW last year, just shy of
an all-time high of 139 GW in 2020.
Going forward, incremental usage of renewable electricity in
2021-2025 would not be counted under the energy consumption cap in
the dual-control policy implementation. The government has also
been providing tax breaks and low-interest loans to
low-carbon project developers.
"I think the Chinese leadership is genuinely committed to this
[energy] transition," said David Sandalow, co-director of the
Energy and Environment Concentration at the School of International
and Public Affairs at Columbia University, in the same forum.
"There are no known climate [change] deniers in the Chinese
government."
Following severe floods in the country in recent years, China's
leaders believe continued renewable expansion will help counter
climate change, Meidan said. This development can also enhance
China's energy security in the long run against the volatile
international markets of fossil fuels, she added.
China has targeted to have at least 30 GW of battery storage by
2025 and 1.2 TW of installed wind and solar power by 2030. The
country is currently the world's largest equipment supplier in
various renewable segments, including photovoltaics.
"The energy transition dovetails with China's desire to become a
global industrial leader in clean technologies," Meidan said. "If
the Chinese industry is not fit for purpose in an increasingly
carbon conscious world, it will become a liability not just for the
sake of the world but also for China's economic and political
sustainability."
Posted 11 March 2022 by Max Tingyao Lin, Principal Journalist, Climate and Sustainability
This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.