China prioritizes short-term energy security and economic stability over decarbonization

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.