MUCH of what China has achieved in the past three decades—its impressive economic growth, the rise of its global stature and the considerable improvement of living standards for hundreds of millions of people—is attributable to one decision: ditching the Maoist model of central-planning that had shackled the economy. Yet some important industries have yet to embrace the market. Power generation is one. As China struggles to reconcile its soaring energy demand with its need to clean up an increasingly toxic environment, reform is becoming more urgent.
China knows it must reduce its reliance on dirty coal and increase its use of (more expensive) renewable energy. Of the new power-generating capacity that China built last year, renewables such as wind and solar power for the first time accounted for more than the share made up of fossil fuels and nuclear energy.
China wants to satisfy the surging electricity demands of its increasingly urban population and to keep its industries running smoothly. It does both reasonably well and blackouts are rare. But officials fret about how grumpy—and vocal—people are becoming about the poisonous air that envelops so many Chinese cities. (An annual international marathon race, pictured above, took place in Beijing on October 19th in air that was nearly 14 times more polluted than the safety limit recommended by the World Health Organisation.) China is aware that its standing abroad will partly depend on its efforts to limit carbon emissions. This will involve weaning itself off coal, which supplies nearly 80% of its energy.
Progress is being hampered by a largely unreformed power industry dominated by large state-owned enterprises (SOEs) which operate under a mix of rigid planning, secrecy and poor regulation. Power suppliers have too little incentive to compete on price, efficiency or greenness. Two international NGOs, the World Wildlife Fund and the Energy Transition Research Institute, describe the SOEs that control all transmission and distribution and most non-renewable generation as “unregulated corporate monopolies”. Their bosses are usually appointed by the central government, but they often ally with regional leaders to resist oversight by a variety of largely toothless regulators.
One problem is China’s system for “dispatch”; that is, determining which power sources will supply electricity to the grid at any given time. A report by the Regulatory Assistance Project (RAP), an American NGO, notes that in most countries dispatch decisions are made in order to minimise costs (including environmental ones). In China regulations would appear to encourage a similar approach: grid-operators are supposed to give priority to electricity supplied by more efficient and greener producers. In practice, grid-operators are more inclined to help coal-fired plants recoup the cost of their investments. Both sides are members of a cosy club of energy-related SOEs. Even if the grid-operators were to try to stick to the rules, they would struggle. Coal plants can easily conceal how much they waste and pollute.
Generators of wind and solar energy thus find themselves handicapped by more than just the high cost of their technologies. Much of China’s most cleanly produced energy is wasted. For wind power, rates of “curtailment”, or energy generated but not taken up by the grid, have improved in recent years as grid systems have become better able to cope with the technical challenge of handling such unsteady sources of power. But the rate still stands at about 10% nationwide. In Britain it was less than 2% between 2011 and 2013.
The government launched pilot reforms in five provinces in 2007 to encourage more efficient dispatch, but they achieved little and have not been expanded. Max Dupuy of RAP’s Beijing office says the scheme met opposition because of its failure to compensate coal-fired plants for the revenue share lost to clean producers.