China's dilemma: growth vs the environment

China welcomed a new set of leaders last week: the National People's Congress endorsed Xi Jinping as president on March 14 and Li Keqiang as premier the next day. Both are expected to serve two five-year terms.

Under the helm of the previous administration, China saw investment in clean energy surge from $US0.66 billion in 2002 to $US65.1 billion last year, thanks to favourable policies. Despite slower growth in recent years, the Asian country still leads the world in wind energy investment and deployment, and wind and solar manufacturing.

In the short term, the new leaders will have to deal with the proposals put forward – and issues left over – by their predecessors: relatively speaking, the wind market in China has had a tough 18 months. It attracted 12 per cent less investment in 2012, after grid accidents in the preceding year prompted the government to limit development. Nonetheless, it remained the world leader in terms of annual installed wind capacity, according to Bloomberg New Energy Finance, with 15.9GW of onshore turbines compared with 13.2GW for the US, in second place.

This year looks likely to be a better one for Chinese wind projects, after approvals picked up speed at the end of 2012 and several large wind bases resumed construction. The incoming government may have to tackle the delayed payments to supply chain companies for projects that were delayed for more than two years. These delayed payments could amount to nearly $US10 billion, with a significant portion still to be accounted for.

China's other big clean energy sector – solar – saw investment surge 80 per cent last year, thanks to incentives such as the feed-in tariff. But its solar companies are struggling after taking on debt to expand supply, leading to a glut that forced down prices and squeezed profits: on March 18, Suntech became the first company from mainland China to default on its bonds, after failing to repay $US541 million of notes due on March 15, breaching terms of other outstanding loans. A phase of serious consolidation in Chinese solar now appears to be underway. Local government or state-backed agencies began to limit their support to solar companies, with only 12 able to obtain credit lines from the China Development Bank, according to a Bloomberg News report.

As well as encouraging the consolidation of solar companies, support to the market appears to be on the new leadership's agenda, after the government filed a proposal on March 10 for a new support framework for PV projects. While the current feed-in tariff sets a uniform subsidy of CNY 1/kWh ($US0.16/kWh) for all locations, the proposal is to set rates based on insolation levels. In addition, the government is likely to cancel the Golden Sun program – the capex-based subsidy without measures to facilitate grid connection or encourage high project quality. Overall, the new proposal sends a clear signal that the aim is a sustainable PV market – not just a big installation number.

As well as implementing new domestic policy, the incoming leadership will also have to address international trade spats relating to solar components. For example, the European Commission is currently investigating whether Chinese producers of solar panels receive trade-distorting government aid and then sell them into the EU below cost.

In terms of the wider energy context, on March 10, the government announced that the State Electricity Regulatory Commission will be integrated into the top energy authority – the National Energy Administration. This move should streamline management processes and will likely be positive for connecting renewables to the grid – one of the major bottlenecks to clean energy deployment in China. This reorganisation is part of a substantial government restructuring, with the aim to form only a few big ministries looking after different aspects of the economy.

The environmental issue that has gained media attention in recent months has been the smog blanketing northern China. Delegates at the National People's Congress showed their anger over the government's handling of environmental issues when over a third of those present vetoed or abstained from the ballot for the candidates to the environmental protection and resource conservation committee. This is a markedly high level of opposition for such votes in the Congress.

In his briefing, new premier Li promised to crack down on pollution, and on March 15, Wu Xiaoqing, vice environment minister, presented some of the policies to control air pollution. In particular, three areas will participate in a pilot program for controlling total coal consumption. The scheme is set to be implemented this year and will eventually help set long-term coal consumption targets for these regions.

The areas are the Beijing-Tianjin-Hebei province region, the Yangtze River Delta region around Shanghai, and the Pearl River Delta region in south China's Guangdong province.

Outside the hall where Li spoke, the level of PM2.5 – the small particulates posing the greatest risk to human health – was 364 on March 16, according to Beijing city government readings. The World Health Organization recommends 24-hour exposure to PM2.5 of no more than 25.

It remains to be seen which will win out for China's new leaders: development or the environment. Economic growth is clearly top of the agenda: Li pledged to open the economy to more market forces and strip power from the government to achieve annual growth of 7.5 per cent through 2020.

EU carbon

European Union allowances (EUAs) for December 2013 tumbled last week to below €4.00/tonne as auctions continued to pump supply into an already bloated market. EUAs dropped 11.3 per cent by the close on Friday to €3.78/t, compared with €4.26/t at the end of the previous week.

They slid below €4.00/t as demand fell in an auction of new permits on Monday, and the EU cancelled an auction for the first time on Tuesday as bids failed to reach a reserve price. EUAs tumbled further on Wednesday, ending trading at €3.52/t, the lowest closing price since January 31. Permits spiked on Thursday morning to €4.23/t after the European Parliament voted to keep a reference to tackling carbon market oversupply in the assembly’s report on the EU’s energy policy through 2050. EUA prices fell back later in the day.

UN Certified Emission Reduction credits for December 2013 lost 8.6 per cent last week to close at €0.32/t.

This article was originally published by Bloomberg New Energy Finance. Republished with permission.