From the barren sands of the Gobi Desert to the high grounds of the Tibetan Plateau, China is building one mega renewable energy project after another. Its combined hydro, wind, solar and nuclear energy capacity topped 1.4 billion kilowatts by the end of October, accounting for nearly half of the country’s total power generation potential, official data shows. 

The sheer scale of the effort means China may have reached a major inflection point this year, according to some analysts: for the first time, its sources of renewable energy are growing fast enough to meet the increase in the country’s electricity demand.  

That means China — currently the world’s largest polluter — will on paper need to use less electricity generated using fossil fuels, in turn meaning its carbon emissions will start to decline six years ahead of the government’s target of 2030, according to a recent report published on the UK-based nonprofit Carbon Brief.

But there’s a catch. While China may have installed huge amounts of clean energy projects, the electricity they produce doesn’t always get transmitted to the country’s homes and workplaces, thanks to legacy issues with its grid and power markets. Unless Beijing can enact much needed reforms to the plumbing of its electricity system, highly polluting coal — the traditional bedrock of the country’s power generation — will retain an outsized role.   

“The main thing is to at least maintain or ideally increase the annual additions of capacity further,” says Lauri Myllyvirta, lead analyst at Centre for Research on Energy and Clean Air (CREA). “But it’s also clear that absorbing all of this clean generation, especially variable solar and wind generation, requires big changes to the electricity system.”

Renewable sources of energy like wind and solar produce power intermittently as their output depends on weather conditions: moreover, they cannot be easily ramped up or down to meet real-time demand. To even out the fluctuations, without relying on backups such as coal-fired power plants, requires efficient electricity trading across large geographic areas and a flexible grid allowing power to flow to where it is needed. 

This is where it gets tricky for China. The country has made huge strides in scaling up its energy infrastructure, with plans ongoing to invest over 6 trillion yuan ($896 billion) between 2021 to 2025 to overhaul its state grid. But the reforms needed to integrate low-carbon energy into the system are far less advanced.

At present, energy allocation across China’s provinces is regulated by rigid government planning, while its power sales are dominated by fixed, mid- to long-term ‘dispatch’ contracts between producers and consumers — an arrangement that doesn’t cater well to dynamic demand and supply conditions. 

The electricity grid network’s design creates further inflexibility. China relies on point-to-point, long distance transmission lines to deliver energy from remote renewable energy bases — such as Inner Mongolia or Xinjiang — to places where consumption is high, such as highly populated eastern coastal provinces. 

The capacity mechanism is the least offensive way to capitulate to the coal sector. Delaying reforms is a substantially more destructive way.

David Fishman, senior manager of the consultancy The Lantau Group

Most of these transmission lines can’t carry renewable energy independently, partly for technical reasons that stem from renewables’ intermittency. Wind and solar power is instead bundled with coal power to stabilize the grid and ensure the lines have a high utilization rate. That has encouraged the construction of new coal-fired plants around renewable bases as backups and to help integrate the increasing levels of clean energy. 

The current, rigid model has led to practical problems. Despite severe droughts and historic heatwaves zapping up hydro-generated power in the southwestern Sichuan province in 2022, it continued to export power as contracted, leading to weeks of rolling blackouts. 

That episode and nationwide power crunches the year before also shifted Beijing’s calculations, prompting a return to the readily-available option of coal. As Chinese leader Xi Jinping expounded in 2022 when he visited Inner Mongolia, a major coal producing region, “we can’t toss away what’s feeding us now while what will feed us next is still not in our pocket.”

Despite Xi’s pledge to “strictly control” coal-fired power generation projects and an ostensible ban on their use for bulk power generation, the country has gone on a spree, approving more new coal power in the first quarter of this year than it did in all of 2021.

“Even though the numbers for solar and wind power capacity are huge, they only account for 11 to 12 percent of electricity generation in reality,” says Zhang Shuwei, chief economist at Draworld Environment Research Center.

“China would be better served by a larger number of shorter length interconnections between various regions coupled with a dispatch system that clearly rewards lowest cost power at a particular time,” says Martin Weil, a researcher at the U.S.-based nonprofit Global Energy Monitor. Under a truly integrated system, power can flow in all directions in response to changes in demand and supply, he adds.

Such reforms are financially and politically complicated, requiring a more integrated grid, the breaking down of boundaries between provinces, and further liberalization of the power market. They would also run against the interests of powerful stakeholders, including state-owned enterprises in the coal sector and provincial governments. 

“Deciding who gets to dispatch electricity and at what price is a major position of economic power, as it literally means directing the flows of hundreds of billions of dollars every year,” Myllyvirta says. “The owners of power plants that would be uncompetitive or unneeded in a well-functioning electricity market stand to lose heavily.”

Progress in systemic reforms has thus been slow and patchy. Beijing is now aiming for a unified electricity market system to take shape by 2025 and be completed by 2030 — a timeline that lags well behind the development of clean energy infrastructure. 

“There’s an entrenched fear that taking action too quickly, especially if there aren’t enough renewables online could lead to disruption,” says Ilaria Mazzocco, a senior fellow at the Center for Strategic and International Studies.

China’s delicate balancing act is playing out at this month’s COP28 meeting in Dubai, where it has refrained from signing on to a global pledge endorsed by 118 countries to phase down coal and improve energy efficiency.  

Beijing recently took further steps in apparent support of the coal industry, introducing a coal capacity compensation mechanism last month to pay coal power plants that are not in use.

For some, this is an acceptable short-term measure. “The capacity mechanism is the least offensive way to capitulate to the coal sector. Delaying reforms is a substantially more destructive way,” says David Fishman, senior manager of the consultancy The Lantau Group.

Is the peak going to happen now or are we going to see another up to five years of emission growth? It’s really a question of whether the reforms happen fast enough.

Lauri Myllyvirta, lead analyst at Centre for Research on Energy and Clean Air (CREA)

Others fret that such moves will further entrench the coal industry’s interests.

“The pressure from both the owners of coal plants as well as the provincial governments will be to slow down that build-out and also to bring up new justifications for curtailing renewable energy,” says Anders Hove, a senior research fellow at the Oxford Institute for Energy Studies.

For sure, China is taking other steps to manage the low-carbon transition, moving quickly to build storage facilities, which are crucial to absorbing excess renewable power generation which will help in meeting peak electricity demand without calling on coal.

But analysts such as Myllyvirta reckon progress will ultimately come down to Beijing’s ability to make hard decisions. “Is the peak going to happen now or are we going to see another up to five years of emission growth? It’s really a question of whether the reforms happen fast enough,” he says.

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