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‘The biggest barrier is the lack of actual physical green volume to fill these agreements, since the list of projects available to trade in the wholesale markets is relatively short,’ says The Lantau Group’s David Fishman. Photo: EPA-EFE

Climate change: why multinational firms, eager to buy green power in China, find it hard to get enough to meet their decarbonisation goals

  • China’s nascent green electricity trading scheme has attracted keen interest, but limited supply as well as volatile energy prices are getting in the way
  • ‘The biggest barrier is the lack of actual physical green volume,’ says energy consultant
China’s nascent green electricity trading scheme has attracted keen interest from multinational companies seeking to offset their carbon footprints in the country.

But supply has been limited in a partially reformed market that is still heavily reliant on state-guided power distribution.

Also making it challenging for buyers and sellers to agree to deals – especially long term ones – is volatile global energy supply and prices amid heightened geopolitical uncertainties sparked by Russia’s invasion of Ukraine.

Green power demand is strong in China as more companies hear that green power purchase agreements are now possible and available,” said David Fishman, a Shanghai-based senior manager at energy consultancy The Lantau Group, which helps large power users secure green energy supply.

“The biggest barrier is the lack of actual physical green volume to fill these agreements, since the list of projects available to trade in the wholesale markets is relatively short.”

The prices and volumes of bilateral deals done through the scheme – administered by the state-run green power exchanges in Guangzhou and Beijing – are not made public.

In the past 12 months, German chemicals giant BASF has clinched three power agreements under the scheme for its US$10 billion wholly-owned petrochemical complex in Zhanjiang, western Guangdong province.

These are key for BASF to achieve its plan for the facilities to be completely powered by green energy. Plants at the site, its third-largest production base globally, will gradually come on line between late this year and 2030.

The deals will also help the company reach its ambition to become carbon-neutral by 2050, and contribute toward China’s goals of peak emissions by 2030 and carbon neutrality by 2060.

A deal with China Resources Power a year ago was billed by BASF as a “landmark initiative to open up a new green energy business model”, as it was the first company to buy renewable energy under the scheme.

It was followed by a 25-year framework agreement in March with State Power Investment Corp for the supply of onshore wind and solar power, and a 25-year supply contract last month with Brookfield Renewable.

The Canadian firm, part of Brookfield Asset Management, will build dedicated solar and wind farms as well as energy storage facilities to support BASF’s Zhanjiang complex.

It was an unprecedented long-term, fixed-price deal in China that allows the consumer to decarbonise “in a measurable, auditable and reportable manner,” said Daniel Cheng, Brookfield’s renewable power and transition managing director.

Brookfield entered China’s renewable energy market in 2017 with the acquisition of 168 megawatts of generating assets. Its China asset portfolio has since grown to 4,200MW.

Still, many green-power project owners have elected to sell their output to the state-owned grid operators, instead of going to the trouble and cost of registering in the open markets under the scheme, Fishman said.

“The rates are higher in the open markets, but the extra work is not worth it for many generators,” he said, adding they are not obliged to sell through the open markets until 2030.

Holly Lei Huanli, China head of Covestro, a rival of BASF, said in March the company wanted to buy more green power via long-term deals, but the supply was limited. It was able to buy enough at a premium to meet 10 per cent of the annual needs of its Shanghai plant, its largest manufacturing site globally.

Pricing a long-term bilateral green power agreement is “very tricky” currently, Fishman said, considering elevated solar power equipment costs caused by the tight supply of materials and sharp surges in fossil fuel prices amid the war in Ukraine.

“What happens if the price of silicon crashes next year, or the price of coal drops [sharply]?” Fishman said. “Suddenly power from the grid would become much cheaper, and the consumers would be unhappy with the terms of their fixed-price, 25-year deals.”

Many Chinese power companies are scrambling to acquire trading skills to cope with price volatility in wholesale power markets, while also learning to trade carbon emission permits after it became mandatory last year, said Jeff Huang, co-founder of AEX Holdings, which helps them trade forward electricity and carbon permits.