Why China’s ‘green certificate’ trading scheme will keep coal-fired power plant bosses on their toes

Beijing sets timetable for roll out of ‘green certificates’ for power sector

PUBLISHED : Tuesday, 07 February, 2017, 4:59pm
UPDATED : Tuesday, 07 February, 2017, 11:02pm

Beijing’s plan to launch the long-awaited “green certificate” trading scheme is part of an effort to ease the snowballing deficit of the state-run renewable energy subsidy fund, and shift part of the financial burden for reducing pollution from consumers to coal-fired power producers.

But scant details on how the scheme would operate means the impact on the worst polluters in electricity generation is still up in the air, although the launch timetable’s announcement comes as the coal-fired industry’s profitability has been squeezed by higher coal costs and frozen benchmark power prices.

The scheme, which will require polluters failing to meet certain yet to be announced clean-energy development thresholds to buy “certificates” from owners of renewable energy plants qualified by the authorities, will be put on trial on July 1 this year on a “voluntary” basis, regulator National Development and Reform Commission said in a circular published last Friday.

Qualified renewable projects will be granted certificates for the amount of clean energy they produce, which can be “sold” to polluters that need to offset their clean energy output shortfall.

Coal-fired power accounted for 64 per cent of the nation’s energy consumption capacity last year, which is required by the central government to fall to 58 per cent by 2020, while that of cleaner-burning natural gas and non-fossil fuels must increase to 25 per cent from 18 per cent.

Based on market conditions, the scheme will go live and become mandatory at a “suitable time” in 2018, the NDRC said, when renewable energy output quotas will be slapped on power generators. Those failing to meet the quotas must buy green certificates to make up the shortfall.

The scheme aims “to steer greater green energy consumption nationwide [and] further improve the current subsidy system of wind and solar power generation,” the NDRC said.

The price of the certificates will be capped at the differential between higher subsidised renewable energy prices and those of state-stipulated benchmark coal-fired power prices at the local level.

Renewable energy projects whose green certificates have been sold will no longer enjoy the subsidised higher tariffs.

Analysts said the scheme will help relieve the huge deficit of the renewable energy fund, which has seen wind and solar farm developers waiting as long as two years before they can collect the subsidies owed to them by the fund.

The fund is managed by the Ministry of Finance, and is financed by a surcharge on consumers’ electricity bills, which currently amounts to around 3 per cent, according to UBS analysts.

“We believe this green certificate scheme is to ease the growing subsidy burden, but not to replace the existing subsidy scheme,” the analysts said in a report.

We believe this green certificate scheme is to ease the growing subsidy burden, but not to replace the existing subsidy scheme
UBS analysts

“Projects which are not getting, or have long overdue subsidy receivables, are likely to participate ... these are likely to be existing solar farms, or newly built wind and solar farms.”

Dennis Ip, head of utilities and renewables research at Daiwa Capital Markets, estimated the deficit would balloon from around 60 billion yuan at the end of 2016 to over 300 billion yuan by 2020 if the surcharge is not raised.

Together with ongoing reductions of subsidised renewable power tariffs as technology advancement reduces wind and solar farms’ operating costs, as well as a planned “carbon tax” for non power sector carbon gases emitters, Ip believes the green certificate scheme could potentially plug the deficit without raising the surcharge to end consumers.

The big subsidy arrears has constrained the capacity of renewable power project developers to finance projects.

Ip noted that a year ago Beijing issued provincial targets for non-hydro renewable power consumption for 2020, by which time it also requires all coal-fired power producers to have non-hydro renewable power output equivalent to at least 15 per cent of their output.

What isn’t clear is how these targets may be used as the basis for the mandatory certificate purchase requirement, and whether the targets will be implemented at the listed company level or parent company level.

Chinese coal-fired power firms to post weaker profits amid capacity glut

Non-hydro renewable output of the Hong Kong listed coal-fired majors amounts to only 1 to 4 per cent of their total output, meaning they will be big losers under the certificate scheme if it is implemented at the listed company level, Ip estimated.

Asked whether Huadian Power International, the listed flagship of one of the nation’s big five state-owned power generators, would step up its investment or acquisition of wind and solar power projects, its spokesman said: “This is not something new, we have been preparing for this scheme for several years.”

Last week Huadian Power said it expected to post a 47 to 57 per cent drop in net profit for last year due to higher fuel costs, falling plant utilisation and lower power tariffs.

China’s coal-fired power industry is forecasted by the China Electricity Council, which represents the largest power producers, to see plant utilisation fall by another 4 per cent to 4,000 hours, after it fell to its lowest in 53 years last year.

Asked if Huadian was concerned about the scheme coming at a time when coal-fired producers’ profits were squeezed by high coal prices and a tariff freeze this year, and when they may lobby Beijing for a more lenient certificate purchase threshold initially, the spokesman said: “We will be working on a solution before the scheme is officially launched.”