【What is Green Certificate in China? Does it lead to new opportunity? 】
Author of this article
New regulation related to renewable energy is starting now in China. In 2019, the Chinese government published the regulation “Guarantee mechanism of renewable energy consumption (可再生能源电力消纳保障机制)”, which is now starting to be implemented in 2020, to promote the consumption of renewable energy-derived electricity. In this article, I’d like to briefly introduce the new regulation, since for companies in new energy sectors, this would lead to new business opportunity, Green Certificate market, which started in 2017.
So far, in China, the market size of Green Certificate is not attractive and only qualified generator of green electricity can issue this Certificate. However, according to our estimation, that the market size of Green Certificate will reach45,872 million RMB at maximum in 2030. Also, new related policies are still in the early development stage. They would be modified in the future. For example, to further promote generation of green electricity, the qualification of the issuance could be eased by the government. In the future, entities who are currently not qualified to issue Green Certificate could get some revenue by issuing Green Certificate.
To prepare for opportunities in the future, it is vital to grasp the system and the market mechanism and to pay attention to the government policy regarding renewable energy from now on.
Guarantee mechanism of renewable energy consumption (Consumption Quota)
Figure1. Simplified administration mechanism of Consumption Quota
In China, renewable power generation is developing, but sluggish consumption of renewable energy, including the issue of abandoned electricity, has begun to become the next issue. In other words, even if the country has the ability to generate electricity from renewable energy (green electricity), it will not make sense if people do not use it, so it is necessary to promote its use. Since the supply side has been sufficiently promoted, the next step is to promote the demand side, which is to promote consumption of renewable energy.
Firstly, the government allocates an obligation (quota) to consume a certain amount of renewable energy-derived electricity to 32 provinces and provincial-class cities, led by the National Energy Agency. For example, “Province A must consume 10% of total electricity consumption from green electricity“. There are two types of quota: the quota of consumption obligations in the total consumption of renewable energy-derived power including hydropower (total consumption responsibility weight) , and the quota of consumption obligations in the total consumption of non-hydroelectric renewable energy excluding hydropower (non-hydro power consumption responsibility weight). Both quotas are assigned by taking into the account the recent consumption and power generation capacity of each province.
*You can check the actual figure of the quota by clicking links bellow.
Secondly, in allocated provinces, the regional departments of the National Energy Administration (NEA, 国家能源局) will take the initiative and impose a certain amount of consumption obligations on market entities with consumption obligations within the province. The market entities that are actually allocated obligations are broadly classified into the following two types.
All grid companies and electricity retailers that provide electricity directly to electricity consumers.
Electricity users who purchase electricity from wholesale electricity market or Electricity users with their own power plant(Self-generator).
In short, consumers who purchase electricity directly from producers (temporary electricity purchasers) or produce and use electricity themselves (Self-generator) are the targets. Consumers in ordinary households, etc. are not subject to this consumption obligation assignment because they purchase electricity from grid companies.
There are four main methods for each province / market entity to achieve its assigned consumption obligations.
Promote and invest in renewable energy power generation, and promote consumption by increasing power generation capacity and power generation within the province and connecting to grids.
Promote consumption by purchasing renewable energy from outside the province.
Market entities that have not achieved their quota purchase, from entities that have achieved the allocation, the excess consumption that has been consumed beyond their quota. (Direct transfer transaction)
Market entities that have not achieved their quota can be considered to have consumed renewable energy by purchasing Green Certificates, and make up for its shortage amount.
Direct transfer transaction
Figure 2. Overview of the direct transfer transaction
Market entities that have achieved quota can sell the actual consumption amount over its quota to market entities that have not achieved. Under-achieving market players can achieve their quota by purchasing their consumption. Although they are not actually consuming them, they are considered to have consumed renewable energy-derived electricity. There are two types of transaction: transaction within province or beyond province. Under the jurisdiction of each power trading institution, each player can transfer quota space/consumption amount according to individual transaction within or beyond their province. It can be reasonably assumed that Province or grid companies who plays representative role of their province would mainly join the transaction beyond its area of each province. This is because it is highly likely that after they calculate and collect their total consumption amount in their province, they start the direct transaction with other province. The price is compared with the green certificate, and it is highly likely that the price will be equal to or lower than the price of the green certificate that can be purchased on the platform. It is also forecasted by our research that the market size of direct transfer transaction will reach 26,194 million RMBat maximum in 2030.
Figure 3.Players on the platform of Green Certificate
Green Certificate is issued with a unique code identification for each MWh of non-hydro renewable energy on-grid electricity. The purchaser of the Green Certificate obtains the right to declare that he/she use the corresponding amount of green electricity. It is managed and issued by National Renewable Energy Information Management Center (国家可再生能源信息管理中心) and the general public can purchase it by creating an account through the online platform. Currently, for Green Certificate, there are two types of market: voluntary market and compulsory market. The voluntary market has been started since July 2017. Any enterprise or individual can subscribe Green Certificate voluntarily as a proof of consumption of green electricity and a support of the development of green power in order to participate in green energy consumption, to control air pollution, to improve social image, and to satisfy social responsibility. After the Guarantee mechanism implemented in 2020, there will be the compulsory market, where the market subjects must buy Green Certificate as an obligation when they cannot reach their total or non-hydro renewable energy consumption target. As stated above, it is projected by our research that the market size of Green Certificate will reach 45,872 million RMB at maximum in 2030.
In the first place, the Green Certificate has been launched with the aim of supporting power producers based on market principles while reducing or eliminating subsidies for renewable energy power generation. Therefore, projects that are qualified to receive the subsidy is one of requirements of the green certificate issuing entity. In this regard, two restrictions are imposed on Green Certificate.
Once Green Certificates have been sold, a power producer loses the right to receive a subsidy for electricity based on the corresponding amount pf Green Certificates sold. ( It can only receive subsidies or sell Green Certificates.)
Green certificates cannot be set and sold at a price higher than the price of the corresponding subsidy.
Currently, it takes time to receive the subsidy, which has affected the cash flow of the power generation company. By selling green certificates, cash can be collected quickly.
There are also some important conditions to issue Green Certificate during the trial period.
Projects should be listed in the specified lists issued by the government, called Catalogue of national renewable energy tariff additional fund subsidy( 国家可再生能源电价附加资金补助目录) , or those in Work plan of wind power project construction in 2019 (2019年风电项目建设工作方案) or Construction plan of photovoltaic power generation project in 2019 (2019年光伏发电项目建设工作方案).
Projects should be onshore wind power generation project or photovoltaic power generation project excluding distributed photovoltaic project.
Electricity should be sold and transferred to public grid companies beforehand.
Even part of the electricity should not be consumed by generators themselves, that is, self-generator cannot apply, even if they connect and sell the rest of their electricity to grid companies, when they consume even a small part of their electricity on their own.
To sum up, the seller is a designated onshore wind power company and a non-distributed photovoltaic power company. By sending all power to the state-run or equivalent grid company, it can issue Green Certificate corresponding to the amount sold. On the other hand, there are no strict restrictions on buyers, so anyone can purchase if they create a purchase account on the platform.
Additionally, Green Certificate has the following unique transaction rules.
Certificates’ maximum prices is set.
Speculative behavior is prohibited.
Futures contract is prohibited.
Relationship between Green Certificate and direct transfer transaction
Which are preferred or prioritized by entities who want to purchase? Given the market mechanism, cheaper one is purchased.
Figure 4. Simplified mechanist of two options for players who cannot achieve their quota
Currently, the price of the green certificate listed for sales can be referenced on the platform, and it is expected that the price in direct transfer transaction of consumption amount should be negotiated based on that price. Market entities that have achieved a quota want to make at least some revenues by selling their actual excess consumption over their quota. Additionally, since the seller is an entity that does not receive subsidies and there is no direct relationship between transaction price and subsidy price, it can be sold even cheaper than Green Certificate, which is currently priced with subsidy price considered. Although the price of direct transfer transaction has no price cap,it is likely to be sold at a lower price than Green Certificate
. This is because there is no point to hold the excessive consumption amount without selling, while generators cannot receive subsidy corresponding to the amount of Green Certificate that they sold.
In addition, state-owned grid companies in each province / city may be responsible for organizing the allocation of market participants in the region. To avoid the cost of purchasing green certificates, it is likely that direct transfer transaction inside and outside a province is promoted at first in such a way as to allocate excess consumption amount to entities that have not yet achieved their quota so as not to miss out on sales.
Last, but not least, considering the fact that in many cases there is a relationship between a parent company and a subsidiary of a state-owned grid company in direct transfer transactions between provinces, quota transactions could be cheaper or free between them.
For these reasons above, in the compulsory market, direct transfer transaction can be prioritized rather than Green Certificate.
Present issues on Green Certificate
In order to support electricity generators, the market must be activated and Green Certificate must be sold at a certain price. On top of that, there are currently several issues.
By 8th Dec, 2019, approximately 27 millions Green Certificates are issued but only about 35,000 were purchased, meaning the market does not work well.
Evaluation based on non-hydro power minimum consumption weight in 2018 published by the central government shows many provinces has achieved their quota, which could not contribute to creating a big market size for Green certificate or the direct transfer transaction of excessive consumption amount in the compulsory market.
Currently, Green Certificate does not have its validity period unless it’s sold, meaning it can be carried over to the next year. Given the fewer demand of Green Certificate, this can bring a serious problem of the excessive supply of Green certificate.
In conclusion, although currently Green Certificate is not very attractive opportunity to the companies who has business in new energy sector because of the market size, the strict qualification for issuance, and some unique transaction rules to regulate the market. Nevertheless, the market will grow up and the strict regulation and some rules would be modified by the government to promote renewable energy, so the market could become more attractive. For the future opportunity, it is better to understand these mechanisms and to keep an eye on the government policy related to renewable energy. By March 2020, official figures on consumption quota obligations in each province will be announced. It is highly suggested checking this actual figure.