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■ Date: Feb 28, 2020
 What is the Green Electricity Certificate in China? Will it Lead to New Opportunities? 】
 
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New regulations related to renewable energy are now being made in China. In 2019, the Chinese government published the regulation “Guaranteeing the mechanism of renewable energy consumption (可再生能源电力消纳保障机制)”. This was 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 will lead to new business opportunities. The Green Electricity Certificate market started in 2017.(If you like this article, please also refer to our comprehensive analysis report "China’s Power Market and Green Electricity Trade" in our database. )
 
So far, in China, the size of the Green Electricity Certificate market is restricted.Only qualified generators of green electricity can issue the Certificate. However, according to our estimation, the size of the Green Electricity Certificate market will reach 45.872 billion RMB by 2030. Also, new related policies are still in the early development stage. They will be modified in the future. For example, to further promote the generation of green electricity, the qualification of the issuance may be eased by the government. In the future, entities who are currently not qualified to issue Green Electricity Certificates could add some revenue by starting to issue them.
 
To prepare for new opportunities in the future, it is vital to grasp the system and the market mechanism and to pay attention to relevant government policies regarding renewable energy from now on.
 
Guaranteeing the mechanism of renewable energy consumption (so called RPS (Rewable Portfolio Standards) or Consumption Quota)
 
Figure1. Simplified administration mechanism of RPS in China
 
In China, renewable power generation is developing, but relatively sluggish consumption of renewable energy, including the issue of abandoned electricity, has begun to present problems. In other words, even if the country has the ability to generate electricity from renewable energy (green electricity), it will not provide any benefit 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.
 
  1.  All grid companies and electricity retailers that provide electricity directly to electricity consumers.
  2.  Electricity users who purchase electricity from wholesale electricity market or Electricity users with their own power plant (self-generators or prosumers).
 

In short, consumers who purchase electricity directly from producers (temporary electricity purchasers) or produce and use electricity themselves (self-generators) 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.

 

  1. 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.
  2. Promote consumption by purchasing renewable energy from outside the province.
  3. 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)
  4. Market entities that have not achieved their quota can be considered to have consumed renewable energy by purchasing Green Electricity Certificates, and thus make up for their shortage amount.
 
Direct transfer transaction
 
Figure 2. Overview of the direct transfer transaction
 
Market entities that have achieved their quotas can sell the actual consumption amount over the quota to market entities that have not achieved their quotas. Under-achieving market players can achieve their quota by purchasing their consumption. Although they are not actually consuming it, they are considered to have consumed renewable energy-derived electricity. There are two types of transaction: a transaction within a province or beyond a 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 a province or grid company that plays the leading role in their province would mainly join the transaction beyond the 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 may start the direct transaction with another 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 transactions will reach a maximum of 26.194 billion RMB by 2030.
 
Green Electricity Certificate (Green Certificate)
Figure 3.Players on the platform of Green Electricity Certificate
 
The Green Electricity 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 the Green Electricity Certificate, there are two types of market: the voluntary market and the compulsory market. The voluntary market has been active 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 Guaranteeing mechanism was implemented in 2020, the compulsory marker began, whereby the market subjects must buy Green Electricity Certificates as an obligation when they cannot reach their total or non-hydro renewable energy consumption targets. As stated above, it is projected by our research that the market size of Green Electricity Certificate will reach a maximum of 45.872 Billion RMB by 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, identifying projects that are qualified to receive subsidies is one of requirements of the Green Electricity Certificate issuing entity. In this regard, two restrictions are imposed on the Green Electricity Certificate.
 
  1. Once Green Electricity Certificates have been sold, a power producer loses the right to receive a subsidy for electricity based on the corresponding amount pf Green Electricity Certificates sold. ( It can only receive subsidies or sell Green Electricity Certificates.)
  2. 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 Electricity Certificates, cash can be collected quickly.

There are also some important conditions for issuing Green Electricity Certificate during the trial period.

 

  1. 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 the 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).
  2. Projects should be onshore wind power generation projects or photovoltaic power generation projects, excluding distributed photovoltaic projects.
  3. Electricity should be sold and transferred to public grid companies beforehand.
  4. No part of the electricity should be consumed by generators themselvesーthat is, power self-generators 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 a Green Electricity 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, the Green Electricity Certificate has the following unique transaction rules.

  1. Certificates’ maximum prices are set.
  2. Speculative behavior is prohibited.
  3. Futures contracts are prohibited.
 

The relationship between Green Certificate and direct transfer transaction

 

Which are preferred or prioritized by entities who want to purchase? Given the market mechanism, the cheaper ones are purchased.

 

Figure 4. Simplified mechanism of two options for players who cannot achieve their quotas

 
Currently, the price of the Green Electricity Certificate listed for sales can be referenced on the platform, and it is expected that the price in any 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 the Green Electricity 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 in holding an excessive consumption amount without selling, while generators cannot receive subsidies corresponding to the amount of Green Electricity 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 around Green Electricity Certificates

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 were issued ーbut only about 35,000 were purchased, meaning the market was not working well.
  • Evaluations based on non-hydro power minimum consumption weight in 2018 published by the central government shows many provinces has achieved their quota. This did not contribute to the creation of a big market size for Green certificate or the direct transfer transaction of excessive consumption amount in the compulsory market.
  • Currently, the Green Electricity Certificate does not have its validity period unless it’s sold, meaning it can be carried over to the next year. Given the low demand for Green Electricity Certificates, this can bring a serious problem concerning the excessive supply of Green Electricity Certificates.
 
In conclusion, although currently Green Electricity Certificates are not very attractive as an opportunity to the companies who have their business in the 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 and the strict regulation and added rules will be modified by the government to promote renewable energy, so the market can become more attractive. For the future opportunities, it is better to understand these mechanisms and to keep an eye on the government policies 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.
 
 
If you like this article, please also refer to our comprehensive analysis report "China’s Power Market and Green Electricity Trade" in our database. 
 
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