Opportunities and challenges of flexibility technologies for achieving a net-zero electricity future in China

3 April 2023

Authors

Muyi Yang, Xunpeng Shi, Xing Zhang, Shurui Wang

This report was published by the Centre for Research on Energy and Clean Air (CREA) with the support of the International Society for Energy Transition Studies (ISETS).

 

Acknowledgments

The authors would like to acknowledge the valuable insights and feedback received from the experts who participated in the survey, one anonymous author and the four anonymous external reviewers. The authors are also grateful for the editorial support from Ember. The authors are responsible for the contents.

Executive summary

China has experienced significant growth in renewable electricity generation in recent years and is expected to see even more as the country works towards achieving its dual carbon goals of peaking emissions before 2030 and reaching carbon neutrality before 2060. Accommodating these new variable renewable sources will require significant investment and changes to the broader power system. There is also a sense of urgency in implementing these systemic changes due to the need to manage changing demand profiles with higher peak and more volatile consumer demand. Fluctuating demand for electricity is mainly caused by the more frequent occurrence of extreme weather conditions (e.g., heatwaves) and the increased use of heating and air conditioning in the household sector.

Changes happening in China’s power system not only involve building more renewable energy projects. Change also entails reconfiguring the whole electricity system necessary to support the uptake of renewable generation. System flexibility, the ability of a system to manage variations in electricity demand and supply reliably and cost-effectively, stands at the core of this system reconfiguration. This raises the questions: what technical solutions are available for improving the flexibility of the power system in China; what are the main issues (techno-economic, market and regulatory) that may affect their uptake; and, more importantly, what should be done to address them?

The main objective of this report is to develop some insights into these questions by delving into the viewpoints and perspectives held by key energy stakeholders in China. These insights will enable the identification of differing interests and cross-cutting issues that need to be addressed, to facilitate consensus building and ensure a rapid uptake of various flexibility technologies. The method adopted in this report is a combination of literature review and expert survey. The main points arising from the analysis conducted in the report are presented below.

– There exists a range of technologies that can help Chinese system operators to manage abrupt changes in electricity supply and demand. Some key technologies include coal power flexibilisation, -pumped hydro, battery storage, green hydrogen, thermal energy storage, and demand-side response.

– Gas-fired power plants, although widely considered as a reliable and dispatchable complement to support the integration of large renewable energy into the grids, are only expected to play a limited role in China. This is mainly due to concerns about high and volatile gas prices and import dependence, exacerbated by geopolitical complexities and domestic instabilities of gas-exporting countries.

– Deeper power connectivity, facilitated by harmonised regulatory and market arrangements across different provinces of China, would enable better cross-provincial balancing and capacity sharing, allowing more effective sharing of complementary renewable resources that are often distributed unevenly across the country. However, the implementation of necessary market and regulatory reforms remains challenging, implying that power connectivity cannot be considered an immediate solution to support further expansion of renewable generation in China.

Technical feasibility
Many flexibility technologies are still emerging at the research stage (conceptualisation), are in development (proof of concept through demonstration projects), or are at an early market introduction stage. Out of the technologies covered in this report, coal power flexibilisation, pumped hydro, lithium-ion batteries and demand response (including vehicle-to-grid) are already mature technologies, some of which are ready for wider adoption.

At a systems-wide level, flexibility technologies could help improve the overall efficiency of the electricity system by enabling higher levels of renewable energy penetration, as well as contributing to lower carbon dioxide (CO2) and pollutant emissions.

For coal power, plant level flexibilisation could affect fuel efficiency (and therefore potential higher CO2 emissions and lead to increased wear and tear of equipment, caused by frequent increase (‘ramping’) and decrease in demand to provide load following services.

Engineering complexity and access to core patents are not seen as a major concern for flexibility technologies, given China’s engineering and research capacity and capabilities, especially for coal power flexibilisation, pumped hydro, battery storage, and demand-side response.

For periods of long-duration seasonal variations that affect renewable sources, the study considers coal power flexibilisation and green hydrogen as potentially viable solutions. Safety concerns, however, could limit the scale-up of hydrogen supply capacity in the near future. Another issue associated with fossil-based hydrogen, not mentioned by participants in the survey, is the uncertainty around carbon capture and storage (CCS). CCS is required to reduce the carbon footprint of hydrogen production in a net-zero future. Other options are being explored by researchers, for example, thermal storage technologies like molten-salt storage have also demonstrated the potential to provide long-duration storage solutions via pilot projects.

Cleanliness
In the expert survey, demand-side response, vehicle-to-grid, pumped hydro, and green hydrogen were seen as preferable technologies from the perspective of greenhouse gas (GHG) and air pollutant emissions.

Economic viability
Many flexibility technologies are considered by experts to lack economic viability in China’s current power system, with a payback period of more than five years. The reasons behind this vary by technology: pumped hydro is impacted by long lead times and high development costs (for example, costs involved in land acquisition and infrastructure construction); rising critical mineral prices for battery storage; and high costs of electrolysers or fossil reformation equipped with carbon capture, utilisation, and storage (CCUS) for hydrogen.

Enabling infrastructure
One issue currently holding back the widespread use of hydrogen is the lack of infrastructure to transport, distribute, store and dispense hydrogen as a fuel for stationary uses.

For pumped hydro, some ideal sites are found in areas far away from the existing road and transmission infrastructure, making their development expensive.

Demand-side technologies, including demand-side response, virtual power plant, and vehicle-to-grid, have emerged as attractive options for managing short- to medium-term variations in electricity supply and demand. Their wider adoption, however, could be affected by the lack of necessary infrastructure, such as smart meters, sensors, communication technology and the Internet of Things. The development of this infrastructure could also be affected by the lack of standardisation and protocols for metering and information technologies, and public concern about data security and privacy, among other issues.

Market and regulatory arrangements
Promoting the uptake of various flexibility technologies requires regulatory and market reforms to better articulate the demand for system flexibility arising from higher levels of renewable energy penetration.

The findings of this report highlight that for innovative flexibility technologies to be deployed at scale, several technical, economic, infrastructure, regulatory, and market issues need to be addressed. By implication, this also suggests that a flexible, clean, and modern electricity system, capable of accommodating large outputs from variable renewable energy sources, can only be developed if several layers of mutually interacting and unpredictably reinforcing factors, such as technology, economics, policy, and social aspects, move forward simultaneously in a concerted way.

Some key aspects for policymakers to consider for guiding the process of addressing flexibility within the wider energy transition are summarised below.

Coal power flexibilisation demotes coal power to a supportive role, generating less power from coal and creating space for more clean energy in the grid. It is an immediately actionable step towards addressing flexibility shortfalls in China’s electricity system. It serves as a leverage point for necessary market and regulatory reforms that would pave the way for the wider adoption of clean flexibility technologies. Clean flexibility technologies, such as battery storage, green hydrogen, and thermal energy storage, are not yet mature enough to be deployed at the scale considered essential for supporting further expansion of variable renewable energy generation in China. The policy of the current energy five-year plan of demoting coal power to play a supportive role in providing ancillary and capacity (not baseload) services, therefore, provides a short-term measure. During the Two Sessions in 2022, the National Energy Administration (NEA) indicated that, ‘in principle’, it will not permit the construction of new coal power projects exclusively for electricity generation, but stated the possibility of building ‘supportive units’ of a ‘certain scale’ to ensure supply sufficiency and provide flexibility services to moderate-variable renewable generation.

Facilitating this change in the role of coal power will require the implementation of necessary market and regulatory reforms to create more effective mechanisms for procuring ancillary and capacity services. These mechanisms, once established, would also enable the integration of clean flexibility technologies into the system when they become more mature.

Deeper power connectivity could unlock substantial additional flexibility from existing capacity, but implementation remains a challenge. Power connectivity envisages the creation of a fully interconnected national electricity system that allows cross-provincial and cross-regional sharing of surplus and reserve capacity, facilitated by grid interconnection, and coordinated market operation. Deeper power connectivity could allow more effective sharing of complementary renewable resources (especially, hydro, wind and solar) that are distributed unevenly across the country, thereby reducing the need for expensive reserve and backup capacity. It could also provide increased access to a variety of supply- and demand-side options for managing variations in renewable generation.

In recognition of the importance of power connectivity, the central government has recently signalled its intention to accelerate the construction of a unified national power market. Despite this, how to deepen market reform in practice remains an issue, especially considering the experience of electricity market reform in China. After nearly three decades of efforts, the utilization of cross-provincial and cross-regional power connectivity in China remains rather low, limited to a few centrally planned initiatives.

Innovation is critical to prepare clean flexibility technologies for wider adoption, where increased R&D support is important but, in isolation, will not bring needed results. The generation, diffusion, and utilisation of novel technologies are not only shaped by technology-focused ‘hardware’ innovation processes. Indeed, they are also influenced by the dynamic interplay of actors (e.g., utility companies, private investors, consumers, and research institutes) and broader institutional structures, such as laws and regulations, market mechanisms, policy frameworks, and technical norms.

A more systemic approach is therefore needed to support innovation in flexibility technologies. This approach comprises: demand pull via market reform and indicative planning; technology push by addressing blocking factors for bringing innovation to the market; and policy learning and adaptation.

Improving the flexibility of the Chinese power system requires an all-of-government approach, closely coordinating climate and supply security imperatives with other cross-cutting issues. For example, retrofitting coal-fired power plants to enable a shift in their use from baseload capacity to supportive capacity means lower capacity utilisation rates and hence less coal burnt for power generation and less coal production needed. This could, in turn, affect economic development in some coal-dependent regions. Another example is electricity affordability, as the upfront costs of system reconfiguration could put upwards pressure on the regulator to raise electricity prices, which may be viewed by the government as a potential threat to people’s living standards.

The report is available in English at ISETS 2023 Opportunities and challenges of flexibility technologies in China report.