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Enhancing China’s ETS

for Carbon Neutrality:

Focus on Power Sector

Co-ordinating climate and

renewable energy policy

The IEA examines the

full spectrum

of energy issues

including oil, gas and

coal supply and

demand, renewable

energy technologies,

electricity markets,

energy efficiency,

access to energy,

demand side

management and

much more. Through

its work, the IEA

advocates policies that

will enhance the

reliability, affordability

and sustainability of

energy in its

31 member countries,

10 association

countries and beyond.

Please note that this

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Source: IEA. All rights

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INTERNATIONAL ENERGY

AGENCY

Institute of Energy, Environment

and Economy, Tsinghua University

Institute of Energy,

Environment and

Economy, Tsinghua

University (3E),

established in 1980, is an

interdisciplinary research

and education institute at

Tsinghua. The institute's

mission is to create,

develop and disseminate

the knowledge, ideas, and

methodologies crucial for

building sustainable

energy systems, mitigating

climate change mitigation

for China and the world.

Our focus area includes:

 Energy and climate

change modeling

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planning

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environmental policy

evaluation

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international cooperation

to mitigate climate

change

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for energy and climate

change research, the

institute has been

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policy advisory services to

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and Reform Commission

(NDRC), the Ministry of

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Energy Administration

(NEA). The institute has

long-time collaborations

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international organizations.

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EnhancingChina’sETSforCarbonNeutrality:FocusonPowerSectorCo-ordinatingclimateandrenewableenergypolicyTheIEAexaminesthefullspectrumofenergyissuesincludingoil,gasandcoalsupplyanddemand,renewableenergytechnologies,electricitymarkets,energyefficiency,accesstoenergy,demandsidemanagementandmuchmore.Throughitswork,theIEAadvocatespoliciesthatwillenhancethereliability,affordabilityandsustainabilityofenergyinits31membercountries,10associationcountriesandbeyond.Pleasenotethatthispublicationissubjecttospecificrestrictionsthatlimititsuseanddistribution.Thetermsandconditionsareavailableonlineatwww.iea.org/t&c/Thispublicationandanymapincludedhereinarewithoutprejudicetothestatusoforsovereigntyoveranyterritory,tothedelimitationofinternationalfrontiersandboundariesandtothenameofanyterritory,cityorarea.Source:IEA.Allrightsreserved.InternationalEnergyAgencyWebsite:www.iea.orgIEAmembercountries:AustraliaAustriaBelgiumCanadaCzechRepublicDenmarkEstoniaFinlandFranceGermanyGreeceHungaryIrelandItalyJapanKoreaLithuaniaLuxembourgMexicoNetherlandsNewZealandNorwayPolandPortugalSlovakRepublicSpainSwedenSwitzerlandTurkeyUnitedKingdomUnitedStatesTheEuropeanCommissionalsoparticipatesintheworkoftheIEAIEAassociationcountries:ArgentinaBrazilChinaEgyptIndiaIndonesiaMoroccoSingaporeSouthAfricaThailandINTERNATIONALENERGYAGENCYInstituteofEnergy,EnvironmentandEconomy,TsinghuaUniversityInstituteofEnergy,EnvironmentandEconomy,TsinghuaUniversity(3E),establishedin1980,isaninterdisciplinaryresearchandeducationinstituteatTsinghua.Theinstitute'smissionistocreate,developanddisseminatetheknowledge,ideas,andmethodologiescrucialforbuildingsustainableenergysystems,mitigatingclimatechangemitigationforChinaandtheworld.Ourfocusareaincludes:EnergyandclimatechangemodelingEnergystrategyandplanningClimateandenvironmentalpolicyevaluationMechanismsforinternationalcooperationtomitigateclimatechangeAsanimportantthinktankforenergyandclimatechangeresearch,theinstitutehasbeencontinuouslyprovidingpolicyadvisoryservicestotheNationalDevelopmentandReformCommission(NDRC),theMinistryofEcologyandEnvironment(MEE),andtheNationalEnergyAdministration(NEA).Theinstitutehaslong-timecollaborationswithprestigiousuniversitiesandinternationalorganizations.EnhancingChina'sETSforCarbonNeutrality:AbstractFocusonPowerSectorPAGE4IEA.Allrightsreserved.AbstractThepaceofemissionsreductionsofthePeople’sRepublicofChina(hereinafter,“China”)overthecomingdecadeswillbeanimportantfactoringlobaleffortstolimitglobalwarmingto1.5°C.ThepowersectoriscentraltoachievingChina’sstatedclimateambitionofpeakingCO2emissionsbefore2030andachievingcarbonneutralitybefore2060.Acceleratingthesector’sdecarbonisationrequiresawell-coordinatedpolicymix.Thisreport,EnhancingChina'sETSforCarbonNeutrality:FocusonPowerSector,respondstotheChinesegovernment’sinvitationtotheIEAtoco-operateoncarbonemissionstradingsystems(ETS)andsynergiesacrossenergyandclimatepolicies.ItshowsthatanenhancedETScouldleadtheelectricitysectortowardanemissionstrajectorythatisinlinewithChina’scarbonneutralitytarget.ThisreportalsoexplorestheinteractionsandeffectsofChina’snationalETSwithitsrenewableenergypolicyintheelectricitysector,namelyrenewableportfoliostandards(RPS).ItexaminestheimpactofdifferentEnhancedETSScenariosonCO2emissions,generationmix,cost-effectivenessandinteractionwithRPS.ThereportconcludeswithaseriesofpolicyinsightstoinformChina’sclimateandenergydebate.EnhancingChina'sETSforCarbonNeutrality:Acknowledgements,contributorsFocusonPowerSectorandcreditsPAGE5IEA.Allrightsreserved.Acknowledgements,contributorsandcreditsEnhancingChina'sETSforCarbonNeutrality:FocusonPowerSectorisajointanalysispreparedbytheEnvironmentandClimateChangeUnit(ECC)intheEnergyEnvironmentDivision(EED)oftheInternationalEnergyAgency(IEA)andtheInstituteofEnergy,EnvironmentandEconomy(3E)ofTsinghuaUniversity.DavidFischer(IEA),XiushanChen(IEA)andDaZhang(Tsinghua)co-ordinatedtheproject.ThemainauthorsofthereportwereDavidFischer,XiushanChenandInsaHandschuchfromtheIEA,andDaZhangandHongyuZhangfromtheTsinghua3EInstitute.XiliangZhang,DirectoroftheTsinghua3EInstitute,providedinvaluableguidancetotheprojectandanalysis.FengquanAn,SeniorChinaAdvisorattheIEA,SaraMoarif,UnitHeadofECC,andTomHowes,DivisionHeadofEEDprovidedvaluablefeedbackandoverallguidancetotheproject.ValuablecontributionsandfeedbackwerealsoofferedbyothercurrentandformerIEAandTsinghuacolleagues:HuilinLuo,LucaLoRe,BrittaLabuhn,ErmiMiao,RebeccaMcKimm,BiqingYang,PaoloFrankl,CésarAlejandroHernández,JacquesWarichet,BrentWanner,DanielWetzel,YasmineArsalane,AraceliFernándezPales,UweRemme,SimonBennett,PeterFraserandHengLiang.ThisanalysiswascarriedoutwiththesupportoftheIEACleanEnergyTransitionsProgramme.WewouldliketoextendourgratitudetothefundersoftheCleanEnergyTransitionsProgramme,inparticulartheAgencefrançaisededéveloppement(AFD).Theauthorsarealsogratefulforvaluablecommentsandfeedbackfromexternalexperts,including:AndersHove(GIZ),ChristophBertram(PIKPotsdam),ChristopheDeGouvello(WorldBank),CyrilCassisa(BHP),DavidHone(Shell),YingFan(BeihangUniversity),FredrichKahrl(RAP),MinHu(IGDP),HuwSlater(ICF),JiahaiYuan(NorthChinaElectricPowerUniversity),JiangLin(LBNL),JingjieZhang(CEC),JohannesEnzmann(EuropeanCommission),XueduLu(ADB),MarcoBaroni(BaroniEnergy),MarissaSantikarn(WorldBank),MichaelGrubb(UniversityCollegeLondon),NeilHirst(ImperialCollegeLondon),PengfeiXie(RAP),PeterVis(EuropeanUniversityInstitute),PeterZapfel(EuropeanCommission),PhilipAndrews-Speed(NationalUniversityofSingapore),YanQin(Refinitiv),RachelMok(WorldBank),RobertStowe(HarvardUniversity),WillEnhancingChina'sETSforCarbonNeutrality:Acknowledgements,contributorsFocusonPowerSectorandcreditsPAGE6IEA.Allrightsreserved.Acworth(PollinationGroup),YueDong(EnergyFoundationChina),JunjieZhang(DukeKunshanUniversity)andDechenZhu(ChinaHuadianCorporation).SincerethanksgotoElspethThomsonwhoeditedthereport.TheauthorswouldalsoliketothanktheIEACommunicationsandDigitalOffice(CDO),particularlyAstridDumond,IsabelleNonain-SemelinandThereseWalshforprovidingvaluableeditorialandpublishingsupport.EnhancingChina'sETSforCarbonNeutrality:TableofcontentsFocusonPowerSectorPAGE7IEA.Allrightsreserved.TableofcontentsExecutivesummary................................................................................................................10Chapter1Policycontext.......................................................................................................21Long-termpolicyobjectives..................................................................................................21China’spowersector............................................................................................................22China’sETSdesign..............................................................................................................26China’srenewablespolicy....................................................................................................29InteractionbetweenandintegrationofRPSandETS..........................................................33Chapter2:Keyfeaturesofthemodelandscenariodesign..............................................37Modeldesign.........................................................................................................................37Scenariodesign....................................................................................................................40Chapter3:Thecurrentpolicymix–RPSandETS.............................................................45ResultsoftheRPSScenario................................................................................................45ResultsoftheRPS-ETSScenario........................................................................................49Chapter4:EnhancedETSdesignsforcarbonneutrality..................................................56ImpactonCO2emissions.....................................................................................................56Impactongenerationmix......................................................................................................59Policycost-effectiveness.......................................................................................................60ImpactsofCO2costsontechnologies..................................................................................65PolicyinteractionsofETSandRPS:impactongreenelectricitypremium..........................72Chapter5Policyinsights......................................................................................................75Generalannex.........................................................................................................................79REPOmodelandmodellingdesign......................................................................................79References............................................................................................................................86Abbreviationsandacronyms.................................................................................................91Glossary................................................................................................................................91ListoffiguresFigureES.1CO2emissionstrajectoryfromelectricitygenerationbyscenario,2020-2035...............................................................................................................14FigureES.2AdditionalemissionsreductionsbychannelintheRPS-ETSandETS+ScenarioscomparedwiththecounterfactualRPSScenario,2025-2035...............15FigureES.3Electricitygenerationmixbytechnologyandscenario,2020-2035.......................17FigureES.4Totalsystemcostsbyscenario,2035.....................................................................18EnhancingChina'sETSforCarbonNeutrality:TableofcontentsFocusonPowerSectorPAGE8IEA.Allrightsreserved.Figure1.1ChinaelectricitygenerationandprojectionsintheAnnouncedPledgesScenario,2000-2050...............................................................................................22Figure1.2SchematicillustrationofinteractionbetweenanRPSandanintensity-basedETSfocusingonfossil-basedgeneration...............................................................35Figure1.3SchematicillustrationofinteractionbetweenanRPSandacap-and-tradeETS.........................................................................................................................36Figure3.1ElectricitygenerationandCO2emissionsintheRPSScenario,2020-2035..........46Figure3.2CoalpowergenerationandcapacitymixintheRPSScenario,2020-2035...........48Figure3.3CO2emissionsfromelectricitygenerationintheRPSandRPS-ETSScenarios,.....2020-2035...............................................................................................................50Figure3.4ElectricitygenerationbytechnologyintheRPSandRPS-ETSScenarios,2020-2035...............................................................................................................51Figure3.5AverageeffectiveCO2costbytechnologyandallowancepriceintheRPS-ETSScenario,2020-2035...............................................................................................52Figure3.6GreenelectricitypremiumintheRPSandRPS-ETSScenarios,2025-2035........54Figure3.7Changeinunitelectricitygenerationcostrelativeto2020intheRPSandRPS-ETSScenarios,2025-2035............................................................................55Figure4.1CO2emissionstrajectoryfromelectricitygenerationbyscenario,2020-2035.......57Figure4.2EmissionsreductionsbychannelintheRPS-ETSandETS+ScenarioscomparedwiththecounterfactualRPSScenario,2025-2035................................58Figure4.3Electricitygenerationmixbytechnologyandscenario,2020-2035.......................59Figure4.4Totalsystemcostsbyscenario,2035.....................................................................61Figure4.5Changeinunitelectricitygenerationcostrelativeto2020byscenario,2025-2035...............................................................................................................62Figure4.6Allowancepricebyscenario,2020-2035................................................................64Figure4.7AllowancepriceandaverageCO2costsignalbytechnologybyscenario,2035...67Figure4.8Generationcostsbytechnologyandscenario,2035..............................................68Figure4.9Greenelectricitypremiumandnon-hydrorenewablessharebyscenario,2025-2035........................................................................................................................73FigureA.1REPOmodelframework.........................................................................................73ListofboxesBox1.1TheimportanceofthepowermarketreformforChina’sETS................................25Box1.2TradablePerformanceStandardsandCap-and-TradeSchemes..........................28Box1.3RPScompanionpolicies:Greencertificatesandgreenpowertrading..................32Box4.1ETSandtechnologicalinnovation..........................................................................64Box4.2PotentialimplicationsforCCERoffsetsinclusion...................................................74ListoftablesTableES.1Keyoutcomesbyscenario,2035............................................................................12Table1.1Benchmarkdesignforelectricitygenerationfor2019and2020............................27Table2.1DesignofRPSandRPS-ETSScenarios................................................................41Table2.2DesignofdifferentEnhancedETSScenarios........................................................43Table2.3Assumptionsonbenchmarkvaluesfor2020-2035................................................44TableA.1Chinapowersector’s6gridregionsandREPOmodel’s32provincialareas........80TableA.2Electricitydemandassumptions.............................................................................82TableA.3Costassumptionsbytechnology............................................................................83EnhancingChina'sETSforCarbonNeutrality:TableofcontentsFocusonPowerSectorPAGE9IEA.Allrightsreserved.TableA.4Costassumptionsbystoragetechnology...............................................................83TableA.5Coalpriceassumptionsbyarea,2020...................................................................84TableA.6Assumptionsonemissionsreductioncostsfromenergyefficiencymeasures.......85TableA.7Assumptionsforthenon-hydrorenewablessharetargetundertheRPSpolicy....85EnhancingChina'sETSforCarbonNeutrality:ExecutivesummaryFocusonPowerSectorPAGE10IEA.Allrightsreserved.ExecutivesummaryThestatementbyPresidentXiJinpinginSeptember2020thatthePeople’sRepublicofChina(hereinafter,“China”)will“aimtohaveCO2emissionspeakbefore2030andachievecarbonneutralitybefore2060”setsoutaclearvisionandtimelineforaprofoundtransformationofthecountry’ssocio-economicdevelopment.ThepaceofChina’semissionsreductionsoverthecomingdecadeswillbeanimportantfactoringlobaleffortstolimitglobalwarmingto1.5°C.Thepowersector,responsiblefornearlyhalfofthecountry’senergysectorCO2emissions,1iscentraltoachievingChina’sclimateambition.Policymakersneedtosettheincentivesandmarketstructureswhichensurethatpowersectoractorscancapturethedynamicdevelopmentandrapidcostreductionoflow-carbontechnologies,andimprovethemanagementoftheexistingfleetoffossil-basedgenerationthroughretrofitting,repurposingandretirement.Acceleratingpowersectordecarbonisationinsupportofthecarbonneutralitygoalrequiresaneffectivelyco-ordinatedpolicymix.ThisreportrespondstotheChinesegovernment’sinvitationtotheIEAtoco-operateoncarbonemissionstradingsystems(ETS)andsynergiesacrossenergyandclimatepolicies.ItexplorestheinteractionsandeffectsofChina’snationalETSwithitsrenewableenergypolicyintheelectricitysector,namelyrenewableportfoliostandards(RPS).Thereportdemonstrateshowthepolicymixcouldbebetterco-ordinatedandexplorespossiblepathwaysthatanenhancedETScouldleadtheelectricitysectortowardanemissionstrajectorythatisinlinewithChina’scarbonneutralitytarget.China’snationalETScameintooperationin2021andistheworld’slargestETS,coveringannualpowersectoremissionsofaround4.5GtCO2.Itcurrentlyemploysanintensity-baseddesignwithfreeallocation.Thismeansthatallowancesareallocatedtocoveredentitiesforfreeaccordingtoactualproductionlevelsofcoal-andgas-firedpowerplants(e.g.kWhofelectricitygenerated)andpredeterminedemissionsintensitybenchmarks(e.g.ingCO2/kWh)coveringonlycoal-andgas-firedpowerplants.ThisisdifferentfrommostETSsystemssuchastheEUETS,whichsetapredeterminedabsolutecaponcoveredemissions.FouremissionsintensitybenchmarksarecurrentlydefinedinChina’snationalETSforcoal-andgas-firedpowerplants,andaredifferentiatedbasedonfuel,sub-technologyandplantsize.Againstthisbackdrop,thisreportanalysesfivepolicyscenariosfortheelectricitysectorfor2020to2035,consistentwithChina’s14thFive-YearPlan(2021-2025)1EnergysectorCO2emissionsincludeCO2emissionsfromfuelcombustionandfromindustrialprocesses.EnhancingChina'sETSforCarbonNeutrality:ExecutivesummaryFocusonPowerSectorPAGE11IEA.Allrightsreserved.andtheLong-RangeObjectivesthroughtheYear2035(China,StateCouncil,2021a).InordertotesttheimpactofdifferentETSdesigns,assumptionsregardingelectricitydemandgrowth,exogenoustechnologycostevolutionsandthecurrentRPSpolicyset-uparekeptidenticalacrossallscenarios.TakingintoaccountChina’songoingelectricitymarketreform,allscenariosassumeeconomicdispatchfrom2025–animportantelementtoeffectivelyintegratetheCO2pricesignalinoperational,investmentandconsumptiondecisions.Thefirsttwoscenariosestablishacounterfactualandexaminecurrentpolicy.TheRPSScenarioestablishesahypotheticalcounterfactualscenariowiththecurrentRPSpolicyset-up,includingatargetontheshareofnon-hydrorenewableswhichisassumedtoincreaseto25.9%in2030and36.0%in2035,butnoemissionscontrolorcarbonpricingpolicy.2ThisscenarioprovidesapointofcomparisonforisolatingandevaluatingETSeffects.TheRPS-ETSScenarioisacurrentpolicyscenariowiththesameRPSpolicyassumptions,andanintensity-basedETSwithfreeallocationascurrentlyimplemented.Thescenarioassumesmoderatetighteningofallowanceallocationbenchmarksovertime.Inaddition,threeEnhancedETS(ETS+)ScenariosexploredifferentETSdesignenhancementsafter2025,whilekeepingthesameRPSpolicyassumptionsastheRPSandRPS-ETSScenario:ETS+Benchmark(BM)Scenariomaintainstheintensity-basedfreeallocationbutwithsignificantlytighterbenchmarks;ETS+AuctionScenariomaintainsintensity-basedallocationwithmoderatebenchmarktighteningandintroducespartialallowanceauctioning;andETS+CapScenariochangesETSdesignsignificantlythroughatransitionfromtheintensity-basedETStoacap-and-tradesystem.ThethreeETS+Scenariosaredesignedtoachieveanelectricitysectoremissionstrajectoryafter2025thatisbetteralignedwithChina’sstatedgoalofcarbonneutralitybefore2060.AllETS+ScenariosusethesameemissionstrajectoryoftheIEA’sAnnouncedPledgesScenario(APS)3asinput,anddemonstratetheimpactofpotentialfutureETSdesigns.2Thesharetargetofnon-hydrorenewablesisbasedonChina’sNationalEnergyAdministration’sconsultationdraft(China,NEA,2021a).3AspresentedintheIEA’spublications“AnenergysectorroadmaptocarbonneutralityinChina”and“WorldEnergyOutlook2021”.ThereisnosinglepathwayforenergysectoremissionsconsistentwithChina’sstatedgoalsofachievingapeakinCO2emissionsbefore2030andcarbonneutralitybefore2060.TheAnnouncedPledgesScenario(APS)presentsoneplausiblepathwaytocarbonneutralityinChina’senergysectorinlinewiththecountry’sstatedgoals.“AnenergysectorroadmaptocarbonneutralityinChina”alsoexploresanAcceleratedTransitionScenario(ATS)toassesstheopportunitiesforandimplicationsofafastertransitionthroughenhancedclimatepolicyambitionsandeffortsto2030.EnhancingChina'sETSforCarbonNeutrality:ExecutivesummaryFocusonPowerSectorPAGE12IEA.Allrightsreserved.ThetablebelowsummarisesthekeyETSdesignfeaturesandoutcomesofeachscenario,excludingthehypotheticalcounterfactualscenario:TableES.1Keyoutcomesbyscenario,2035ScenarioKeyETSdesignfeaturesCO2reduction(from2020)MaindriverofCO2reductionsIncreaseintotalsystemcostsAdditionalrenewablesshareInteractionwithRPSRPS-ETSIntensity-based;ModerateBMtightening;Freeallocation-20%CCUS-/--/-LowETS+BMIntensity-based;StrongBMtightening;Freeallocation-38%CCUS5.2%1%LowETS+AuctionIntensity-based;ModerateBMtightening;Partialauctioning-38%RenewablesCCUS1.4%8%HighETS+CapCap-and-Trade;Stringentcap;Freeallocation-38%Renewables0%12%HighIncreaseintotalsystemcostsrelativetotheRPS-ETSScenariorequiredtoachievegivenCO2reductionlevel.Additionalshareofnon-hydrorenewablesinelectricitygenerationmixrelativetotheRPS-ETSScenario.Electricitysectoremissionspeakbefore2030withcurrentRPSandETSpoliciesImplementationoftheRPS-ETSScenariocanalmosttripleCO2emissionsreductionsby2035relativeto2020comparedtoanRPSonlyscenario.Together,bothpoliciescanresultinelectricity-relatedemissionsfallingafter2025,anddecreasingto20%below2020levelsby2035.Inthenear-andmedium-term,bothpoliciescouldworkintandemtosuccessfullypeakandreduceabsoluteCO2emissionsfromtheelectricitysector.Thetwopoliciesactondifferentpowergenerationsourceswithlimitedoverlaps,deliveringemissionsreductionsthatarecomplementary.Theintensity-basedETSenhancestheefficiencyoftheexistingcoalpowerfleetandtheRPSdrivesrenewablesgeneration.ImplementingtheRPSpolicy,targetingaround36%ofnon-hydrorenewablesinthegenerationmixby2035,drivessignificantnewcapacityadditionsfrommainlyvariablerenewableenergy(VRE)sourcessuchaswindandsolarPV.Anintensity-basedETSwithgraduallytighteningbenchmarkscoveringcoalandgas(RPS-ETSScenario)driveshighercoalfleetefficiency,includingthroughincentivisingretrofitsandashiftincoalpowergenerationtothemostefficientplants.Italsosupportscurbingnewadditionsofunabatedcoalinfavourofcarboncapture,utilisationandstorage(CCUS)technologydeployment.However,thecurrentETSdesignprovidesveryEnhancingChina'sETSforCarbonNeutrality:ExecutivesummaryFocusonPowerSectorPAGE13IEA.Allrightsreserved.limitedincentiveforswitchingawayfromcoalgenerationtonon-fossilsourcesanddoesnotleadtoadditionalrenewablesdeployment.China’sintensity-basedETSdesignwithfreeallowanceallocationcurrentlyonlypermitstheactiveparticipationoffossil-basedgeneration.Thisisbecauseallowancesarecalculatedandallocatedthroughfuel-andtechnology-specificbenchmarksforcoalandgaspowerplantsonly,whilenon-fossilgenerationsourcesarenotcoveredbythebenchmarks.Powergeneratorswithanemissionsintensityhigherthanthebenchmarksexperienceanallowancedeficit.However,thiscanonlybebalancedbyanallowancesurplusfrompowergeneratorscoveredbybenchmarks,andthathavealoweremissionsintensitythanthosebenchmarks.Generationsourcesthatarenotcoveredbythebenchmarks–suchasrenewables–cannottakepartinthecurrentETSexceptthroughtheverylimitedrouteofChineseCertifiedEmissionsReductions(CCERs).Switchingtonon-fossilgenerationsourcescouldallowageneratortoavoidanallowancedeficitandtheassociatedcostofneedingtoacquireadditionalallowances.However,sincenon-fossilsourcesdonotreceiveallowances,theycannothelpbalanceallowancedeficits,norcannon-fossilgeneratorsbenefitfromsurplusallowancesthatcanbesold.ThisETSdesignoffuel-andtechnology-specificbenchmarksforonlycoalandgaspower,therefore,mainlylowerstheemissionsintensityofbenchmark-coveredgenerationsources,includingthroughCCUS,whileprovidingverylimitedencouragementforfuelswitchingtonon-fossilsources.EnhancementsinETSdesigncanaccelerateelectricitysectoralignmentwithacarbonneutralitytrajectoryStrongerdecarbonisationthanintheRPS-ETSScenariowouldbetteraligntheelectricitysectorwithChina’scarbonneutralitygoal.Inordertosupporteconomy-widecarbonneutralitybefore2060,China’spowersectorwouldlikelyneedtoachievenetzeroCO2emissionsbefore2055(IEA,2021a).AcceleratingthetransitionoftheelectricitysectorwouldnotonlyfurtherreduceCO2emissionsfromthebiggestsourceinChinabutalsomaximisethesector’sroleindecarbonisingend-usesectors,asgrowingelectrificationwithanincreasinglydecarbonisedelectricitysectorwouldfurtherreduceoverallemissions.Avoidingnewunabatedcoalcapacitiesandafastertransitionalsoincreasethechancesofreachingcarbonneutralityinanorderlyfashionandreducethepotentialburdenofemissionslock-inandstrandedassets(IEA,2021a).ETSdesignchangescandoubletheCO2reductionoftheRPS-ETSScenarioandacceleratealignmentwithacarbonneutralityemissionstrajectory.IntheETS+Scenarios,electricitysectoremissionsare38%lowerby2035comparedto2020–nearlydoublethereductionsasintheRPS-ETSScenario.DifferentETSenhancementscoulddrivetheseadditionalemissionsreductions.IfEnhancingChina'sETSforCarbonNeutrality:ExecutivesummaryFocusonPowerSectorPAGE14IEA.Allrightsreserved.retainingthecurrentdesign–anintensity-basedETSwithfreeallocation–thebenchmarktighteningratewouldneedtobedoubledin2025-2030andalmostquadrupledin2030-2035(ETS+BMScenario),comparedtotheRPS-ETSScenario.Thiswouldreducecoalbenchmarkstotwo-thirdsoftheir2020levelsby2035.IntheETS+AuctionScenario,aroundaquarterofallowanceswouldneedtobeauctionedby2035whilemaintainingthesametighteningrateforcoalbenchmarksasintheRPS-ETSScenario.Athirdoption(ETS+CapScenario)istointroduceanabsoluteemissionscapthatisalignedwithacarbonneutralitypathway.FigureES.1CO2emissionstrajectoryfromelectricitygenerationbyscenario,2020-2035IEA.Allrightsreserved.StringentETSbenchmarksdriveefficiencyandCCUS;auctioningandacapencouragefuelswitchingDependingonitsdesign,theETScandriveemissionsreductionsthroughdifferentchannels.Inanintensity-basedETSwithfullyfreeallocationthroughcoalandgaspowerbenchmarks(RPS-ETSandETS+BMScenarios),theETSdeliversmostoftheemissionsreductionsbytransformingthecoalfleetthroughimprovingunabatedcoalfleetefficiencyandencouragingCCUSadoptionincoalpowerfrom2030onwards.Withincreasedbenchmarkstringency,theETS+BMScenariotriplesCCUS-relatedreductionscomparedtotheRPS-ETSScenarioin2035,withsomeverylimitedfuelswitchingfromcoaltogasandnon-fossiltechnologies.TheETS+AuctionScenariogeneratesmostoftheemissionsreductionsthroughfuelswitchingtonon-fossiltechnologies,mainlyonshorewindandsolarPV,andtoalesserdegreetogas,aswellasthroughCCUSdeployment.Thescenario’seffectonfuelswitchingtogasandunabatedcoalfleetefficiencyimprovementsissimilarinmagnitudetothatintheRPS-ETSandETS+BM0100020003000400050002020202520302035MtCO₂RPSScenarioRPS-ETSScenarioEnhancedETS(ETS+)ScenariosEnhancingChina'sETSforCarbonNeutrality:ExecutivesummaryFocusonPowerSectorPAGE15IEA.Allrightsreserved.Scenarios.Ontheotherhand,transitioningfromanintensity-basedETStoacap-and-tradedesignwithastringentcapcouldsignificantlychangehowtheETSdrivesdecarbonisation.IntheETS+CapScenario,emissionsreductionsresultentirelyfromfuelswitchingawayfromcoalpower–around90%tonon-fossiland10%togaspower.Whiletechnicalefficiencyimprovementsofthecoalfleetalsotakeplaceinthisscenario,theaverageoperationalefficiencydoesnotimproveasallcoalunitsseeareductioninrunninghours.FigureES.2AdditionalemissionsreductionsbychannelintheRPS-ETSandETS+ScenarioscomparedwiththecounterfactualRPSScenario,2025-2035IEA.Allrightsreserved.Theintroductionofallowanceauctioningandatransitiontoastringentcap-and-tradeconsiderablyincreasetheETSincentiveforfuelswitching.Partialauctioning(ETS+AuctionScenario)–leadingtoareductioninfreeallocationthroughcoalandgaspowerbenchmarks–raisestheeffectiveCO2costforcoveredfossil-basedgenerationsources.Itthusmakesthemmoreexpensivetoruncomparedwithnon-fossilgenerationtechnologies,therebyencouragingswitchingtorenewables.Atthesametime,theintensity-baseddesignstillencourageshigherfleetefficiencyandsomeCCUSdeployment.Transitioningtoacap-and-tradesystem(ETS+CapScenario)withastringentemissionscapwouldfurtherchangetheETSimpactsontechnologies.Bysettingapredeterminedemissionscapandmovingawayfromtechnology-specificbenchmarks,acap-and-tradeallowstheparticipationofallgenerationsourcesinachievingabsoluteemissionsreductions,insteadoffocusingonemissionsintensityreductionofcoalandgaspower.ItsdesignincentivisesgeneratorstoreduceCO2emissionsthroughthelowest-costabatementoptions,thusspurringemissionsreductionsmainlythroughfuelswitchingtocost-competitiverenewables.-1500-1000-5000RPS-ETSRPS-ETSETS+BMETS+AuctionETS+CapRPS-ETSETS+BMETS+AuctionETS+Cap202520302035MtCO₂Switchfromfossiltonon-fossiltechnologiesCoal-to-gasswitchSwitchfromunabatedcoaltocoalwithCCUSCoalfleetefficiencyimprovementsEnhancingChina'sETSforCarbonNeutrality:ExecutivesummaryFocusonPowerSectorPAGE16IEA.Allrightsreserved.EnhancedETSdesignsleadtoverydifferentgenerationmixes,butallacceleratethephase-downofunabatedcoal.InallETS+Scenarios,unabatedcoalpowerplantswouldgenerate2800TWhofelectricityby2035comparedwitharound4800TWhin2020;unabatedcoal’sshareofthegenerationmixwouldalsodeclinefrommorethan60%in2020to24%in2035.Thisiscomparedwitha33%generationshareintheRPS-ETSScenarioby2035,notingthatinallscenariostotalelectricitygenerationincreasesbymorethan50%between2020and2035.ThedifferentenhancedETSdesignsdrivedifferentlow-carbonsolutions.IntheETS+BMScenario,wherethebenchmarksofanintensity-basedETSaresignificantlytightened,theshareofcoalpowergenerationwithCCUSincreasesto11%oftotalgenerationby2035.Thesharesofnon-fossiltechnologiesremainsimilartothoseoftheRPS-ETSScenario.Introducingpartialauctioningintheintensity-basedETS(ETS+AuctionScenario)resultsinthemostdiversesetofdecarbonisationsolutions.ItencouragesadditionalrenewablesandCCUSdeployment,aswellassomeefficientgasgenerationandcoalfleetefficiencyimprovement.By2035,theshareofrenewablesgenerationreachesnearly60%,withnon-hydrorenewablesstandingfor43%.Meanwhile,CCUS-equippedcoalpowercontributes3%.Transitioningtoacap-and-tradesystemwithastringentemissionscap(ETS+CapScenario)leadstoagenerationmixdominatedbyrenewables.Thesewouldaccountfor63%oftotalgenerationby2035,including47%ofnon-hydrorenewables–around12%higherthanintheRPS-ETSScenario.Thissuggeststhatacap-and-tradesystemcouldsignificantlyacceleratethedeploymentofmaturerenewables.IntheETS+CapScenario,nocoalpowerwithCCUSisdeployedby2035.EnhancingChina'sETSforCarbonNeutrality:ExecutivesummaryFocusonPowerSectorPAGE17IEA.Allrightsreserved.FigureES.3Electricitygenerationmixbytechnologyandscenario,2020-2035IEA.Allrightsreserved.AnETSwithacap-and-tradecandoubleCO2emissionsreductionsatnoadditionalcostAllthreeEnhancedETSScenarioscanachievethesameemissionstrajectoryfortheelectricitysector,butatdifferentcosts.Totalsystemcost4increasessignificantlyovertimeacrossallscenariosduetoincreasingelectricitydemand:intheRPS-ETSScenario,totalsystemcostincreasesfrom2.80trillionChineseYuanRenminbi(CNY)(USD434billion)in2020toCNY4.28trillion(USD664billion)in2035.Withthesameelectricitydemandgrowthassumption,theETS+CapScenarioleadstothelowesttotalsystemcostfortheelectricitysectoracrossallEnhancedETSScenarios.In2035,ithasthesamesystemcostastheRPS-ETSScenariobutwithalmost20%additionalCO2emissionsreductions.ThisisfollowedbytheETS+AuctionScenariowithslightlyhighercosts(CNY4.34trillion,USD673billion),andtheETS+BMScenariowhichis5%morecostlythantheRPS-ETSScenario(CNY4.49trillion,USD698billion).Inaddition,auctionrevenuesgeneratedintheETS+AuctionScenariocouldreachCNY260billion(USD40billion)in2035,whichcanbeusedtoaddress4Inthisreport,totalsystemcostincludesannualisedcapitalexpenditureaswellasvariableandfixedoperatingandmaintenancecostsofelectricitygeneration,transmissionandbalancingcosts,andcostsforplantretrofits.0%20%40%60%80%100%ETS+CapETS+AuctionETS+BMRPS-ETSETS+CapETS+AuctionETS+BMRPS-ETSRPS-ETSRPS-ETS2035203020252020CoalCoalwithCCUSGasNuclearHydroNon-hydrorenewablesTargetedRPSshare(non-hydro)18.7%25.9%36.0%EnhancingChina'sETSforCarbonNeutrality:ExecutivesummaryFocusonPowerSectorPAGE18IEA.Allrightsreserved.affordabilityorcompetitivenessconcernsofelectricityconsumers,aswellastoinvestintechnologyinnovationandenergyefficiencytoreducefuturedecarbonisationcost.FigureES.4Totalsystemcostsbyscenario,2035IEA.Allrightsreserved.Note:AuctioningcostisthecostofageneratortopurchaseoneChineseEmissionsAllowance(CEA)inallowanceauctions.ForthecomparisonontotalsystemcostsweexcludetheauctioningcostfortheETS+AuctionScenariobecause,fromasystemperspective,auctioningcostsandrevenuescanbebalanced.Thecap-and-tradesystemachievesthiscost-effectivenessbyprioritisingthelowest-costabatementopportunities,especiallyfuelswitching.Byallowingpowersectoractorstofreelychoosethecheapestabatementtechnology,thecap-and-tradesystemintroducestechnologyneutralitywhich,inturn,drivesfuelswitchingfromunabatedcoalgenerationtorenewables.Incontrast,theETS+BMScenarioresultsinamuchmorecostlygenerationmixasitwouldprimarilyencourageashiftfromunabatedcoaltocoalpowerwithCCUS,alessmatureandmoreexpensiveabatementoption.Introducingauctioningintotheintensity-basedETS(ETS+AuctionScenario),raisestheeffectiveCO2costthatgeneratorsfaceandencouragesbothsomefuelswitchingtorenewablesandintensityimprovementsinthecoalfleetincludingthroughCCUS.Consequently,intheETS+CapScenario,fuelswitchingtomaturerenewablescanbeencouragedalreadywitharelativelylowallowancepricelevelofCNY100/tCO2(USD16/tCO2)by2035.Incontrast,anintensity-basedETS(inbothETS+BMandETS+AuctionScenarios)wouldleadtoahigherallowancepriceofaroundCNY300/tCO2(USD47/tCO2)by2035toachievethesameemissionstrajectory.ThisisbecausetheETSdesigndrivesemissionsreductionsatleastinpartthroughCCUSdeploymentwhichrequireshigherfinancialsupport.010002000300040005000RPS-ETSETS+BMETS+Auction(excludingauctioningcost)ETS+CapbillionCNYDifferencecomparedtoRPS-ETS+5.2%0%+1.4%EnhancingChina'sETSforCarbonNeutrality:ExecutivesummaryFocusonPowerSectorPAGE19IEA.Allrightsreserved.EvolutionofETSandRPSrequireapolicyco-ordinationprocesstostrengthentheireffectivenessSimultaneousoperationoftheRPSandETSpolicymixcanhaveimportantinteractioneffectswhichneedtobetakenintoaccountinpolicydesign.WheretheRPSandETSactondifferentelectricitygenerationassets,asintheRPS-ETSScenariowhichmodelsthecurrentpolicyset-up,bothworkalongsideeachotherandwithlimitedinteraction.However,withpotentialchangesintheETSdesign,andasrenewablesaccountforagreatershareintheelectricitysector,overlapsbetweentheETSandtheRPSleadtoagreaterneedforpolicyco-ordination.Theresultsofthisreportshowthatacap-and-tradeETS(ETS+CapScenario),aswellaspartialauctioning(ETS+AuctionScenario),canhelptoprovidethefinancialincentivesneededtoincreaserenewablesdeployment.WhilethesechangesinETSdesigncanmakeitakeyinstrumentinfurtherdecarbonisingtheelectricitysector,andensuringalignmentwithacarbonneutralitypathwayatalowercost,theETSpriceincentivecoulddirectlyinteractwiththegreencertificatepriceoftheRPS.Internationalexperiencealsoshowsthatinacap-and-tradeETS,higherthanexpectedrenewablesdeploymentcanleadtoallowancepricedecreases,whichinturncanreduceincentivesfortechnologicalinnovationandincreasedecarbonisationcostsoverall.TheseinteractionshighlighttheimportanceforpolicymakerstoregularlyassesstheimpactsofchangestoChina’senergyandclimatepolicies.Strengthenedpolicyco-ordinationshouldaimtoimprovetheeffectivenessofthepolicymix,andsupportachievingeconomy-widecarbonneutralityatthelowestcostpossible.PolicyInsightsAsChina’scarbonneutralitytargetshiftsthepolicyfocusfromimprovingemissionintensitiestowardsachievingabsoluteemissionsreductions,policymakerscouldconsiderthefollowinginsightstoacceleratethealignmentoftheelectricitysectorwitha2060carbonneutralitytargetthroughanenhancedETS:CarefullyexaminedifferentETSdesignoptionsinlinewiththeintendedpolicyobjectives,inparticularwithaviewtotheresultingcosts,thecarbonpriceandthetechnologymix.Whiledifferentdesignapproachescanachievethesameemissionstrajectory,theycouldservedifferentpolicypriorities,suchassupportingdifferenttechnologiesfromrenewablestoCCUS.Consequently,theywouldalsorequiredifferentlevelsofco-ordinationandcompanionpolicies(e.g.adjustingtargetlevelandRPSfocusonlessmaturerenewables,supportfortransportandstorageinfrastructurenecessaryforCCUSdeployment).CommunicatefutureplansonChina’sETSdesignwellinadvance,includingthemedium-termbenchmarkand/orcaptrajectory(e.g.forthenext5-10years),toprovidevisibilityandplanningcertaintyformarketparticipants.ThiswillguideEnhancingChina'sETSforCarbonNeutrality:ExecutivesummaryFocusonPowerSectorPAGE20IEA.Allrightsreserved.plantmanagementandinvestmentdecisions(includingfortechnologyinnovation),andacceleratealignmentwithcarbonpeakingandcarbonneutralitygoals.Establishapolicyco-ordinationprocessinvolvingallrelevantgovernmentinstitutionsthataimstoanalyseex-antetheimpactofdifferentpolicymixestoavoidunintendedside-effects,andwhichregularlyreviewspolicyoutcomes.Considerintroducingflexibilitymechanismssuchasallowancereservesorpricecorridorstohelpaccommodateunexpectedpolicyinteractionsandexternalshocks.Considergraduallyintroducingallowanceauctioninginthecurrent14thFive-YearPlan(FYP)period(2021-2025)toincentivisemorediversifiedandlower-costemissionsabatementoptions,encouragingrenewablesinadditiontofossil-basedgenerationimprovementandCCUSdeployment.Thiswouldalsoenabletheuseofauctionrevenuestoaddressdistributionalimpactsandcompetitivenessconcerns,aswellastodirectlyinvestinclimateactionssuchaslow-carbontechnologyinnovationandenergyefficiency.Considertransitioningtoacap-and-tradesystemwithastringentcaplaterinthedecadetopositiontheETSasakeyinstrumentinChina’spathtocarbonneutrality,toreducethenumberofadditionalpoliciestargetingrenewables,andtolowerthecostfordecarbonisation.ThedeploymentofCCUScouldstillbeincentivisedthroughspecialprovisionswithinanETS,suchasadditionalfreeallowances,orthroughcompanionpoliciesdedicatedtoCCUSuptake.SwiftlyimplementannouncedplanstoextendtheETStoothersectors,andconsideropeningmarketparticipationtonon-complianceentitiessuchasfinancialintermediaries.Sectoralextensionwouldreducecostsbyexpandingpossibleoptionsforemissionsreductions,andestablishacross-sectoralcarbonpricesignaltohelpachievecarbonneutrality.OpeningparticipationwouldalsoincreasetheETS’liquidityandfacilitatepricediscoverythroughalargernumberofactorstradingallowances.EnhancingChina'sETSforCarbonNeutrality:Chapter1.PolicycontextFocusonPowerSectorPAGE21IEA.Allrightsreserved.Chapter1.PolicycontextResponsiblefornearlyhalfofthecountry’senergysectorCO2emissions5,thepowersectoriscentraltoachievingChina’sclimateambitions.Itsaccelerateddecarbonisationrequiresaneffectivelyco-ordinatedpolicymixthatcansupportthedevelopmentoflow-carbontechnologies,manageexistingfossil-basedinfrastructure,andmaximiseitskeyroleindecarbonisingend-usesectorsviaelectrification.ThischapterfirstprovidesabriefoverviewofthelatestdevelopmentsinChina’spowersector,emissionstradingsystemandrenewablessupportpolicyinthecontextofChina’scarbonneutralitygoal.Itthendiscussespotentialinteractionsbetweenemissionstradingandrenewablespolicydrawingfrominternationalexperiences.Long-termpolicyobjectivesAttheUnitedNationsGeneralAssemblyinSeptember2020,PresidentXiJinpingannouncedthatChinaaimstohaveCO2emissionspeakbefore2030andtoachievecarbonneutralitybefore2060.InOctober2021,Chinareleasedahigh-levelGuidancedocumentforachievingtheannouncedtargets(hereafter“theGuidance”)(China,CCCPCandStateCouncil,2021),andanActionPlantopeakCO2emissionsbefore2030(China,StateCouncil,2021b).ThesetargetswerealsoreflectedinternationallyinChina’supdatedNationallyDeterminedContribution(NDC)undertheParisAgreementfor2030,andinitsfirstlong-termlowgreenhousegasemissiondevelopmentstrategy(China,StateCouncil,2021c,2021d).China’supdatedNDCalsoincludestargetsforloweringCO2emissionsperunitofGDPbyover65%fromthe2005level,increasingtheshareofnon-fossilfuelsinprimaryenergyconsumptiontoaround25%,increasingtheforeststockvolumeby6billioncubicmetersfromthe2005level,andexpandingitstotalinstalledcapacityofwindandsolarpowertoover1200GWby2030.Foritslong-termcarbonneutralitygoal,thecountrysetatargettoincreasethenon-fossilenergysharetoover80%by2060.Thehigh-levelGuidanceanchorsChina’spolicyframeworkontheclimategoals,guidingtheformulationofmoredetailedsectoralandregionalpolicies.TheGuidancehighlightstheneedtoacceleratethedevelopmentofalow-carbonandefficientenergysystem,includingbysignificantlyimprovingenergyefficiency,increasinglytransformingtheenergymixfromfossilfuelstonon-fossilenergy,anddeepeningenergysystemreforms.Forthenear-andmedium-term,Chinaaims5EnergysectorCO2emissionsincludeCO2emissionsfromfuelcombustionandfromindustrialprocesses.EnhancingChina'sETSforCarbonNeutrality:Chapter1.PolicycontextFocusonPowerSectorPAGE22IEA.Allrightsreserved.tolimittheincreaseincoalconsumptionoverthe14thFYPperiod(2021-2025)andtophaseitdowninthe15thFYPperiod(2026-2030),developanewpowersystembasedonnewenergysources(mainlywindandsolar)andadvancemarket-orientedreformsinthepowersector.Amongkeypolicymechanismsforachievingtheclimategoals,theGuidanceidentifiedtheneedtoacceleratethedevelopmentandimprovementofcarbonpricingmechanismsandthemarket-basednationalemissionstradingsystem(ETS),whichbegantradinginJuly2021andcovers,initsinitialphase,coal-andgas-firedpowerplantsresponsibleforaround4.5GtofannualCO2emissions.TheGuidancealsounderlinedtheneedtobetterco-ordinatethetradingofelectricity,energyconsumptionpermitsandcarbonemissionsallowances.Furthermore,theGuidanceandtheCO2EmissionsPeakingActionPlanaimtoimproveinnovationmechanismsandsystems,enhanceinnovationcapabilityandaccelerateR&Dandapplicationoflow-carbontechnologies,suchasforlarge-scalerenewablesintegration,advancedenergystorage,hydrogenandCCUS.China’spowersectorChinaaccountedfornearly30%ofglobalelectricitygeneration(7800TWh)in2020,withitselectricityproductionrisingover80%,or6%annually,between2010and2020.DespitetheCovid-19pandemic,thecountrysawa3.7%annualincreaseinelectricitygenerationin2020comparedto2019,andstronggrowthat8%in2021to8100TWh.China’selectricitydemandisexpectedtocontinuetogrow,thoughataslowerpacethaninthelastdecade,withelectricitygenerationestimatedtodoubleby2050inIEA’sAnnouncedPledgesScenario(APS)(Figure1.1)(IEA,2021b).Figure1.1ChinaelectricitygenerationandprojectionsintheAnnouncedPledgesScenario,2000-2050IEA.Allrightsreserved.Note:TheAnnouncedPledgesScenario(APS)ispresentedinIEA’sWorldEnergyOutlook2021.Ittakesaccountofalloftheclimatecommitmentsmadebygovernmentsaroundtheworld,includingNationallyDeterminedContributionsaswellaslongertermnetzero/carbonneutralitytargets,andassumesthattheywillbemetinfullandontime.0%25%50%75%100%02000400060008000100001200014000160002000200520102015202020302050Electriictygeneration(TWh)OtherOtherrenewablesSolarPVWindHydroNuclearGasCoalRenewablesshareNon-hydrorenewablesshareEnhancingChina'sETSforCarbonNeutrality:Chapter1.PolicycontextFocusonPowerSectorPAGE23IEA.Allrightsreserved.CoalpowerElectricitygenerationinChinaremainshighlyreliantoncoalaselectricitydemandundergoessustainedgrowth,despiteeffortstolimitcoalconsumptionandthefastexpansionofalternativesourcesintherecentdecade.Coalfuelledover60%ofelectricityproducedin2020,followedbyhydropower(17%),wind(6%)andnuclear(5%).SolarPVandnaturalgasbothcontributedaround3%(IEA,2021b).Theshareofcoalinthegenerationmixisexpectedtofallbelow60%by2025,asrenewableenergysourcesaresettomeetthemajorityofadditionaldemand,butcoalisstillexpectedtomeetaroundaquarteroftheincrementduring2022-2024(IEA,2022a).Thedominanceofcoalledtoemissionsofalmost4.8GtCO2fromelectricitygenerationinChinain2020,6correspondingto14%ofglobalenergysectorCO2emissionsandover40%ofChina’senergysectoremissions(IEA,2021b).7OfChina’semissionsfromelectricitygeneration,over95%camefromcoal-firedpowerplants.Similarly,in2021,coalpowerinparticularwascalledontomeetanunprecedentedincreaseinChina’selectricitydemand,inturncontributingtothehighestlevelofglobalCO2emissionsever(IEA,2022b).In2020,Chinahad1080GWofinstalledcoal-firedpowercapacity–morethanhalfofglobalcoalcapacity.Theyoungageofthecoalfleetincreasestheriskoflocked-inemissions:theaverageplantageisonly13years,with40%ofcoalplantshavingbeenbuiltinthelasttenyears.Inaddition,therewerenearly250GWofnewcapacityatvariousstagesofdevelopment(CEC,2021;IEA,2021a).Whilemostrecentlybuiltcoalplantsarelarge-scalesupercriticalorultra-supercriticalplantswithhighefficiency,lessefficientplantssuchassubcriticalplantsstillrepresentalmosthalfofChina’scoalcapacityinoperation.Existingcoal-firedpowerplantscouldaccountforaround60%(101GtCO2)oftotalcumulativeemissions(175GtCO2)fromChina’sexistingenergyinfrastructurebetween2020and2060,equivalenttonineyearsofChina’senergysectoremissionsin20208(IEA,2021a).Limitingnewcoalpowercapacityadditionsandmanagingthecoal-poweredfleetthroughretrofitting,repurposingandearlyretirement,willbekeytoChina’scleanenergytransitionandachievingcarbonneutrality.A2021Plantoretrofitandupgradecoal-firedunitsaimsto6TheIEAandChina’sestimatesforelectricitysectoremissionsdifferduetomethodologicaldifferences,includinghowpowersectoremissionsareattributedbetweenheatandelectricitygenerationinco-generationplants,andtoemissionsfactorsusedforfossilfuelsub-categories.Forthepurposeofthisreportandtoevaluatecountry-specificpolicyimpacts,electricitysectoremissionsusedformodelling(Chapters2-4)areestimatedusingChina’smethodology,resultinginaround4.5GtCO2,andarethereforelowerthantheIEA’sestimate(seeAnnexAformoreinformation).7Energysectoremissionsincludeenergy-relatedandindustrialprocessCO2emissions.8Theanalysisonemissionsfromexistinginfrastructureuses2020asthebaseyearandassumesthattheexistingenergyinfrastructureareoperatedunderthetypicaloperatingconditions(e.g.capacityfactors,fuelsharesandmileages)andthatnoassetsareretiredearlyormodified.TypicallifetimesofcoalpowerplantsandheavyindustryassetsinChinaof25-35yearsareused.Theanalysisdoesnotincludeenergyinfrastructurethatareplannedtobebuiltinthecomingyears.EnhancingChina'sETSforCarbonNeutrality:Chapter1.PolicycontextFocusonPowerSectorPAGE24IEA.Allrightsreserved.reducetheaverageenergyintensityofthermalpowerfrom305.5grammesofstandardcoalequivalentperkilowatthour(gce/kWh)in2020to300gce/kWhby2025,andtargetsflexibilityretrofits9for200GWofcoal-firedcapacity.Newcoal-firedunitsarestillallowed,subjecttostrictapprovalandinprinciplecanonlybeultra-supercriticalunitswithenergyintensitybelow270gce/kWh(China,NDRCandNEA,2021a).RenewablesDespitethecontinueddominanceofcoal,Chinaisthegloballeaderinthedeploymentofrenewables,includingsolarPV,windandhydro.By2020,Chinaincreaseditsrenewablecapacitytoover930GW(includingpumpedstoragehydropower),exceedingthecapacitytargetforthe13thFYPperiod(2015-2020)of715GWby30%.Hydropowerhasaccountedfor35%oftotalrenewablecapacityadditionssince2000.Another60%ofrenewablecapacityadditionssince2000hascomefromsolarPVandwindpower.Bytheendof2020,Chinahadinstalledcapacityofover280GWofwindandover250GWofsolarPV,andfurtheraddedover100GWofwindandsolarcombinedcapacityin2021.AspartofitsupdatedNDC,Chinahasannouncedatargettoincreasethetotalcapacityofwindandsolarpowertoover1200GWby2030.China’srenewables-basedelectricitygenerationreached2200TWhin2020,meetingnearly30%ofelectricitydemand(China,StateCouncilInformationOfficeandNEA,2021),comparedto16%in2000.Therenewablesexpansion,togetherwiththatofnuclearpowerandfossil-basedpowerplants'efficiencyimprovement,helpeddrivedownthecarbonintensityofelectricitygenerationbyaround30%between2000and2020(IEA,2021a).Renewables,inparticularwindandsolarPV,willneedtocontinuetheirmassivescale-upinthepowersectortosupportChina’scarbonpeakandcarbonneutralitygoals.IntheIEA’sAnnouncedPledgesScenario(APS),theshareofrenewablesinelectricitygenerationreachesover45%in2030andnearly80%in2050.Reachingtheseshareswouldrequirestronginvestmentinrenewablegenerationresources,butalsoinvestmentinelectricitysystemflexibility,includingpowerplantflexibility,storagecapacities,demand-sideresponseandelectricitynetworks,aswellasadaptationsinpolicy,regulatoryandmarketframeworkstoenablesecureandefficientintegrationofahighshareofvariablerenewables(IEA,2021b,2018).9Examplesofflexibleretrofitsincluderetrofitsthatcanreducetheminimumstablelevelatwhichaplantcanoperate,replacementofoldequipmentandoperationsupdatesinordertoenhanceapowerplant’scapacitytoprovideflexibilitytothegrid.EnhancingChina'sETSforCarbonNeutrality:Chapter1.PolicycontextFocusonPowerSectorPAGE25IEA.Allrightsreserved.PowersystemreformAlongsidethetransformationofthegenerationmixandinfrastructure,China’spowersectoriscurrentlyundergoingwide-rangingregulatoryreformstoexpandtheuseofmarket-basedmechanismstodeterminepowersectoroperationsandimprovesystemefficiency.ThishasimportantimpactsforthefunctionofChina’sETS(Box1.1).ElectricitydispatchandpricinghaspredominantlybeendeterminedadministrativelyinChina.ImportantreformsunderPolicyDocumentNo.5in2002restructuredthepowersystembyseparatingthepowergenerationandtransmissionfunctionsoftheverticallyintegratedutility,strengtheningregulation,andintroducinginitialelementsofmorecompetitivepowermarkets.Anewmajorroundofpowersystemreformswaslaunchedin2015withthepublicationofDocumentNo9,whichaimstoenhancethemarket’sroleinelectricitypricing,reduceelectricityprices,increaseindustrialproductivityandboosteconomicgrowth(China,CCCPCandStateCouncil,2015).Implementationisunderway,includingestablishingmid-tolong-termelectricityforwardmarketswherewholesaleenergypricesaredecidedbynegotiationorauctionbetweengeneratorsorsuppliersandlargeconsumers,broadeningancillaryservicesmarkets,andpilotingspotmarketswhichenableday-ahead,real-timeenergyexchanges.Since2019,Chinahastakenstepstoliberalisethepricingofcoal-firedpower,turningtheregulatedcoalbenchmarkpricingtoa“baseprice+fluctuation”system,andallowingcoalpowerpricestofluctuateby10%upwardsand15%downwardsfrombenchmarkpricelevels(China,NDRC,2019).InOctober2021,inamajorsteptowardsmarketpricingofelectricity,furtherreformstookplacewhichallowedcoal-firedpowerpricestoriseorfallbyupto20%frombenchmarkpricelevels,andremovedpricefluctuationlimitsforenergy-intensivefirmsandelectricityspottrading,(China,NDRC,2021a).Withelectricitymarketscurrentlyoperatingatprovincialandregionallevels,Chinaalsoaimstoacceleratetheestablishmentofanation-wideelectricitymarketby2025tofurtheroptimiseresourcesallocation,includingthroughincreasedinterprovincialpowertrade,aswellastoimprovethestabilityandflexibilityofthepowersystem,andtobettersupportrenewablesintegration(China,NDRCandNEA,2022a).Box1.1TheimportanceofthepowermarketreformforChina’sETSTheeffectivenessofChina’sETSiscloselyrelatedtotheprogressinpowermarketreform,inparticulartoeconomicelectricitydispatchdecisions.Atransitionfromadministratively-determineddispatchtoeconomicdispatch,wherethepowerplantwiththelowestgenerationcostshaspriorityformeetingelectricitydemand,hasprofoundimplicationsforpromotingtheuseofefficient,low-emissions,andleast-costgenerationresources.EconomicdispatchwouldstrengthentheEnhancingChina'sETSforCarbonNeutrality:Chapter1.PolicycontextFocusonPowerSectorPAGE26IEA.Allrightsreserved.effectivenessoftheETSbyallowingmarketstoreflectcarbonpricesinelectricitygenerationcostsandthustodirectlyimpactdispatchdecisions.Withoutthisreform,theETSrisksplayingalimitedroleinreducingpowersectoremissions;coalpowerplantswouldnotneedtoadjusttheiroperationinresponsetothepricesignalstemmingfromtheETSallowanceallocation(IEA,2020a,2021c).Transitioningtoaneconomicdispatchmechanismwouldalsoallowcostpass-throughfromgeneratorstoenergyconsumers,andhencestrengthenincentivesfordemand-sideresponse.Atthesametime,itwouldrequireco-ordinationinpolicyandmarketdesignstomanageimplicationsforequity,energyaffordabilityandcompetitiveness.Together,powermarketreformsandeffectivecarbonpricingcouldhelptosignificantlyreducepowersystemoperationalcosts,improvewindandsolarpowerintegration,andachieveaconsiderabledropinpowersectoremissions(IEA,2019).China’sETSdesignChina’snationalemissionstradingsystem(ETS)wasofficiallylaunchedin2017andcameintooperationinJuly2021,tenyearsafterthecountryannounceditwoulddevelopregionalpilotcarbonmarkets,severalofwhichbeganoperatingin2013.ThenationalETScurrentlycoversthepowersector(electricityandheatgeneration10),involvingmorethan2000companiesandcoveringaround4.5GtCO2oraround40%ofChina’senergysectorCO2emissionsin2020.11AlreadythelargestETSintheworld,thecoverageofChina’sETSisexpectedtoexpandtoincludeotherenergy-intensivesectors,whichaccountforaround30%ofChina’senergysectorCO2emissions,includingpetrochemicals,chemicals,buildingmaterials,ironandsteel,non-ferrousmetals,paperanddomesticaviation.ThefirstcomplianceperiodofthenationalETS,whichcoveredpowersectoremissionsfrom2019and2020,successfullyendedinDecember2021witha99.5%compliancerate,i.e.allowancescorrespondingto99.5%oftheverifiedemissionswerereturnedbytheendof2021.AllowancesmostlytradedataroundCNY40-60/tCO2,withaweightedaveragepriceofCNY42.85/tCO2.However,themarkethasshownchallengesoflimitedliquidity,withacumulativetradingvolumeof179millionallowancesfor2019and2020verifiedemissions,10Onlyheatgenerationfromcombinedheatandpowerunitsiscovered;heating-onlyplantsarenotcoveredbyChina’snationalETS.11Acompanyisincludedifitremainsinoperationandownspowerunitswithannualemissionsover26000tCO2inanyyearovertheperiodof2013-2019.Thethresholdforinclusionwouldbemetbyacoal-firedpowerunitof6MWrunningat2018averagecapacityfactor.EnhancingChina'sETSforCarbonNeutrality:Chapter1.PolicycontextFocusonPowerSectorPAGE27IEA.Allrightsreserved.representingaround4%ofannuallycoveredemissionsandwiththevastmajoritytradedonlyinthemonthofDecemberbeforethecompliancedeadline(China,MEE,2022).Table1.1Benchmarkdesignforelectricitygenerationfor2019and2020BenchmarkcategoryTechnologytypeCO2emissionsbenchmarkforelectricitygeneration(gCO2/kWh)Unconventionalcoal-firedunitsCirculatingfluidisedbed(CFB)1146Conventionalcoal-firedunitsatandbelow300MWHigh-pressureSubcritical≤300MWSupercritical≤300MW979Conventionalcoal-firedunitsabove300MWSubcritical>300MWSupercritical>300MWUltra-supercriticalCoalwithCCUS877Gas-firedunitsGasGaswithCCUS392Note:CCUS=carboncapture,utilisationandstorage.Theanalysismadetheassumptionthatcoal-andgas-firedpowerunitsequippedwithCCUStechnologyaresubjecttothesamebenchmarksasthelargeconventionalcoalandgasunits.Source:China,MEE,2020.China’sETScurrentlyemploysanintensity-basedallowanceallocationapproach,12whereemissionsallowances–eachrepresentingtherighttoemitonetonneofCO2–areallocatedtocoal-andgas-firedpowerplantsaccordingtotheiroutputlevel(e.g.totalMWhofelectricitygeneratedin2019-2020)andpredeterminedemissionsintensitybenchmarks(intonnesofCO2/MWhforelectricityandtonnesofCO2/GJforheatgeneration)foreachfuelandtypeofplant.Thecurrentallowanceallocationplandefinesfourbenchmarkcategories,threeforcoal-firedandoneforgaspowerplants(Table1.1).Coal-andgas-firedplantsreceiveemissionsallowancesbasedontheiractualelectricityandheatgeneration,13multipliedbytheCO2emissionsintensitybenchmarksspecifictotheplant’sfuel,technology,andsize(Table1.1).Allowancesarecurrentlyallocatedtopowerplantoperatorsforfree(China,MEE,2021a).ETScompliancerequiresthataplantreturnsthenumberofallowancescorrespondingtoitsverifiedemissions,whicharecalculatedbasedonitsfuelconsumptionandfuelemissionsfactor.12Anintensity-basedETSisoftenalsotermedatradableperformancestandard(TPS).13Duringacomplianceperiod,entitiesfirstreceivedfreeallowancesbasedonacertainpercentageofhistoricalproduction,andallowanceswerelateradjustedtoreflectactualproductionofthecoveredyear(s).Forexample,forthe2021complianceperiodwhichcoveredemissionsfrom2019and2020,entitiesfirstreceivedallowancesbasedon70%ofcoal-andgas-firedplants’productionin2018,whichwerelateradjustedto2019and2020productionlevels.EnhancingChina'sETSforCarbonNeutrality:Chapter1.PolicycontextFocusonPowerSectorPAGE28IEA.Allrightsreserved.Thecoverageandstringencyofthefourbenchmarksarecriticalfortheeffectivefunctioningofanintensity-basedETS.Ifaplant’semissionsintensityishigherthanitsapplicablebenchmark(typicallywhentheplantislessefficientthanthebenchmarkimplies),itwillfaceanallowancedeficitandwillhavetobuyallowancestobecompliant.Conversely,ifitsemissionsintensityfallsbelow(i.e.performsbetterthan)thebenchmark,theplantwillhavereceivedmoreallowancesthanitwouldneedtosurrenderforitsverifiedemissions,andcansellorpotentiallybankthesurplusforafuturecomplianceperiod,providingafinancialincentiveforreducingemissionsintensity.Rulesonbankingareyettobespecified.InChina’snationalETS,tolimitthescheme’sburdenongasplants,whichhaveamuchloweremissionsintensitythancoalplants,gas-firedpowerplantsarecurrentlyexemptfromtheobligationtopurchaseallowancesincaseofdeficit.AstheETScoversonlycoal-andgas-firedpowerplants,generationfromnon-fossilenergysourcessuchasrenewablesandnuclearpowerplantsdonotreceiveanyallowancesandcannotactasasourceofsupplytothemarket.EntitiesareallowedtouseChineseCertifiedEmissionsReduction(CCER)offsetcreditstomeetcomplianceobligationsforupto5%ofverifiedemissions.RulesforCCERprojectshavebeenunderrevisionsince2017,withnewrulesexpectedin2022.EligiblecreditsfornationalETScurrentlyconcernCCERcreditsapprovedpriortoMarch2017(China,MEE,2021a,2021b)(seeBox4.2inChapter4forfurtherdiscussiononCCERs).Theintensity-baseddesignthuscontrolsoverallemissionsintensitybyencouragingpowerplantstoreducetheiremissionsintensitybelowthebenchmarklevelwhileremainingflexibleinthecontextofChina’sgrowthinenergydemandandindustrialproduction.Sincetheintensity-basedapproachdoesnotsetapredeterminedcapontotalemissions,asincap-and-tradesystemssuchastheEUETS,totalemissionscoveredbyChina’scurrentETScanstillrise(Box1.2).Box1.2TradablePerformanceStandardsandCap-and-TradeSchemesThedesignofChina’sETSdifferssubstantiallyfrommanyotheremissionstradingsystemsimplementedaroundtheworld.Whilemostjurisdictionsoptedforacap-and-tradescheme,Chinaadoptedanintensity-basedsystemthatessentiallyfunctionsasatradableperformancestandard(TPS)(Goulderetal.,2020).Acap-and-tradeschemedeterminesamaximumamountofGHGemissionsthatcoveredsectorsareallowedtoemitinaspecifictimeperiod,thussettinganabsolutecaponemissions.Thiscreatesincentivesforregulatedemitterstoreduceemissionswherethesearemostcost-effective,allowingthemarkettofindtheEnhancingChina'sETSforCarbonNeutrality:Chapter1.PolicycontextFocusonPowerSectorPAGE29IEA.Allrightsreserved.cheapestwaytomeettheoverallquantityofcappedemissions.ExamplesforthisETStypearetheEUETS,California’scap-and-tradeschemeandNewZealand’sETS.Incontrast,atradableperformancestandardsetsarelativeemissionsreductiontarget.Aperformancestandarddefinesthemaximumamountofemissionsallowedperunitofoutputoftheregulatedentities.Therefore,itisalsocalledarate-orintensity-basedstandardor,sometimes,intensity-basedcap(BrookingsInstitute,2015;IEA,2020a).Whilebothschemetypesareeffectivemarket-basedclimatepolicyinstruments,thedifferencesintarget-settinghaveacrucialimpactonthemechanismsofGHGemissionsreductions.Incontrasttoacap-and-trade,aTPSdoesnotsetanabsolutetarget.Thisreducesthepredictabilityoftotalemissionsreductions.Further,inacap-and-tradescheme,energyefficiencyimprovementsandtheswitchtolow-carbonenergysourcescanserveasmeanstoreduceemissionsandmeetthetarget.ThelatterchanneltoreduceemissionsisunderminedinaTPSifthebenchmarkscoveronlyfossil-basedgenerationsources,asthemoreoutput(e.g.electricityandheat)afossil-basedplantproduces,themoreallowancesitcouldreceive.Thisfeaturecouldhelptoaddresschallengesintarget-settingrelatedtooutputuncertainty,inparticularinasituationwherethereisstronggrowthineconomicandindustrialactivities.However,italsoimplicitlysubsidisesbenchmark-coveredoutputandincentivisesloweremissionsproducers(i.e.thoseperformingbetterthanthebenchmark)toexcessivelyexpandactivities(Goulderetal.,2020).China’srenewablespolicyRenewableshavebeenakeypillarinChina’senergypoliciesoverthelasttwodecades,motivatedbyconsiderationsforenergysecurity,airquality,industrialdevelopmentandclimategoals.Drivenbycontinuouspolicysupport,Chinahasbeentheglobalengineofrenewablecapacitygrowth,responsibleforover40%oftheworld’snewinstallationsbetween2011and2020(IEA,2021d).AsChinaseekstocontinuouslyexpandrenewablesdeployment,thecountryhasbeengraduallyadaptingitspolicystrategyforsupportingandintegratingrenewablesinitspowersector.RenewablestargetsSince2006,theRenewableEnergyLawhasbeenthelegalandpolicyfoundationforthelarge-scaledevelopmentofrenewables.Thislawcoversfundamentalelementssuchascapacitytargets,planning,incentives,pricingmechanismsandEnhancingChina'sETSforCarbonNeutrality:Chapter1.PolicycontextFocusonPowerSectorPAGE30IEA.Allrightsreserved.costsharing.IthasguidedtheformulationandpromulgationofaseriesofFive-YearPlans(FYPs)onrenewablesdevelopment.ChinahassetcapacitytargetsforvariousrenewableelectricitytechnologiesinrecentFYPsonRenewableEnergyDevelopmentandFYPsonPowerSectorDevelopment.TheFYPsonRenewableEnergyDevelopmentalsosetoutindicativegenerationtargetsforrenewables.The13thFYPonRenewableEnergyDevelopment(2016-2020)settargetsforinstalledrenewablecapacityat715GW(including40GWpumpedstoragehydropower)andforrenewablestoreach27%oftotalgenerationby2020.Bothtargetswereoverachievedwithmorethan930GWofinstalledcapacityandagenerationshareof29.5%.China’s14thFYPforaModernEnergySystemandrecentcommunicationonthe14thFYPonRenewablesEnergyDevelopment(2021-2025)renewambitionsonrenewablesdeploymentwhileputtinggreaterfocusonconsumptiontargetsandrenewablesintegration.Theyindicatethatrenewableswillmeetthemajorityofthegrowthinenergyandelectricityconsumption.By2025,theshareofnon-fossilelectricitygeneration(includingfromrenewablesandnuclear)isstipulatedtoreacharound39%(China,NDRCandNEA,2022b).Renewableelectricityconsumptionissettoaccountfor33%oftotalelectricityconsumption,with18%comingfromnon-hydrorenewables(China,NEA,2022).Alongwithrenewabletargets,Chinahassettargetstoincreaseflexibilitysourcesanddemand-sideresponsecapacitytosupportahighershareofvariablerenewablesintheelectricitysystem(China,NDRCandNEA,2022b).Thecountryhasstrengthenedpolicyplanningonstoragedevelopment,targeting30GWofnewenergystoragecapacity(mainlybatterysystems)by2025(China,NDRCandNEA,2021b)and120GWoftotalpumpedhydrostorageby2030(China,NEA,2021b).Whilegridcompaniesarethemainactorsresponsibleforensuringrenewablesintegration,generatorsareencouragedtodeveloporcontractstorageandbalancingcapacitiesinordertobeabletoincreasetherenewablecapacityconnectedtothegrid(China,NDRCandNEA,2021c).Feed-inTariffRapidrenewablecapacityexpansioninChinahasmainlybeendrivenbythefeed-intariffs(FIT)introducedinthelate2000s,whichprovidefinancialincentivestonon-hydrorenewables.TheFITschemeprovidesa20-yearcontracttoqualifiedprojectswithfixedFITratesthatareestablishedonthebasisofthetypeofrenewabletechnologyandresourcelevelattheprojectlocation.Whiletheschemehassuccessfullypromotedrenewablesgrowth,challengeshaveemergedasinstallationhasfarexceededinitialexpectations.Theseincludenationalsubsidydeficitandrenewablesintegrationdifficulties.Duringthe13thFYPperiod(2016-2020),ChinareviseditsFITratesdownandphasedoutFITsubsidiesfromthecentralgovernmentfornewwindandsolarEnhancingChina'sETSforCarbonNeutrality:Chapter1.PolicycontextFocusonPowerSectorPAGE31IEA.Allrightsreserved.projectsbytheendof2020(China,NDRC,2021b).14Thecountrygraduallytransitionedawayfromtheschemetoothersupportinstruments,includingcompetitiveauctioning,voluntarygreencertificatetradingandrenewableportfoliostandards(RPS).Theseaimtomakerenewablesmorecost-competitiveandreach“grid-parity”withothersourcesofgeneration,promotebetterintegrationandreducesubsidyburdenongovernmentfunding.RenewableportfoliostandardsIn2019,Chinaintroducedarenewableportfoliostandards(RPS)schemetopromotesustainabledevelopmentandbetterintegrationofrenewables,markinganimportantshiftfromcapacitytargets(inMW)togeneration/consumptiontargets(inMWh),whichprovidestrongerincentivesforinstalledcapacitytoeffectivelydeliverrenewableelectricityandminimisecurtailment.TheRPSschemesetsannualtargetsonsharesoftotalrenewablesandnon-hydrorenewablesinelectricityconsumptionbyprovince,takingintoconsiderationprovincialrenewablecapacities,interprovincialelectricityexchangesandChina’sfive-yeartargetfortheshareofnon-fossilfuelsinprimaryenergyconsumption.Forinstance,insupportofthe13thFYPtargetfornon-fossilfuelstoreach15%oftotalprimaryenergyconsumption,theRPStargetsbyprovincefor2020weresettoincreasetheshareofrenewablesinnationalelectricityconsumptiontoover28%andtheshareofnon-hydrorenewables(mainlywindandsolar)tonearly11%(China,NDRCandNEA,2020).UndertheRPSscheme,twotypesofobligatedpartiesneedtofulfilthetargetedrenewablesandnon-hydrorenewablessharesintheirelectricitysalesorconsumption:i)grid,distributionandretailcompanieswhichdirectlysellelectricitytoend-consumers,andii)largeconsumersthatpurchaseelectricityfromthewholesalemarketandentitieswithcaptivepowerplants.Obligatedpartiescanfulfilthetargetsbygeneratingtheirownrenewableelectricity,procuringitviathegridordirectlyfromarenewableelectricitygenerator(e.g.viatherecentlypilotedgreenpowertrading),abilateralagreementwiththoseexceedingtheirRPSquota,orbypurchasinggreencertificates(China,NDRCandNEA,2019)(Box1.3).ProvincialgovernmentsareresponsibleforimplementingtheRPSobligations,andgridcompaniesassumeaco-ordinationrole.14ChinaphasedoutitsFITschemeandcompetitiveauctionsfornewonshorewind,utility-scalesolarPVandcommercialandindustrialdistributedPVprojects.OffshorewindandconcentratedsolarpowerprojectsnolongerbenefitfromFITsbutmaybeawardedinprovincialcompetitiveauctions.ResidentialdistributedPVprojectsbenefitfromanextensionoftheFITscheme.EnhancingChina'sETSforCarbonNeutrality:Chapter1.PolicycontextFocusonPowerSectorPAGE32IEA.Allrightsreserved.Box1.3RPScompanionpolicies:GreencertificatesandgreenpowertradingChinaimplementedavoluntarygreencertificatesschemein2017toenhancerenewablesintegrationandincreasefinancialflowstorenewables(China,NDRC,MOFandNEA,2017).In2021,itbegantochangethisschemeintoacomplementarypolicytothemandatoryRPSscheme(China,MOF,NDRCandNEA,2020).Tradablegreen(orrenewableenergy)certificatessystemsareschemesthatestablishamarketforthe“greenness”,i.e.thenon-energyenvironmentalattributesofrenewableenergy,withtheaimtosupporttheeligibletechnologies.Agreencertificateaccreditsacertainamountofrenewableenergyandcanbetradedonthecertificatemarkettorewarditsgeneratororowner.Atthesametime,greencertificatesystemsprovideamechanismfortrackingissuanceandownershipofcertificatestosubstantiateclaimsofuseofrenewableenergy.Aroundtheworld,greencertificateschemesoftenaccompanyRPSpoliciestoallowforaccuratetrackingofRPScomplianceandreducecompliancecostsbyprovidingobligatedpartiestheflexibilitytomeettargetbycertificatepurchase.InChina’sgreencertificatescheme,onegreencertificateaccredits1MWhofnon-hydrorenewableelectricityandcanbetradedtoproviderenewablegeneratorsanadditionalrevenuetoelectricitysales,withlarge-scaleonshorewindandsolarPVprojectscurrentlybeingeligible.Sinceitslaunch,thegreencertificatesschemehasco-existedwiththeFITscheme:renewablegeneratorseligibleforFITscanissuegreencertificatesbutsalesofthecertificatesentailforegoingtheFIT,andthecertificatepriceiscappedbythesubsidyundertheFITscheme(i.e.therelevantFITrateminuscoal-firedpowerbenchmarkprice).SincesellinggreencertificatesmeantgivingupFITsubsidiesforgenerators,FITrateshadastronginfluenceongreencertificates’price:betweenJuly2017andDecember2020,certificatesforonshorewindandsolarprojectsthatwereeligibleforFITstradedonaverageataroundCNY175andCNY670respectively–mirroringthesignificantlyhigherFITforsolar.Transactionswerelow,withlessthan1%oflistedcertificates(andaround0.15%ofissuedcertificates)beingsold,asbuyershadnoobligationtopurchasegreencertificatesunderthevoluntaryscheme.AsChinatransitionsfromFITstotheRPS,thegreencertificateschemeisbeingreformedtosupportRPScomplianceandthemarkethasbeenevolving.Thecertificatepricingtrendisalreadychanging:whilecertificatesfromexistingprojectsthathaverightstoFITsoverthecomingyearscontinuedtobesoldatsimilarpricesasbefore,thegreencertificatesfrommorerecentwindandsolarprojects,whicharenoteligibleforFITs,wereonaveragetradedatmuchlowerpricesataroundCNY50in2021.Bytheendof2021,non-FITeligibleprojectsaccountedfornearly90%ofcumulativegreencertificatessold.TradingvolumehasincreasedwithEnhancingChina'sETSforCarbonNeutrality:Chapter1.PolicycontextFocusonPowerSectorPAGE33IEA.Allrightsreserved.risingdemandforcertificatesastheschemeisincreasinglyidentifiedasachanneltomeetRPSobligations.Thecumulativenumberofcertificatessoldroseto15timesthatinDecember2020andaccountedfor9%oflistedcertificates(Chinagreencertificatetradingplatform,2021).Chinaisalsoco-ordinatingtheschemewithgreenpowertrading.Pilotedin2021,greenpowertradingallowsrenewableelectricity(currentlywindandsolarPV)tobetradedasadistinctproductwithintheframeworkofbilateralmid-andlong-termforwardcontractsbetweenelectricitygeneratorsandconsumers,allowingforagreenpremium.ThefirstgreenpowercontractsproducedapremiumofCNY0.030-0.050/kWh,similartotheaveragepriceofnon-FITeligiblegreencertificates.Purchasersofgreenpowerreceiveacertificationoftheirgreenelectricityconsumption,whichisintheprocessofbeingco-ordinatedwiththegreencertificatescheme(China,NDRC,2021c;Xinhua,2021a,2021b).InFebruary2021,theNEAissuedaconsultationdraftonRPStargetsfor2021andindicativetargetsfor2022-2030,envisaginganationaltargetforrenewablestoreach40%oftotalelectricityconsumptionandnon-hydrorenewablestoreach25.9%by2030,withtheaimtosecureChina’s2030targetsof25%non-fossilfuelshareintotalprimaryenergyconsumptionand1200GWofwindandsolarcapacity(China,NEA,2021a).ThefinalpolicydocumentreleasedinMay2021setprovincialtargetsfor2021andindicativetargetsfor2022,andspecifiedthatRPStargetswillbesetannuallywithfinaltargetsforthecurrentyearandindicativetargetsforthenextyear(China,NDRCandNEA,2021d).InteractionbetweenandintegrationofRPSandETSWhilerenewablesupportpoliciessuchasanRPSandanETSareeachdesignedtotargetoneprimaryobjective,theyhavesignificantpotentialtoeithercomplementandsupporteachother,ortointerferewitheachotherincounterproductiveways.AnETSisaclimatepolicyinstrumentthatusesmarketforcestoreducecarbonemissionswhereitcostsleast.WhileanETScaneffectivelydrivedecarbonisationespeciallythroughoperationalchanges,energyefficiencymeasures,fuelswitchingandthepromotionofinnovativelow-carbontechnologies(AldyandStavins,2012),itisoftencomplementedwithrenewablesupportpolicies.Thesecomplementarypoliciesaimtofurtherincentiviseinnovationinandde-riskingofemerginglow-carbontechnologies,lowerthelong-termcostofthecleanenergytransition,improveindustrialcompetitivenessandensuresecurityofsupply.EnhancingChina'sETSforCarbonNeutrality:Chapter1.PolicycontextFocusonPowerSectorPAGE34IEA.Allrightsreserved.TherearenoteworthypotentialoverlapsbetweenanRPSpolicyandanETS.Intheelectricitysector,anRPSpolicycreatesobligationstoincreasetheshareofrenewablesinthepowerconsumptionmixwhileanETSaimstoreducepower-relatedemissionsincludingthroughfuelswitchingtolower-carbonsources.TheRPS’companiongreencertificateschemeandtheETSbothaimtosetpriceincentivestomakepowersupplyfromcarbon-intensivegenerators,suchasunabatedcoalpower,lessattractiverelativetolower-carbonpowersources.Intheshortrun,thecombinationofbothcouldincreaseelectricityprices–althoughlesssoinaregulatedelectricitymarket.Theexactextentofthis,however,verymuchdependsonpolicydesignspecificities,thepowergenerationmix,electricitymarketdesignandthepaceofcostreductionofalternativelower-carbongenerationsources.InteractionofRPSwithintensity-basedETSInteractionbetweenanRPSschemeandanintensity-basedETSfocusingonfossil-basedgenerationmaybelimited.Inthiscase,renewablesdeploymentdrivenbytheRPSisunlikelytosignificantlyreducethedemandforCO2emissionsreductionsintheETS,asthedemandforallowances–aswellastheneedfordecarbonisation–isheavilydrivenbytheperformanceofcoalandgaspoweragainsttheirrespectivebenchmarks.Renewablescannotactasasourceofallowancesupplyinthissystemandthereforewouldhaveonlyaminoreffectondecreasingtheallowanceprice.Renewablesarealsounlikelytoreceiveasignificantincentivefromthesystemifallallowancesareallocatedtofossil-basedgeneratorsforfree.Theintensity-basedETScould,however,haveastrongerroleinincentivisingrenewablesdeploymentifpartialauctioningisimplemented,asthisdecreasesthecostcompetitivenessoffossil-basedgenerationfurtherinrelationtorenewables.Inturn,thisadditionalincentiveforrenewablesdeploymentthroughtheETScouldleadtoasignificantdecreaseinthepremiumtogreenpowerorthepriceofgreencertificatesthatcouldbeusedtofulfiltheRPSobligations.EnhancingChina'sETSforCarbonNeutrality:Chapter1.PolicycontextFocusonPowerSectorPAGE35IEA.Allrightsreserved.Figure1.2SchematicillustrationofinteractionbetweenanRPSandanintensity-basedETSfocusingonfossil-basedgenerationIEA.Allrightsreserved.InteractionofRPSwithcap-and-tradeETSInteractionsbetweenRPSandacap-and-tradeETSarelikelytobestrongercomparedwithanintensity-basedETS,andcouldimpactpolicyeffectivenessintheabsenceofsufficientco-ordination.Forinstance,ahighershareofrenewableelectricitygenerationachievedthroughanRPSschemereduceselectricity-relatedemissions,whichdecreasesdemandforemissionallowancesinacap-and-tradeETSwhereallowancesupplyissetbyapredeterminedcap.Thiscould,inturn,drivedowntheallowancepriceanddecreasetheeffectivenessoftheETS.Thiseffectislikelymorepronouncedinacap-and-tradeETSifthecapdoesnottakeintoaccounttheexpectedrenewablesdeploymentincentivisedbyanRPS.Inaddition,inacap-and-tradeETSthatcoversmultiplesectorssuchasindustryandelectricity,theETScapsetsthetotalemissionsthatcoveredsectorsareallowedtoemit.Insuchadesign,emissionsreductionsintheelectricitysectorthroughtheRPScouldleavemoreroomforindustrytoemitwithoutbreachingtheoverallcapoftheETSif,insettingthecap,thepolicymakerdoesnotanticipatesuchemissionsreductionsoradjuststhecapafterwards–aso-calleddisplacementeffect(Figure1.3)(LehmannandGawel,2013).ThiscouldagainleadtolowerallowancepricesandareducedincentiveforfurtherdecarbonisationinsectorscoveredbytheETS.Ontheotherhand,acap-and-tradeETSwouldincreasetherelativecompetitivenessofrenewablesandencouragetheirdeploymentbysettingafinancialdisincentiveforfossil-basedgenerationthroughthecarbonprice,whichwouldcontributetomeetingtheRPStargetbutwouldlikelydecreasethegreencertificatepriceaccompanyingtheRPS.Intensity-basedETSElectricitymarketRenewablesdeploymentdrivenbyRPSEffectonelectricitypricedependsoncostcompetitivenessofrenewablesIncreaseselectricityprice/costsMinordecreasingeffectonallowancepriceSignificantincreasingeffectondeploymentanddecreasingeffectongreencertificatepriceifpartialauctioningisintroducedSetsemissionsintensitybenchmarksandputsapriceonCO2emissionsEnhancingChina'sETSforCarbonNeutrality:Chapter1.PolicycontextFocusonPowerSectorPAGE36IEA.Allrightsreserved.Figure1.3SchematicillustrationofinteractionbetweenanRPSandacap-and-tradeETSIEA.Allrightsreserved.Source:IEA,adaptedfromVandenBergh,DelarueandD’haeseleer(2013).Therefore,itisimportantthatpolicymakersassesstheinteractionchannelsandimpactswhendesigningenergyandclimatepoliciesinadvance.Thiscanbefacilitatedthroughtheinstitutionalisationofpolicyco-ordinationacrossallrelevantMinistriesinadditiontoNDRC’soverarchingco-ordinationrole,andhelpensurethataclimateandenergypolicyinstrumentmixachievesitsmultiplepolicyobjectivesmoreeffectivelyandatalowercost,whichisimportantforthesocialacceptabilityofcleanenergytransitions.Inaddition,introducingflexibilitymechanismssuchasaMarketStabilityReserve15inanETS,orpricecorridorsinanETSandagreencertificateschemecanalsoaccommodatedeviationsintheinitiallyexpectedemissionsreductionsanddemandforallowancesbyadjustingsupplyanddemand.15TheEUETS’MarketStabilityReserve(MSR)isagoodexampleofsuchaflexibilitymechanismthatautomaticallyaddsorremovesallowancesfromtheETSifthevolumeofallowancesincirculationislowerorhigherthanthepre-definedthresholds.DecreasesallowancepriceOtherETSsectorsCap-and-tradeETSElectricitymarketRenewablesdeploymentdrivenbyRPSDisplacesCO2emissionsEffectonelectricitypricedependsoncostcompetitivenessofrenewablesIncreaseselectricityprice/costsStimulatesrenewablesdeploymentanddecreasesgreencertificatepriceSetsCO2emissionscapandputsapriceonCO2emissionsEnhancingChina'sETSforCarbonNeutrality:Chapter2.KeyfeaturesofthemodelFocusonPowerSectorandscenariodesignPAGE37IEA.Allrightsreserved.Chapter2.KeyfeaturesofthemodelandscenariodesignThisreportreliesonquantitativeoutputfromscenariosimulationsdesignedtounderstandtheeffectsof,andevaluatetheinteractionsbetweenRPSandETSpoliciesinChina’spowersector.ThischapterpresentskeyfeaturesofthemodelandexplainshowitincorporatestheRPSandETS.Itfurthergivesanoverviewofthefivescenariosassessedinthisreport:thefirsttwoscenariosincludeacounterfactualRPSScenario,aswellasacurrentpolicyscenariothatincorporatesRPSandamoderateETSbasedonthedesignimplementedinChinatoday.AnadditionalthreepolicyscenariosexplorewaystoacceleratethealignmentofChina’spowersectoremissionstrajectorywiththecountry'sstatedcarbonneutralitytargetbystrengtheningtheETSdesign.ModeldesignToanalysehowChina’sETSaffectsthecountry’spowersector,thisreportusesamarket-basedpowersystemmodelthatminimisestotalpowersystemcosts,andincludesbothendogenouscapacityandtransmissionlineexpansionanddispatchmodules.Thesystemcostoptimisationtakesintoaccountannualisedcapitalexpenditureaswellasvariableandfixedoperatingandmaintenancecostsofelectricitygeneration,transmissionandbalancingcosts,andcostsforplantretrofits,subjecttopolicyconstraintsandresourcevariabilitysuchasgeographicaldistributionofrenewableresourcesandfossilfuelcosts.CO2costsorgainsresultingfromtheETSpolicyareconsideredtobeintegratedinplantoperatingandinvestmentdecisionsandareincludedinthemodel’scostoptimisation.Themodeluses2015asthebaseyearandassessespotentialETSimpactsinfive-yearincrementsupto2035.Thesimulationfor2020hasbeenstronglycalibratedbasedon2020statistics.InitialnationalandprovincialcapacityandgenerationmixesarebasedondatafromtheChinaElectricityCouncil(CEC).Themodellingexerciseincorporatessomekeyassumptionsforpowersectordevelopment,technologycostsandpolicytrends,tosimulatetheeffectsofkeypoliciesonChina’spowersystem,andtheirpotentialcontributiontoachievingChina’sclimateandenergyobjectives.Electricitydemandfor2015and2020arebasedonCECdata,andfutureelectricitydemandisalignedwiththeIEA’sAnnouncedPledgesScenario(IEA,2021b).TakingintoaccountChina’songoingpowermarketreform,includingtheaimtobuildnation-wideelectricitymarketsby2025,themodelassumespartlyplanneddispatchin2020andeconomicdispatchEnhancingChina'sETSforCarbonNeutrality:Chapter2.KeyfeaturesofthemodelFocusonPowerSectorandscenariodesignPAGE38IEA.Allrightsreserved.from2025onwards,16whileallowingforinterprovincialtradeuptothelimitoftransmissioncapacity,andoptimisescapacityandgenerationmixesaccordingly.Minimumoperatinghours(2500hoursperyear)areassumedforgas-firedplantstoreflectthepoliticalincentivesforgas-firedpowergeneration.Assumptionsonelectricitydemandgrowth,exogenoustechnologycostevolutionsandrenewablespolicyframework(detailedintheModellingofRPSPolicysectionbelow)arekeptidenticalacrossallscenariosinthisreport.TheAnnexincludesamoredetaileddescriptionoftheRenewableElectricityPlanningandOperation(REPO)modelandkeyinputsforcapacityandgenerationmix,costassumptionsandemissionfactors.ItisnoteworthythatcostoptimisationmodelssuchastheREPOmodelfacerestrictionsinrepresentingthepowersector’scomplexmechanismsandcannotfullycapturealluncertaintiesregardingfuturedevelopments.TheREPOmodelseekstominimisetotalpowersystemcostsandthereforescalesleast-costlytechnologiesinafinitetimehorizon.Itdoesso,however,withintheassumptionsandconstraintsmentionedintheAnnex.Theoutputsshouldthereforebeviewedwiththosemodellinglimitationsinmind.ModellingofRPSPolicyChina’sRPSpolicysetstargetsforthesharesofallrenewablesandnon-hydrorenewablesintotalelectricityconsumption.TheRPSpolicyismodelledbyagenerationconstraintwheretheshareofelectricityfromnon-hydrorenewablesinthetotaldemandshouldbenolessthantherequiredtarget.Thisanalysisassumesnon-hydrorenewablessharetargetstobe18.6%by2025,25.9%by2030and36%by2035,basedonNEA’sconsultationdraftofindicativeRPStargetsupto2030(China,NEA,2021a)andassumingamoderateaccelerationoftargetsupto2035.Themodeldoesnotdirectlysetaconstraintonthetotalrenewablesshare,asthedynamicforhydropowerandnon-hydrorenewablesdiffersconsiderably.Instead,themodelincludesassumptionsonhydropowercapacitydevelopmentinlinewithpolicyplanningandresourceavailability.ThemodeldoesnotmakeassumptionsonprovincialrenewablescapacitytargetsandallowsforinterprovincialpowertradinginfulfillingRPSobligations.UndertheRPStargetconstraint,themodelalsoproducesaso-calledgreenelectricitypremium,whichreflectstheleveloffinancialincentiveneededforthesystemtoincreasenon-hydrorenewablesgenerationtomeettheRPStarget.Itisapremiumawardedtonon-hydrorenewablestooutcompeteothersources,16Planneddispatchinvolvesadministrativelyassignedoperatinghours.InthecaseofChina,thishastraditionallybeentheprovisionofanoperatinghoursrangepertechnologytogeneratorsbytheadministration.Economicdispatchistheshort-termdeterminationoftheoptimalelectricityoutputtomeettherequiredelectricitydemandbasedonameritordercurvewhichdeterminesthelowestmarginalcosttomeetthesystemload.EnhancingChina'sETSforCarbonNeutrality:Chapter2.KeyfeaturesofthemodelFocusonPowerSectorandscenariodesignPAGE39IEA.Allrightsreserved.includingexistingfossil-basedgenerationsources.Thegreenelectricitypremiumisusedtoexplore,first,thepotentialfinancialincentiverequiredtoachieveapowersystemwithahighershareofrenewables,andsecond,theinteractionsbetweenETSandRPSpolicies.Forthelatter,itisanindicatorofhowtheETScancontributetoprovidingfinancialincentivestonon-hydrorenewablesandhowitmightimpactrenewablessupportschemessuchasthegreencertificateandgreenpowertradingmarkets.Thevalueofthegreenelectricitypremiuminthemodelismainlyinfluencedbygenerationcostsofnon-hydrorenewablesvis-à-visothersources.Itisalsopartiallyinfluencedbysystemintegrationcosts,suchasforstorageandbalancinginordertointegrateahighershareofvariablerenewableenergy.Itsvaluecanthereforebepositiveevenifthecostofrenewablesdeploymentonaveragereachesparitywithothersources.Thisis,first,becauserenewablesresourcesvarygeographicallyandahighershareofrenewablesmayrequiredeploymentinregionswithlessresourcesandhighercosts,andsecond,becauseintegrationcostscouldriseasahighershareofrenewablesleadstomoreintegrationneeds.ModellingoftheETSTheETSismodelledthroughanemissionsconstraintfunctionwherebytotalverifiedCO2emissionsmustremainbelowthetotalCO2allowancesallocatedundertheETS.Dependingonthescenario,theETSallowanceallocationeitherusesanintensity-basedapproach,withthenumberofallowancesbasedonannualelectricitygenerationandtechnology-specificbenchmarks,orfollowsacap-and-tradeapproachwithadefinedemissionstrajectory.VerifiedCO2emissionsrepresentallowancesthatmustbereturnedforcompliance,andtheyarecalculatedbymultiplyingfuelconsumptionwiththeCO2fuelfactor.17Analysisisconductedattheunitlevel,andthemodellingassumesthatcompaniescoveredbytheETSperformcostoptimisationforoperationalandinvestmentdecisionswithintheirportfoliowhencomplyingwiththesystem.Themainleversforemissionsreductionsinclude(i)efficiencyimprovementinfossil-basedgeneration,suchasthroughtechnicalefficiencyimprovementsorretrofitsandshiftinggenerationfromlesstomoreefficientplants,(ii)deploymentofCCUStechnologyonfossil-basedpowerplants,(iii)switchingfromcoal-firedtogas-firedgeneration,and(iv)switchingfromfossil-basedgenerationtonon-fossilsources.Demandreductionisnotanalysedasamainleverinthismodellingexercise,aselectricitydemandisanexogenousassumptionandremainsidenticalacrossscenarios.The17Thisreportappliesanaveragefuelfactorforcoalof101.65kgCO2/GJfortheanalysedperiod,takingintoaccounttheuseofahighdefaultfactorincaseofnon-monitoringaccordingtoChina’sETSMRVrules.InrealityanincreaseinmonitoringoftheCO2fuelfactorbyunitscouldreducetheaveragefuelfactorforverifiedemissionstoe.g.95kgCO2/GJ(factorfor“otherbituminouscoal”,thedominantfuelsourceinChina’scoalpowersector).Inthiscase,benchmarktighteningrateswillneedtobefurtherincreasedaccordinglytoachievethesametighteningeffectaspresentedinthisreport.EnhancingChina'sETSforCarbonNeutrality:Chapter2.KeyfeaturesofthemodelFocusonPowerSectorandscenariodesignPAGE40IEA.Allrightsreserved.allowancepriceisanoutputofthemodel.Itreflectsthemarginalcostofemissionsabatementthatminimisestotalsystemcostswhilemeetingtheallocatednumberofallowances.Forscenariosincludinganintensity-basedETS,theanalysisassumedasetofbenchmarkvalues,inaccordancewiththefourbenchmarkcategoriesinChina’sETSallowanceallocationplanfor2019-2020:unconventionalcoal-firedunits,conventionalcoal-firedunitsatandbelow300MW,conventionalcoal-firedunitsabove300MWandgas-firedpowerunits.Thebenchmarkvaluesfor2020areshowninTable1.1aspresentedinChapter1.Benchmarkevolutionspost2020varyacrossscenariosandaredetailedinthesectionbelow.AsinChina’scurrentETSallowanceallocationplan,gas-firedunitswithanallowancedeficitarenotrequiredtopurchaseallowancesforcompliance,toreflectpoliticalincentivesforfuelswitchingtogas.Thereisnoprovisionforallowancebanking(i.e.theuseofsurplusallowancesinafuturecomplianceperiod)astherulesonbankingareyettobespecified.ChineseCertifiedEmissionsReduction(CCER)offsetsasasourcetomeetallowanceobligationshavenotbeenpartofthemodelling.ScenariodesignCurrentpolicyandcounterfactualscenarioTheRPS-ETSScenarioisbasedonthecurrentlyplanneddevelopmentofChina’sclimateandenergypolicyframeworkforthepowersector.InordertoevaluatetheroleoftheETSinthepowersectortransition,itiscomparedtoahypotheticalcounterfactualscenario(theRPSScenario).ThetwoscenariosaredevelopedtoevaluatetheimplicationsofChina’sETSwithafreeintensity-basedallocationdesign,anditscombinedeffectwiththeRPSpolicy.Keyassumptionsofthetwoscenariosareoutlinedbelow(Table2.1),andtheirresultsarediscussedinChapter3:RPSScenario:acounterfactualscenariowiththecurrentRPSpolicyset-upbutwithnoemissionscontrolorcarbonpricingpolicy.Itassumesatargetfortheshareofnon-hydrorenewablesof25.9%by2030and36%by2035.RPS-ETSScenario:acurrentpolicyscenariowiththesameRPSpolicyassumptionsandanintensity-basedETSwithfreeallocation,ascurrentlyimplementedinChina.ThisscenarioassessestheETSpolicyeffectsandinteractionswithRPSpoliciesinthepowersector.ItassumesthatETSbenchmarksforallcoal-firedunitsaremoderatelytightenedovertime:a3%benchmarktighteningrateisassumedforthefive-yearperiodto2025,followingatrendcomparablewiththehistoricalefficiencyimprovementofcoalplantsoverthelastfiveyears,anddoubledthereaftertoreflectanincreaseinpolicystringency.EnhancingChina'sETSforCarbonNeutrality:Chapter2.KeyfeaturesofthemodelFocusonPowerSectorandscenariodesignPAGE41IEA.Allrightsreserved.Table2.1DesignofRPSandRPS-ETSScenariosScenarioPolicyareaPolicyinstrumentDesignevolution202520302035RPSScenarioRenewablessupportRPSNon-hydroRPStarget18.6%25.9%36.0%EmissionscontrolNospecificinstrument-/-RPS-ETSScenarioRenewablessupportRPSNon-hydroRPStarget18.6%25.9%36.0%EmissionscontrolEmissionstradingsystemAllowanceallocationIntensity-basedFreeallocationBenchmarktighteningatthesamerateforallcoalunits’benchmarksoverfive-yearperiod-3%-6%-6%Constantbenchmarkforgas-firedunitsNote:Thisreportappliesanaveragefuelfactorforcoalof101.65kgCO2/GJfortheanalysedperiod,takingintoaccounttheuseofahighdefaultfactorincaseofnon-monitoringaccordingtoChina’sETSMRVrules.InrealityanincreaseinmonitoringoftheCO2fuelfactorbyunitscouldreducetheaveragefuelfactorforverifiedemissionstoe.g.95kgCO2/GJ(factorfor“otherbituminouscoal”,thedominantfuelsourceinChina’scoalpowersector).Inthiscase,benchmarktighteningrateswillneedtobefurtherincreasedaccordinglytoachievethesametighteningeffect.EnhancedETSScenariosIn2020,ChinaannouncedthatitaimstohaveCO2emissionspeakbefore2030andbecomecarbonneutralbefore2060.Toachievethesetargets,thecountry’spowersectorneedstoundergoadeeptransformation.Therefore,thisreportdevelopsthreepossiblepolicypathwayswithstrengthenedETSdesignsthatcanacceleratethealignmentoftheelectricitysector’semissionstrajectorywithChina’stargetforcarbonneutralitybefore2060.AllthreeEnhancedETS(ETS+)ScenariosaredesignedtoachieveanemissionstrajectorythatisalignedwithChina’sstatedcarbonpeakingandcarbonneutralitygoals.TheETS+ScenariosusetheemissionstrajectoryoftheIEA’sAnnouncedPledgesScenario(APS)inAnenergysectorroadmaptocarbonneutralityinChinaandintheWorldEnergyOutlook2021(IEA,2021b)asinputtodefinethenecessaryETSstringencyinthethreescenarios.18WhilekeepingthesameRPSpolicyassumptionsasintheRPSandtheRPS-ETSScenarios,thethreeETS+ScenarioseachstrengthentheETSviaadifferent18ThereisnosinglepathwayforenergysectoremissionsconsistentwithChina’sstatedgoalsofachievingapeakinCO2emissionsbefore2030andcarbonneutralitybefore2060.TheAnnouncedPledgesScenario(APS)presentsoneplausiblepathwaytocarbonneutralityinChina’senergysectorinlinewiththecountry’sstatedgoals.TheIEA’sreport“AnenergysectorroadmaptocarbonneutralityinChina”alsoexploresanAcceleratedTransitionScenario(ATS)toassesstheopportunitiesforandimplicationsofafastertransitionthroughenhancedclimatepolicyambitionsandeffortsto2030.EnhancingChina'sETSforCarbonNeutrality:Chapter2.KeyfeaturesofthemodelFocusonPowerSectorandscenariodesignPAGE42IEA.Allrightsreserved.designevolutionafter2025(Table2.2)toachievethesameintendedemissionstrajectory:ETS+BMScenario:ascenariowithamorestringentintensity-basedETSthroughsignificanttighteningoftheallowanceallocationbenchmarksforcoal-basedplants.IncontrasttotheRPS-ETSScenario,theETS+BMmodelshighercoalbenchmarktighteningratesfrom2025onwards:thefive-yeartighteningrateisdoubledto12%intheperiod2025-2030andincreasesagainto22%in2030-3035.ETS+AuctionScenario:ascenariothatintroducespartialauctioningofemissionsallowancesintheintensity-basedETS.Thisscenarioreliesonthesameintensity-basedETSandbenchmarktighteningratesastheRPS-ETSScenariobutassumesfullyfreeallowanceallocationuntil2025withpartialauctioningintroducedthereafter,i.e.foragivenproduction,onlypartoftheallowancesdeterminedbytheapplicablebenchmarksareallocatedforfreewhileothersaresuppliedtothemarketviaauctioning.By2030,17.5%oftheallowancesareauctioned,andby2035thissharerisesto23.5%.ETS+CapScenario:ascenariothattransitionstheintensity-basedETStoacap-and-tradeETSwithanabsoluteemissionscapthatdecreasesovertime.Until2025,thisscenarioassumesanintensity-basedETSwiththesamebenchmarktighteningrateastheRPS-ETSScenario.After2025,theETSistransformedintoacap-and-tradeschemewithfreeallowanceallocation.Theallowancecapissetat11%lowerthan2020emissionsfor2030(3.99GtCO2)andthendecreasesfurthertoabout38%lowerthan2020in2035(2.78GtCO2).EnhancingChina'sETSforCarbonNeutrality:Chapter2.KeyfeaturesofthemodelFocusonPowerSectorandscenariodesignPAGE43IEA.Allrightsreserved.Table2.2DesignofdifferentEnhancedETSScenariosScenarioRPSsharetargetEmissionsTradingSystem(ETS)20302035202520302035CurrentPolicyScenarioRPS-ETS25.9%36.0%Coalbenchmarkstighteningrate(overfive-yearperiod)-3%-6%-6%EnhancedETS(ETS+)ScenariosETS+BM25.9%36.0%Coalbenchmarkstighteningrate(overfive-yearperiod)-3%-12%-22%ETS+Auction25.9%36.0%Coalbenchmarkstighteningrate(overfive-yearperiod)-3%-6%-6%Shareofallowanceauctioning-/-17.5%23.5%ETS+Cap25.9%36.0%Coalbenchmarkstighteningrate(overfive-yearperiod)-3%-/--/-AllowanceallocationIntensity-basedCap-and-tradeCap-and-tradeCapreduction(relativeto2020emissions)-/--11%-38%Note:Thisreportappliesanaveragefuelfactorforcoalof101.65kgCO2/GJfortheanalysedperiod,takingintoaccounttheuseofahighdefaultfactorincaseofnon-monitoringaccordingtoChina’sETSMRVrules.InrealityanincreaseinmonitoringoftheCO2fuelfactorbyunitscouldreducetheaveragefuelfactorforverifiedemissionstoe.g.95kgCO2/GJ(factorfor“otherbituminouscoal”,thedominantfuelsourceinChina’scoalpowersector).Inthiscase,benchmarktighteningrateswillneedtobefurtherincreasedaccordinglytoachievethesametighteningeffect.Thebenchmarkreductionratesofthedifferentscenariodesignstranslateintosignificantreductionsoftheabsolutebenchmarkvaluesovertime.Intheperiodof2020-2035,intheRPS-ETSandETS+AuctionScenarios,coalbenchmarksarereducedbyatotalof14%whiletheETS+BMScenarioexperiencesanoverallreductionof33%.Sinceonlythebenchmarksofcoaltechnologiesarereduced,thereisnodecreaseinthegasbenchmark.Table2.3summarisestheresultingabsolutebenchmarkvalues.EnhancingChina'sETSforCarbonNeutrality:Chapter2.KeyfeaturesofthemodelFocusonPowerSectorandscenariodesignPAGE44IEA.Allrightsreserved.Table2.3Assumptionsonbenchmarkvaluesfor2020-2035CO2emissionsbenchmarkforelectricitygeneration(gCO2/kWh)Benchmarkcategory2020202520302035RPS-ETS,ETS+AuctionETS+BMRPS-ETS,ETS+AuctionETS+BMUnconventionalcoal-firedunits114611121045982982765Conventionalcoal-firedunitsatandbelow300MW979950893839839653Conventionalcoal-firedunitsabove300MW877851800750750585Gas-firedunits392Notes:Theanalysismadetheassumptionthatcoal-andgas-firedpowerunitsequippedwithCCUStechnologyaresubjecttothesamebenchmarksaslargeconventionalcoalandgasunits.Thisreportappliesanaveragefuelfactorforcoalof101.65kgCO2/GJfortheanalysedperiod,takingintoaccounttheuseofahighdefaultfactorincaseofnon-monitoringaccordingtoChina’sETSMRVrules.InrealityanincreaseinmonitoringoftheCO2fuelfactorbyunitscouldreducetheaveragefuelfactorforverifiedemissionstoe.g.95kgCO2/GJ(factorfor“otherbituminouscoal”,thedominantfuelsourceinChina’scoalpowersector).Inthiscase,benchmarktighteningrateswillneedtobefurtherincreasedaccordinglytoachievethesametighteningeffect.EnhancingChina'sETSforCarbonNeutrality:Chapter3.Thecurrentpolicymix–FocusonPowerSectorRPSandETSPAGE45IEA.Allrightsreserved.Chapter3.Thecurrentpolicymix–RPSandETSBasedonthepowersectormodellingfor2020to2035describedinChapter2andintheAnnex,thischapteranalysestwopolicyscenariostoexplorethepotentialeffectsonChina’spowersectorofi)asuccessfulRPSpolicy,andii)anRPSpolicyalongwithanintensity-basedETSwithamoderatebenchmarktighteningtrajectory.Theanalysispresentedprovidesinsightsonthemechanismthroughwhichthetwopoliciesdrivepowersectordecarbonisation,aswellastheirinteractions.ResultsoftheRPSScenarioTheRPSScenario–thecounterfactualscenarioagainstwhichtheroleoftheETSisevaluated–considersonlypowersectorreformssuchaseconomicdispatchandtheRPSpolicytargetingahighershareofnon-hydrorenewables,butnopoliciestocontrolCO2emissions.Thissectionillustratestheimpactsofsuchascenarioonthemainpowergenerationsources.SuccessfullymeetingtheRPStargetsofa26%sharefornon-hydrorenewablesintheelectricityconsumptionmixby2030and36%by2035couldhelpChina’sCO2emissionsfromtheelectricitysectorpeakbefore2030andmoderatelydeclinethereafter.IntheRPSScenario,despitecontinuousgrowthinelectricitydemand,emissionsincreaseto6%above2020levelsin2025beforefallingto3%abovein2030andthendecreasingto7%below2020emissionslevels–or4.2Gt–by2035(Figure3.1).19Comparedto2020,China’selectricitydemandisexpectedtoexpandbymorethan50%by2035.Whileinthepaststrongdemandgrowthhasledtohighergeneration,especiallyfromunabatedcoal-firedpowerplants,thistrendcouldbeoverturnedinthecourseofthe2020swithincreasingcost-effectivenessofrenewablesandsuccessfulimplementationofRPSconsumptionsharetargets.19TheIEAandChina’sestimatesforelectricitysectoremissionsdifferduetomethodologicaldifferences,includinghowpowersectoremissionsareattributedbetweenheatandelectricitygenerationofco-generationplants,andtheemissionsfactorsusedforfossilfuelsub-categories.Forthepurposeofthisreportandtoevaluatecountry-specificpolicyimpacts,electricitysectoremissionsareestimatedwithChina’smethodologyandarethereforelowerthantheIEA’sestimateofaround4.8GtforChina’semissionsfromelectricitygenerationin2020(seeAnnexAformoreinformation).EnhancingChina'sETSforCarbonNeutrality:Chapter3.Thecurrentpolicymix–FocusonPowerSectorRPSandETSPAGE46IEA.Allrightsreserved.ImpactonrenewablesUndertheRPSScenario,renewablesgrowthcanmeetover60%ofadditionaldemandalreadyin2020-2025.After2030,itexceedsdemandgrowthinordertomakeupforthegradualphase-downofunabatedfossilfuel-basedgeneration.Intotal,from2020to2035,renewablescanmeetabout90%ofadditionalelectricitydemand.Figure3.1ElectricitygenerationandCO2emissionsintheRPSScenario,2020-2035IEA.Allrightsreserved.Theshareofrenewablesintotalelectricitygenerationincreasesfromalmost30%in2020to41%in2030and50%in2035.Renewablesgenerationnearlydoublestoabout4200TWhfrom2020to2030,reaching5800TWhin2035.SolarPVexperiencesthelargestexpansion,growingfivefoldbetween2020and2030toover1300TWhand13%ofelectricitygeneration,andreaching2100TWh(18%oftotalgeneration)in2035–inthecourseovertakinghydropowerasthelargestrenewableelectricitysource.Windproductiondoublesbetween2020and2030,andexpandsevenmorerapidlyafter2030.ThisistocomplementahighershareofsolarPVforgridbalancingpurposes,andbecausefurthersolarPVdeploymentbecomesmoreexpensiverelativetowindpowerasthecheapestsourceswillalreadyhavebeendeveloped.In2035,windgenerationreaches1750TWh,accountingfor15%oftotalgeneration.Hydropowergenerationgrowsmoderatelyto2035–up28%comparedto2020–butitsshareinelectricitygenerationfallsfrom18%to15%.Intermsofcapacity,installedrenewablescapacitynearlydoublesto1850GWin2030,withwindandsolarcapacityreachingmorethan1300GW,exceedingthetargetof1200GWinChina’supdatedNDC.By2035,renewablescapacityfurthergrowsto2600GW–ofwhich2000GWwillbewindandsolarcapacity–nearlyfourtimesthecapacityin2020.010002000300040005000025005000750010000125002020202520302035Generation(TWh)ElectricitygenerationandCO₂emissionsCoalGasNuclearHydroWindSolarBiomassCO₂emissions(rightaxis)Emissions(MtCO2)0%20%40%60%80%100%2020202520302035ElectricitygenerationbytechnologyEnhancingChina'sETSforCarbonNeutrality:Chapter3.Thecurrentpolicymix–FocusonPowerSectorRPSandETSPAGE47IEA.Allrightsreserved.IntheRPSScenario,thegreenelectricitypremium20fornon-hydrorenewablesoutputtedbythemodelstandsatCNY0.030/kWhin2025,indicatingsomefinancialsupportwouldstillbeneededtomeettheRPStargetshareofrenewablesgenerationandrelatedintegrationneeds.However,thisisatthelowerendofthegreenpremiumobservedingreenpowertradingin2021.Asbothrenewablesandstoragetechnologiesareexpectedtobecomeincreasinglycost-competitive(seetheAnnexfortechnologycostassumptions),thegreenelectricitypremiumneededdecreasestoCNY0.025/kWhin2030andtoCNY0.001/kWhin2035intheRPSScenario.Thissuggeststhatby2035a36%non-hydrorenewablessharecouldbeachievedalmostwithoutincurringadditionalcoststothesystem–evenincludingassociatedstorageandbalancingneeds.ImpactoncoalpowerAsstrongrenewableexpansionmeetsanincreasinglylargershareofelectricitydemandgrowth,coalpowergenerationexperiencesonlyalimitedincreaseduringthe2020sandpeaksbefore2030intheRPSScenario–acriticalelementforpeakingChina’selectricitysectoremissionsbefore2030.Coal’sshareintotalgenerationsteadilyfallsfrom62%in2020to38%by2035(Figure3.1).Coalpowergenerationincreases7%fromaround4800TWhin2020to5100TWhin2025andthendeclinestobelow5000TWhby2030.Itfallsevenmoresignificantlyto4400TWhin2035,whichisabout7%lowerthanin2020.Themaindriverisamorethan10%declineincoalpowercapacityfromanaverageofaround1100GWinthe2020sto980GWin2035asolderunitsreachtheendoftheirlifetime.Theaveragerunninghoursoftheremainingcoalfleetincreasesslightlycomparedto2020duetoalargershareofefficientultra-supercriticalcoalplants,whichmaintainaveragerunninghoursof5600hours,whiletherunninghoursofothercoalplantsfallbelow4000hours.Withinthecoalfleet,theshiftfromless-efficienttomore-efficientcoalpowercontinues,withultra-supercriticalunitsbecomingincreasinglydominant,andsubcriticalaswellashigh-pressureunitsdeclininginparticular.However,ifnoadditionalpolicyincentivesareprovidedtoconstraincoalpowerorfurtheracceleratethedevelopmentoflow-carbonalternatives,nearly140GWofultra-supercriticalunitscouldstillbebuiltinthedecadeto2030.Totalcoalpowercapacity,nevertheless,remainsroughlystableataround1100GWasnewadditionsandretirementsarealmostbalanced.Furthercoalpowercapacityretirementsof130GWcouldtakeplacebetween2030and2035astypicalendoflifetimesarereached.Asaresult,by2035,ultra-supercriticalunitsaccountforover50%ofcoalcapacitycomparedtoone-thirdin2020.Combinedwithhigher20ForanexplanationofthegreenelectricitypremiumpleaseseeBox1.3inChapter1andthesection“ModellingofRPSPolicy”inChapter2.EnhancingChina'sETSforCarbonNeutrality:Chapter3.Thecurrentpolicymix–FocusonPowerSectorRPSandETSPAGE48IEA.Allrightsreserved.runninghoursthanotherlessefficientunits,ultra-supercriticalunitsgenerate63%ofcoal-firedpowerin2035(Figure3.2).Averageenergyintensityofthecoalfleetdecreasesonlyslowlyovertimeataround-1%by2025comparedto2020,fallingshortofthe-2%Chinatargetsforthermalpowerplantsoverthisfive-yearperiod(China,NDRCandNEA,2021a).21By2035,theaverageenergyintensityofthecoalfleetdecreasesbylessthan-3%comparedto2020.IntheRPSScenario,CCUStechnologyisnotyetcost-competitiveanddoesnotenterthepowermixby2035.Figure3.2CoalpowergenerationandcapacitymixintheRPSScenario,2020-2035IEA.Allrightsreserved.Note:CFB=circulatingfluidisedbed.OtherpowersectorimpactsAstheshareofvariablerenewablesinthepowermixincreaseswhilecoalgraduallydeclinesandhydropowerisconstrainedbyresourceavailability,dispatchablegenerationsourcesincludingnuclearandgas-firedplantsplayamoreimportantroleinthepowermix.BothinstalledcapacityandpowergenerationfromnuclearandgasunitsdoubleintheRPSScenariobetween2020and2035–albeitfromlowlevels.Theshareofnuclearinthegenerationmixincreasesfrom5%in2020to8%in2035,whiletheshareofgasgrowsfrom3%to5%.Therapidexpansionofvariablerenewablesalsorequiresastrongdevelopmentofstoragecapacity.Pumpedstoragehydroincreasesto70GWby2025,surpassingthetarget(China,NEA,2021b),andreaches90GWby2030withnofurthergrowthafterwardsasbatterystoragebecomescost-competitive.Battery21InordertoassessthepotentialimpactoftheETSpolicyonimprovingtheefficiencyoffossil-basedpowerplants,thisreportandtheunderlyingmodeldonotpre-assumetheachievementofthermalplantefficiencytarget.0%20%40%60%80%100%2020202520302035Coal-firedpowergenerationCFBHigh-pressureSubcriticalSupercriticalUltra-supercritical0200400600800100012002020202520302035GWCoal-firedpowercapacityEnhancingChina'sETSforCarbonNeutrality:Chapter3.Thecurrentpolicymix–FocusonPowerSectorRPSandETSPAGE49IEA.Allrightsreserved.storagecapacityissettoincreasefrom3GWin2020to30GWby2025drivenbypolicytargets(China,NDRCandNEA,2021b),andgrowingevenfasterespeciallyafter2030asdeploymentatscalebringscostdown.Deploymentofstoragecapacityplaysacriticalroleinsupportingtheintegrationofahighershareofrenewablesandreducingtheneedfordispatchablefossil-basedcapacitytoensuresupplysecurity.ResultsoftheRPS-ETSScenarioTheRPS-ETSScenariorepresentsacurrentpolicyscenariowiththesameassumptionsforRPSpolicyandexogenoustechnologycostevolutionsastheRPSScenario,andanintensity-basedETSwithfreeallocationfrom2020onwards,ascurrentlyimplementedinChina.Italsoassumesamoderatetighteningofallocationbenchmarksovertime(Table2.1).ThissectionillustratestheresultsofthisscenarioandcomparesthemtotheRPSScenariotoevaluatetheeffectsoftheETSaswellasitsinteractionwiththeRPSpolicy.Withincreasinglystringentbenchmarks,theETScandeliveradditionalemissionsreductionstotheRPSpolicyandacceleratethedecarbonisationofChina’spowersector.Usingfreeandintensity-basedallowanceallocation,theETSprimarilydrivesthetransformationofthecoalpowerfleettowardshigherefficiencyandCCUSdeployment,withlimitedimpactsonrenewablesandothergenerationsources.Thestringencyofthebenchmarkswouldonlymarginallyimpacttheleveloffinancialsupportneededtoachieveahighershareofrenewables.ImpactonCO2emissionsandgenerationmixIntheRPS-ETSScenario,theintroductionofanETSfrom2020allowselectricity-relatedemissionstopeakatalowerlevelthanintheRPSScenario.By2030,CO2emissionsfromelectricitygenerationare8%lowerthanintheRPSScenario,andfallto5%belowthe2020level.AdditionalemissionsreductionsdeliveredbytheETSincreaseasbenchmarksaretightened,leadingelectricity-relatedemissionstofallbelow3.6GtCO2in2035,nearly20%belowthe2020leveland13%lowerthanintheRPSScenario(Figure3.3).EnhancingChina'sETSforCarbonNeutrality:Chapter3.Thecurrentpolicymix–FocusonPowerSectorRPSandETSPAGE50IEA.Allrightsreserved.Figure3.3CO2emissionsfromelectricitygenerationintheRPSandRPS-ETSScenarios,2020-2035IEA.Allrightsreserved.TheintroductionofanETSdeliversadditionalemissionsreductionsnotbyahighershareofrenewablesintheelectricitygenerationmix,butbychangeswithinthecoal-firedpowermix.UnabatedcoalpowergenerationintheRPS-ETSScenariodevelopsinlinewiththeRPSScenariountil2025–reaching5100TWh–andafterwardsfallsto3800TWhby2035(about14%lowerthaninRPSScenario)withacorrespondingshifttocoalpowerwithCCUS.Before2025,theETSencouragesefficiencyretrofitsandslightlyacceleratesthetechnologyshiftwithintheunabatedcoalfleetbydecreasingtherunninghoursoflessefficientcoalplants.Averageenergyintensityofthecoalfleetdecreasesby3%intheRPS-ETSScenario(comparedtoaround1%intheRPSScenario)andfallsbelowthe300gce/kWh(835gCO2/kWh)22targetChinasetforthermalpowerplantsby2025.By2030,averageenergyintensityofunabatedcoalfallstoaround290gce/kWh(807gCO2/kWh),thoughfurtherefficiencyimprovementsbecomeincreasinglycostlyandtechnicallydifficult.Theintensity-basedETScanthusserveasaneffectiveinstrumenttosupportcoalfleetefficiencyimprovements–butwithincreasinglystringentbenchmarksitalsodrivesthedeploymentofCCUStechnology.WhilethereisnoCCUSdeploymentintheRPSScenario,CCUS-equippedcoalpowerplantscouldbecomecost-competitiveincertainregions–alsovis-à-visrenewables–duetotheincentiveeffectoftheintensity-basedETSdesignforcoalwithCCUS(seethefollowing22ThisassumesapplyingaCO2fuelfactorof95kgCO2/GJ(thefactorfor“otherbituminouscoal”)intheconversion.Ifapplyingtheaveragefuelfactorforcoalof101.65kgCO2/GJusedinthisreport’smodelling,therespectivecarbonintensitieswouldbe894gCO2/kWhfor2025and864gCO2/kWhfor2030.0100020003000400050002020202520302035MtCO₂RPSRPS-ETSEnhancingChina'sETSforCarbonNeutrality:Chapter3.Thecurrentpolicymix–FocusonPowerSectorRPSandETSPAGE51IEA.Allrightsreserved.section“ImpactsofCO2costsontechnologies”).IntheRPS-ETSScenario,around70GWofCCUS-equippedcoalplantsaredevelopedwhichgeneratearound510TWhin2035,accountingfor4%oftotalgeneration.23Gaspowergenerationalsoincreasesbyabout15%in2035.ThroughthedeploymentofCCUS-equippedcoalandincreasedgaspowergeneration,thedisplacementof600TWhofunabatedcoalpowergenerationispossibleby2035.However,thedeploymentoflow-carbonsourcesremainsunaffected,withgenerationfromrenewablesandnucleargrowingatthesamepaceinbothscenarios(Figure3.4).Figure3.4ElectricitygenerationbytechnologyintheRPSandRPS-ETSScenarios,2020-2035IEA.Allrightsreserved.ImpactofCO2costsontechnologiesTheCO2allowancepricereflectsthemarginalabatementcost24thatkeepsemissionsatthelevelthatcorrespondstothenumberofallowancesallocatedtoemitters.Inanintensity-basedETS,allowanceallocationisnotlimitedbyapre-setcap,butdependsonproductionactivitiesandemissionsintensitybenchmarks.AsChina’sETScoverscoal-andgas-firedpowerwithseparatebenchmarks,theallowancepriceprimarilysendsasignaltoenabledecarbonisationoptionsthatcanreducetheemissionsintensityoffossil-basedgenerationsourcesinlinewiththosebenchmarks.Non-fossilgeneration,ontheotherhand,isnotincludedinthebenchmarkcategoriesandcannotactasasourceofallowancesupply.IntheRPS-ETSScenario,theallowancepricerisesfromaroundCNY60/tCO2in2020toCNY280/tCO2in2030astheETSshiftstodriveCCUSdeploymentinaddition23Plantrunninghoursarearesultofthemodel’soptimisingsystemcostsundereconomicdispatchandpolicyconstraints(suchastheRPSandETS).Amaximum85%capacityfactorissetforcoalplants.Asaresult,themodelproduceshigheraveragerunninghoursforCCUS-equippedcoalplantsthanforunabatedcoalplants.24Abatementcostisthecostofreducingenvironmentalexternalities.ThemarginalabatementcostisthecostofreducingonemoretonneofCO2.Itthusreflectsthecostofreducingtheemissionstoagivenlevel–inthecontextofChina,tothenumberofallowancesallocatedtoemitterscoveredbyitsETS.0%10%20%30%40%50%60%70%80%90%100%RPS-ETSRPSRPS-ETSRPSRPS-ETSRPS2035203020252020CoalCoalwithCCUSGasNuclearHydroNon-hydrorenewablesTargetedRPSshare(non-hydro)18.7%25.9%36.0%EnhancingChina'sETSforCarbonNeutrality:Chapter3.Thecurrentpolicymix–FocusonPowerSectorRPSandETSPAGE52IEA.Allrightsreserved.toencouragingrelativelycheapimprovementsincoalfleetefficiencyunderincreasinglytightenedemissionsintensitybenchmarks.By2035,theallowancepricethendecreasestoCNY230/tCO2ascostsforCCUStechnologyfallwithgreaterdeploymentandCCUSrequiresless,thoughstillsignificant,financialincentivesfromtheETStocompetewithothertechnologies(Figure3.5,seealsoFigure4.8onaveragegenerationcostbytechnologyinChapter4).Theintensity-baseddesignshapeshowtheallowancepriceimpactsdifferenttechnologies.Underthisdesign,generatorsreceiveallowancesinproportiontotheirproductionactivitiesandpredeterminedbenchmarksforfree,i.e.themoreelectricitytheygenerate,themorefreeallowancestheywillbeabletoreceive.Therefore,theeffectiveCO2cost(inCNYperkWhofgenerationproduced)incurredtoaunitdependson:i)theallowanceprice(inCNY/tCO2),andii)thedifferencebetweenaunit’semissionsintensityanditsapplicablebenchmark(ingCO2/kWh),insteadofitsabsoluteemissionsintensity.AunitfacesaneffectivecostundertheETSonlyifitgenerateselectricityatanemissionsintensityexceedingtheapplicablebenchmark,whileotherunitsperformingbetterthanthebenchmark(i.e.ataloweremissionsintensity)receivemorefreeallowancesthantheyneedtosurrenderandcangainfinanciallybysellingthesurplus.Figure3.5AverageeffectiveCO2costbytechnologyandallowancepriceintheRPS-ETSScenario,2020-2035IEA.Allrightsreserved.Notes:CFB=circulatingfluidisedbed.NegativevaluesinCO2costimplythatunitsofthattechnologyonaveragereceiveanallowancesurplusandcouldmakeafinancialgain.TheaverageCO2costforcoalpowerwithCCUSin2020and2025indicatethepotentialgainCCUScouldhavemadeundertheassumedemissionsintensitybenchmarkandallowanceprice.Inthemodel.However,itisnotsufficienttomakeCCUScost-competitiveandenterthegenerationmixby2025.UndertheETSbenchmarktrajectoryanalysedintheRPS-ETSScenario,theeffectiveCO2cost–thecostgeneratorsactuallyneedtopayforpurchasingallowancestomeetETScompliance–wouldbebelowCNY0.005/kWhformostunabatedcoal-firedpowertechnologiesin2020-2025.Ultra-supercriticalcoal-0.25-0.20-0.15-0.10-0.050.000.052020202520302035EffectiveCO₂cost(CNY/kWh)CFBHigh-pressureSubcriticalSupercriticalUltra-supercriticalCoalwithCCUSGasAverageCO₂costbytechnology0501001502002503002020202520302035CNY/tCO₂CO₂allowancepriceAllowancepriceCostGainEnhancingChina'sETSforCarbonNeutrality:Chapter3.Thecurrentpolicymix–FocusonPowerSectorRPSandETSPAGE53IEA.Allrightsreserved.unitsandCFBunitsmightevenreceiveafinancialincentiveastheyonaverageperformbetterthantheirrespectivebenchmarks.Consequently,intheRPS-ETSScenario,theETSleadstoaslightshiftwithintheunabatedcoalgenerationfromhigh-pressure,subcriticalandsupercriticalunitstoultra-supercriticalandCFBunits.Asbenchmarksgraduallytightenby2030,mostunabatedcoaltechnologies–includingultra-supercriticalunits–wouldhaveahigheremissionsintensitythantheirbenchmarksandfaceanactualCO2cost.Asaresult,unabatedcoalgenerationisreducedasareultra-supercriticalcapacityadditions–to90GW,comparedto140GWintheRPSScenario.Through2035,theeffectiveCO2costremainsonaveragebelowCNY0.050/kWhforallcoalsub-technologiesandforthedominantultra-supercriticalunitsbelowCNY0.020/kWh(Figure3.5).Atthesametime,withtheincreasingallowanceprice,theETSwouldprovideCCUS-equippedcoalunitswithasignificantCO2abatement“subsidy”ofCNY0.200/kWhaslongastheyaresubjecttothesamebenchmarkasconventionalunabatedcoalunitsabove300MW.Byprovidingthisfinancialincentive,theETScouldmakeCCUS-equippedcoalpowercost-competitiveincertainregionsandallowittoenterintothepowermixby2030.Meanwhile,gasgenerationreceivesamuchsmallerfinancialgainofaroundCNY0.010/kWhasthebenchmarkforgasunitsismuchclosertotheiractualemissionsintensity,producingonlyalimitedallowancesurplus.RenewablesandnucleargeneratorsfaceneitherdirectcostnorgainbecausetheyarenotincludedinthebenchmarkdesignanddonotreceiveallowancesundertheETS.Ifacoalpowergeneratorswitchesthereforefromcoaltogasornon-fossilgenerationsources,thegeneratorwilllosefreeallowancesassociatedwiththecoalpowerproduction,andreceiveallowancesunderthegasbenchmarkornofreeallowancesincaseofswitchingtonuclearorrenewables.Hence,theETSincentiveforswitchingfromcoaltoalternativefuelsdependsprimarilyonhowtheCO2costimposedonunabatedcoalgenerationimpactstherelativecostcompetitivenesstoothergenerationsources.Duetothedesignoftheintensity-basedsystem,theETSincentivetoreducetheemissionsintensityofcoalpowergeneration,includingthroughCCUS,isgreaterasitconsistsofboththeavoidedCO2costandasubstantialfinancialgainfromsurplusallowances.Overall,theintensity-basedETSdesignwithfreeallocationandmultiplebenchmarksrewardsbetterperformersandpenalisesworseperformersrelativetotheirrespectivebenchmarks.However,italsocreatesdifferentiatedcarbonpricingsignalstotechnologiesdependingonthedefinitionofbenchmarkcategoriesandstringency.Itprovidesthestrongestincentivetomeasuresthatcouldreduceemissionsintensityfromcoveredgenerationsourcestobelow-benchmarklevel,whileprovidinglimitedincentivesforfuelswitchingtolower-EnhancingChina'sETSforCarbonNeutrality:Chapter3.Thecurrentpolicymix–FocusonPowerSectorRPSandETSPAGE54IEA.Allrightsreserved.carbonsourcesthataresubjecttoadifferentbenchmarkorthosenotincludedintheallowanceallocationsuchasrenewables–especiallyascomplianceoccursatthecompanylevel.InteractionofETSandRPSInadditiontothepowermixandCO2costdynamics,thegreenelectricitypremiumprovidesanindicatorforunderstandinghowtheintensity-basedETSwouldinteractwiththeRPSpolicyandthefinancialsupportrequiredtoensurethetargetednon-hydrorenewablesshare(Figure3.6).Thisinvolvesnotonlyrenewablescompetingwithfossil-basedgenerationinnewadditions,butalsocompetingwithexistingfossil-basedcapacityinthegenerationmix.Overall,theinteractionobservedisratherminimal.IntheRPS-ETSScenario,thegreenelectricitypremiumamountstoCNY0.034/kWhin2025,slightlyhigherthanintheRPSScenario.Thisisbecausewiththeassumedmoderatebenchmarktighteningbefore2025,theETSincentiviseshigherrunninghoursformoreefficientcoal-andgas-firedpowerplants,therebyincreasingtheirrelativecostcompetitivenessvis-à-vislessefficientcoalandgasplantsbutalsoothergenerationsourcessuchasrenewables.Inturn,toencouragethesamedeploymentlevelofnon-hydrorenewables,ahigherfinancialincentiveisrequired.By2030,theETSimposesapositiveCO2costonallunabatedcoaltechnologiesasbenchmarksaretightenedfurther,andconsequentlythegreenelectricitypremiumfallstoCNY0.022/kWh–12%belowtheleveloftheRPSScenario.Thistrendcontinuesto2035withthepremiumleveldroppingalmosttozero.Figure3.6GreenelectricitypremiumintheRPSandRPS-ETSScenarios,2025-2035IEA.Allrightsreserved.0.000.010.020.030.04203520302025CNY/kWhRPSRPS-ETSEnhancingChina'sETSforCarbonNeutrality:Chapter3.Thecurrentpolicymix–FocusonPowerSectorRPSandETSPAGE55IEA.Allrightsreserved.TheresultshowsthatwhentheETSactstoimproveefficiencyandemissionsintensityoffossil-basedgeneration,itcouldhaveimplicationsfortherelativecostcompetitivenesswithothergenerationsources.IftheETSismodestinstringency,itgivessomeincentiveforslightlylower-carbonfossil-basedgeneration,whichresultsintheneedformoresupportgiventorenewablestoachievethetargeteddeploymentlevels.WhentheETSismorestringent,however,theCO2costonfossil-basedgeneration,evenifmodest,improvesthecostcompetitivenessofrenewablesdeploymentandlowerstherequired“greenpremium”.Nonetheless,theobservedinteractioneffectsintheRPS-ETSScenarioremainlimitedto2035.ElectricitygenerationcostTheintegrationofahighershareofrenewablesintheelectricitysystemandtheinternalisationofCO2costsaffectthedevelopmentofelectricitygenerationcosttoalimitedextent(Figure3.7).IntheRPSScenario,unitelectricitygenerationcostincreasesintheperiodto2025by2%asahighershareofrenewablesisintegratedintothesystemwhichrequiresadditionalcapitalinvestmentaswellasbalancingandstoragecosts.However,asdeploymentdrivescostreductions,electricitygenerationcostsalsodecreaseafter2025.Figure3.7Changeinunitelectricitygenerationcostrelativeto2020intheRPSandRPS-ETSScenarios,2025-2035IEA.Allrightsreserved.TheRPS-ETSScenariofollowsasimilartrend,albeitataslightlyhigherlevel.TheinternalisationofCO2costshasamoderateimpactonelectricitycostthatbecomesmoreidentifiableby2030.AsbenchmarkstightenandtheallowancepriceincreasestoaroundCNY230-285pertonneofCO2post2030,theunitelectricitycostintheRPS-ETSScenarioisabout1.5%to3%higherthanintheRPSScenariointheperiod2030-2035.Thisis,however,againstthebackdropofanadditional13%reductionsinemissionsthattheETScangeneratecomparedtotheRPSonlyscenario.-4%-3%-2%-1%0%1%2%3%4%203520302025RPSRPS-ETSEnhancingChina'sETSforCarbonNeutrality:Chapter4.EnhancedETSdesignsFocusonPowerSectorforcarbonneutralityPAGE56IEA.Allrightsreserved.Chapter4.EnhancedETSdesignsforcarbonneutralityIn2020,ChinaannouncedthatitaimstopeakCO2emissionsbefore2030andbecomecarbonneutralbefore2060.Therapiddecarbonisationofpowersupplyalongsidetheelectrificationofawiderangeofenergyend-usesacrossallsectorsareanimportantpillarofanystrategyforachievingcarbonneutrality.Inordertosupporteconomy-widecarbonneutralitybefore2060,China’spowersectorwouldlikelyneedtoachievenetzeroCO2emissionsbefore2055(IEA,2021a).ThischapteranalysesthreepossiblepolicyscenarioswithstrengthenedETSdesignsthatcouldacceleratethealignmentoftheelectricitysector’semissionstrajectorywithChina’scarbonneutralitytarget,usingtheemissionstrajectoryoftheIEA’sAnnouncedPledgesScenario(APS)25asinput.AssumingthesameRPSpolicyassumptionsastheRPS-ETSScenario,thesescenariosintroducedifferentETSdesignenhancementsafter2025withsignificantlytighterbenchmarks(ETS+BM),partialallowanceauctioning(ETS+Auction)ortransitioningtheintensity-basedETStoacap-and-tradesystem(ETS+Cap).ThekeyassumptionsanddifferencesamongtheEnhancedETS(ETS+)ScenariosareexplainedindetailinChapter2andpresentedinTable2.2.Thefollowingsectionsdiscussandcomparetheimplicationsofthesethreepolicydesignsfortheemissionstrajectory,thegenerationmix,theircost-effectiveness26andtheinteractionsoftheETSwiththeRPSpolicy.ImpactonCO2emissionsAsallthreeETS+policyscenariosaimtoalignwithapathwayforreachingChina’scarbonneutralitytarget,theyfollowthesameemissionstrajectorywithloweremissionsrelativetotheRPS-ETSScenario.IntheRPS-ETSScenario,CO2emissionsfromelectricitygenerationdecreasefromabout4.5Gtin2020by5%until2030andbyaround20%until2035.WhiletheRPS-ETSScenariowouldsuccessfullypeakelectricity-relatedemissionsbefore2030andsetemissionsto25TheAnnouncedPledgesScenario(APS)ispresentedintheIEA’sreports“AnenergysectorroadmaptocarbonneutralityinChina”and“WorldEnergyOutlook2021”.ThereisnosinglepathwayforenergysectoremissionsconsistentwithChina’sstatedgoalsofachievingapeakinCO2emissionsbefore2030andcarbonneutralitybefore2060.TheAPSpresentsoneplausiblepathwaytocarbonneutralityinChina’senergysectorinlinewiththecountry’sstatedgoals.TheIEA’sreport“AnenergysectorroadmaptocarbonneutralityinChina”alsoexploresanAcceleratedTransitionScenario(ATS)toassesstheopportunitiesforandimplicationsofafastertransitionthroughenhancedclimatepolicyambitionsandeffortsto2030.26Costeffectivenessisdefinedasthepolicymixthatcanachieveagivenemissionstrajectoryatlowerfinancialcost.Thisreportestimatesthecostintermsoftotalsystemcostandintermsofunitelectricitygenerationcost(i.e.thecostofgenerationperkWhproduced).EnhancingChina'sETSforCarbonNeutrality:Chapter4.EnhancedETSdesignsFocusonPowerSectorforcarbonneutralityPAGE57IEA.Allrightsreserved.furtherdeclineby2035,muchstrongerpolicytighteningandfasteremissionsreductionswouldbenecessaryafter2035toalignthesectorwithcarbonneutrality.CombinedwiththesameRPStargets,thethreeETS+ScenariosofferdifferentmeansofusingtheETStoachieveoneelectricitysectoremissionstrajectorythatcouldbetteralignwiththecarbonneutralitytarget.ThroughdifferentETSdesignenhancementsafter2025,emissionsreductionsinthesectorcouldbedoubledby2030andelectricity-relatedCO2emissionscoulddecreaseby38%in2035comparedto2020,fallingto2.8GtCO2(Figure4.1):ETS+BMScenario:Significantlytighteningthecoalbenchmarkspost2025,doublingthefive-yeartighteningrateto12%intheperiodto2030andincreasingitagainto22%in2030-3035.Overall,coalbenchmarksarereducedto67%oftheir2020levelby2035,comparedto86%intheRPS-ETSScenario.ETS+AuctionScenario:Graduallyintroducingpartialauctioningintheintensity-basedETSpost2025,with17.5%oftheallowancesauctionedby2030and23.5%by2035,whiletighteningthecoalbenchmarksatthesamepaceasintheRPS-ETSScenario.ETS+CapScenario:Transitioningtoatechnology-neutralcap-and-tradeETSpost2025,withanabsoluteemissionscapat89%of2020emissionslevelfor2030and62%of2020levelfor2035.Figure4.1CO2emissionstrajectoryfromelectricitygenerationbyscenario,2020-2035IEA.Allrightsreserved.Dependingonitsdesign,theETScoulddriveemissionsreductionsthroughdifferentchannels(Figure4.2).ComparingemissionsreductionswiththecounterfactualRPSScenario,anintensity-basedETSwithfreeallocation(RPS-ETSandETS+BMScenarios)deliversmostoftheemissionsreductionsbytransformingthecoalfleetthroughimprovingunabatedcoalfleetefficiencyand0100020003000400050002020202520302035MtCO₂RPSScenarioRPS-ETSScenarioEnhancedETS(ETS+)ScenariosEnhancingChina'sETSforCarbonNeutrality:Chapter4.EnhancedETSdesignsFocusonPowerSectorforcarbonneutralityPAGE58IEA.Allrightsreserved.encouragingCCUSadoptionincoalpowerfrom2030onwards.Moreover,theETS+BMScenariotriplesCCUS-relatedreductionsto950MtCO2in2035comparedtoaround330MtCO2intheRPS-ETSScenario.Withtighterbenchmarks,fuelswitchingfromcoaltogasandnon-fossiltechnologiesalsoincreasestosomeextent.However,thisonlymakesuparound20%ofdecarbonisation,mostlyfuelswitchingfromcoaltogas.Figure4.2EmissionsreductionsbychannelintheRPS-ETSandETS+ScenarioscomparedwiththecounterfactualRPSScenario,2025-2035IEA.Allrightsreserved.Anintensity-basedETSwithpartialauctioning(ETS+AuctionScenario)generatesemissionsreductionsthroughacombinationofcoalfleettransformationaswellasfuelswitchingtogasandtonon-fossiltechnologies,withtheshareoffuelswitching-relatedreductionsgrowingovertime.By2035,fuelswitchingtonon-fossiltechnologiesaccountsforabout54%oralmost800MtCO2ofemissionsreductionsinthisscenario.ItsemissionsreductionfromfuelswitchingtogasandunabatedcoalfleetefficiencyimprovementsissimilarinmagnitudeasintheETS+BMScenarios.EmissionsreductionsfromcoalpowerequippedwithCCUSismuchlowerataround280MtCO2.Transitioningfromanintensity-basedETStoacap-and-tradedesignsignificantlychangeshowtheETSdrivesdecarbonisation.IntheETS+CapScenario,emissionsreductionsresultentirelyfromfuelswitchingawayfromcoalpower–around90%tonon-fossilsources(reducingover1200MtCO2by2035)and10%togaspower(around200MtCO2).NoemissionsreductionsaregeneratedthroughefficiencyimprovementsinthecoalfleetcomparedtothecounterfactualRPSScenarionorthroughCCUSdeployment.Thisisbecauseoperationalefficiencydoesnotimproveduetoallcoalunitsseeingareductioninrunninghoursdespitetechnicalefficiencyimprovementsofthecoalfleet.-1500-1000-5000RPS-ETSRPS-ETSETS+BMETS+AuctionETS+CapRPS-ETSETS+BMETS+AuctionETS+Cap202520302035MtCO₂Switchfromfossiltonon-fossiltechnologiesCoal-to-gasswitchSwitchfromunabatedcoaltocoalwithCCUSCoalfleetefficiencyimprovementsEnhancingChina'sETSforCarbonNeutrality:Chapter4.EnhancedETSdesignsFocusonPowerSectorforcarbonneutralityPAGE59IEA.Allrightsreserved.ImpactongenerationmixAchievingChina’scarbonneutralitygoalrequiresastrongandrapidshifttolow-carbonpowerinthegenerationmix.TheanalysedETSenhancementsachievetheemissionstrajectorybyincentivisingdifferentlow-carbonsolutions,resultingindifferentgenerationmixesthatimpactcoalandrenewablesinparticular,whilegasandnuclearremainsimilaracrossscenarios(Figure4.3).Figure4.3Electricitygenerationmixbytechnologyandscenario,2020-2035IEA.Allrightsreserved.AllthreeETS+Scenariosacceleratethephase-downofunabatedcoalpowergenerationastheETSdesignisenhancedafter2025.UnlikeintheRPS-ETSScenario,where40GWofnewunabatedcoalcapacityisstillbuiltin2025-2030,almostnonewunabatedcoalcapacityisaddedpost2025intheETS+Scenarios,reducingtheriskofemissionslock-inandstrandedassets.By2030,theshareofunabatedcoalintotalgenerationdeclinesfrommorethan60%in2020tojustover40%–around4%lowerthanintheRPS-ETSScenario–withonlyslightdifferencesacrosstheETS+Scenarios.InallETS+Scenarios,unabatedcoalpowerplantsgeneratearound2800TWhofelectricityby2035comparedwith4800TWhin2020,andunabatedcoal’sshareofthegenerationmixdeclinesto24%.Thisiscomparedwith33%intheRPS-ETSScenarioby2035.Exceptforultra-supercriticalcoalplants,unabatedcoalpowerplantswouldonaveragehave0%20%40%60%80%100%ETS+CapETS+AuctionETS+BMRPS-ETSETS+CapETS+AuctionETS+BMRPS-ETSRPS-ETSRPS-ETS2035203020252020CoalCoalwithCCUSGasNuclearHydroNon-hydrorenewablesTargetedRPSshare(non-hydro)18.7%25.9%36.0%EnhancingChina'sETSforCarbonNeutrality:Chapter4.EnhancedETSdesignsFocusonPowerSectorforcarbonneutralityPAGE60IEA.Allrightsreserved.annualrunninghoursbelow2500hours,andservemostlyasasourceforsystemsecurityandflexibility.27IntheETS+BMScenario,thetighteningofemissionsintensitybenchmarksleadstoemissionsreductionsmainlythroughtechnologyswitchfromunabatedcoalgenerationtocoalpowerequippedwithCCUS.CoalpowergenerationwithCCUSincreasesbymorethan2.5timesto1340TWhby2035,providing11%oftotalgeneration.Meanwhile,thesharesofgasandnon-fossiltechnologiesremainatasimilarlevelastheRPS-ETSScenario,eachincreasingbyonly1%.IntroducingpartialauctioningofallowancesintheETS+AuctionScenariowouldallowtheETStoprovidesignificantsupporttorenewablesbyincreasingtheeffectivecostofcarbonwithouthavingtotightenbenchmarksasmuchasintheETS+BMScenario.Theshareofrenewablesgenerationincreasestonearly60%by2035,9%morethanintheRPS-ETSScenario.Theshareofnon-hydrorenewablesreaches43%,whichsurpassesthetargetedRPSshareby7%.CoalpowerequippedwithCCUSisdeployedandcontributesaround3%oftotalgenerationin2035,slightlybelowthelevelintheRPS-ETSScenario.TheETS+CapScenarioshowsamoreprofoundfuelswitchingtrendinthegenerationmix.TransitioningtheETSfromanintensity-baseddesigntoacap-and-tradeleadstoasignificantscale-upofnon-hydrorenewables:itsshareinthepowermixreaches47%by2035,11%higherthantheRPStargetandthelevelreachedintheRPS-ETSScenario.Theshareofallrenewablesincreasesto63%,withhydropowergenerationincreasingmarginally.Fossil-basedgeneration,ontheotherhand,fallsbelow30%–with24%stillcomingfromcoalgenerationand6%fromgasgeneration.Incontrasttothescenarioswithanintensity-basedETS,ETS+CapleadstonosizeabledeploymentofCCUSinthepowersectorby2035ascoalpowerwithCCUScannotcompetewithrenewablesonacostbasis(see“ImpactsofCO2costsontechnologies”sectionbelow).Theseresultssuggestthat,astheETSisstrengthenedthroughpartialauctioningandespeciallyasacap-and-tradesystem,itcansignificantlyacceleratethedeploymentofmaturerenewablesastheircostshaveandarecontinuingtodecrease.Both,ETS+AuctionandETS+Cap,surpassthetargetedRPSshareafter2030,indicatingthatadditionalfinancialsupportthroughRPSwouldnolongerbeneededfornon-hydrorenewablestoreachtheirtarget.Policycost-effectivenessWhileallETS+Scenariosachievethesameemissionstrajectoryfortheelectricitysector,theyresultindifferentcostsfortheelectricitysystem.Transitioningtoa27Tomaintainthefinancialviabilityofplantswithannualrunninghoursbelow2500andenablesuchplantstoactasasourceforsystemflexibility,supportforflexibilityretrofitsandcapacitymarketswouldlikelybecomenecessary.EnhancingChina'sETSforCarbonNeutrality:Chapter4.EnhancedETSdesignsFocusonPowerSectorforcarbonneutralityPAGE61IEA.Allrightsreserved.cap-and-tradesystemandgraduallyintroducingpartialauctioningintoanintensity-basedETSdemonstratemuchstrongereconomicefficiencythanamorestringentintensity-basedETSwithcompletefreeallocation.TotalsystemcostBy2035,theETS+CapScenarioleadstothelowesttotalsystemcosts28amongthethreeETS+Scenarios(Figure4.4).ComparedtotheRPS-ETSScenario,whichincludesanintensity-basedETSwithamoderatebenchmarktrajectory,theETS+CapScenarioachievesaround20%additionalemissionsreductions(over800MtCO2)atthesametotalsystemcost.ItisfollowedbytheETS+AuctionScenariowith1%highercosts(whenexcludingcostsforallowancepurchaseastheycanbebalancedatthesystemlevelwiththeresultingauctioningrevenue),andtheETS+BMScenario,whichis5%morecostly.In2035,achievingthesamecarbonneutrality-alignedtrajectorywouldcostCNY220billionmorewithanintensity-basedETSwithsignificantlytightenedbenchmarks(ETS+BMScenario),thanwithacap-and-tradesystem(ETS+CapScenario).Figure4.4Totalsystemcostsbyscenario,2035IEA.Allrightsreserved.UnitelectricitygenerationcostThecost-effectivenessofthedifferentETSenhancementsisalsoreflectedbytheunitelectricitygenerationcost29overtime.IntheRPS-ETSScenario,unit28Inthisreport,totalsystemcostincludesannualisedcapitalexpenditureaswellasvariableandfixedoperatingandmaintenancecostsofelectricitygeneration,transmissionandbalancingcostsandcostsforplantretrofits.29Theunitelectricitygenerationcostiscalculatedasthetotalpowersystemcostdividedbytotalelectricitygeneration.010002000300040005000RPS-ETSETS+BMETS+Auction(excludingauctioningcost)ETS+CapbillionCNYDifferencecomparedtoRPS-ETS+5.2%0%+1.4%EnhancingChina'sETSforCarbonNeutrality:Chapter4.EnhancedETSdesignsFocusonPowerSectorforcarbonneutralityPAGE62IEA.Allrightsreserved.electricitygenerationcostisatCNY0.367/kWhin2020,increasesuntil2025andthendecreasesto1%below2020levelsby2035.AmongthethreeETS+Scenarios,theETS+CapScenariodemonstratesthelowestunitcostforelectricitygenerationin2030and2035.AsintheRPS-ETSScenario,itscostlevelfallsto1%below2020levelsby2035whiledeliveringdecarbonisationinlinewithChina’speakingandneutralitytargets(Figure4.5).Thecap-and-tradesystemachievesthiscost-effectivenessbyprimarilydrivingfuelswitchingfromunabatedcoalgenerationtowhichevergenerationtechnologycandeliveremissionsreductionsattheleastcost.Thisleadstoaswitchtorenewablesastheyoffermorecost-efficientgenerationthancoalpowerequippedwithCCUS,whichcanbeencouragedbyanintensity-basedETS.Figure4.5Changeinunitelectricitygenerationcostrelativeto2020byscenario,2025-2035IEA.Allrightsreserved.IntheETS+AuctionScenario,unitelectricitycostalsofallspost2025butstillstandsat0.5%abovethe2020levelby2035.With23.5%ofallowancesauctionedin2035,thenewcarboncostcomponentintroducedwithpartialauctioningreachesCNY0.020/kWhwhichincreasestheunitelectricitycostforgeneratorsby6%above2020levels.30However,thiscarboncostalsorepresentsasourceofgovernmentrevenue,whichcouldreachmorethanCNY260billionin2035.Thisrevenuecouldbeusedtoaddressaffordabilityorcompetitivenessconcerns30Whilefromasystemperspectiveauctioningcostsandrevenuescanbebalanced,anelectricitygeneratorthathastopurchaseallowancesstillfaceshigherperunitelectricitygenerationcoststhanbefore.Aregulatorcancompensateageneratorforthathighercost–thiswould,however,negatethedesiredeffectofauctioning.Thisreport,instead,takesasystemperspectivewherearegulatorreinveststherevenuestothebenefitofelectricityconsumers.Allowanceauctioningcost/revenue-8%-6%-4%-2%0%2%4%6%8%ETS+CapETS+AuctionETS+BMRPS-ETSETS+CapETS+AuctionETS+BMRPS-ETSRPS-ETS203520302025EnhancingChina'sETSforCarbonNeutrality:Chapter4.EnhancedETSdesignsFocusonPowerSectorforcarbonneutralityPAGE63IEA.Allrightsreserved.byelectricityend-consumers–especiallyifpowerproducersareabletolargelypassthroughthecost–andtolowerthelong-termcostsofachievingcarbonneutralitybyinvestingtheproceedsinlessmaturelow-carbontechnologies(Box4.1)orenergyefficiencymeasures.Enhancinganintensity-basedETSwithfreeallocationthroughmorestringentbenchmarksaloneleadstotheleastcost-efficientgenerationmixamongthethree.IntheETS+BMScenario,unitelectricitygenerationcostcontinuestoincreasepost2025,growingto4%higherthan2020levelsby2035and5%higherthanintheETS+CapScenario.AllowancepriceAsthedifferentETSdesignsspuremissionsreductionsthroughdifferenttechnologyandfuelchoices,allowancepricelevelsalsovaryacrossscenarios(Figure4.6).Thesameemissionsreductionscanbeachievedwithamuchlowerallowancepricewhentransitioningtoacap-and-tradesystem(ETS+Cap),whichencouragescost-efficientfuelswitchingtorenewableswithanallowancepriceofaroundCNY100/tCO2in2030-2035.Anintensity-basedETS,whetherwithfreeallocation(ETS+BM)orpartialauctioning(ETS+Auction),wouldinsteadleadtoahigherallowancepriceofaroundCNY300/tCO2asitmainly–orpartiallyinthecaseofETS+Auction–drivestherequiredemissionsreductionsthroughCCUSdeploymentwhichneedshigherfinancialsupportand,hence,determinestheallowancepricelevel.ThesestarkdifferencesbetweenETS+Capandanintensity-basedETSdesign(RPS-ETS,ETS+BMandETS+Auction)areexplainedbythefactthatthelattermainly–ifnotexclusively–allowsonlytheactiveparticipationoffossil-basedgenerationintheETSthroughitscoalandgaspowerbenchmarks.Cheaperabatementoptionssuchasrenewablesareexcludedbythesystem’sdesignwhereasinacap-and-tradesystemallgenerationsourcescanactivelyparticipateinmeetingtheemissionscap.Theresultsalsosuggestthatcarefulmanagementofmarketexpectationsmaybeneededifatransitiontoacap-and-tradesystemistotakeplace,sothatpotentialallowancepricechangeswouldnotbemisinterpretedasreducedpolicycommitmentorstringencyandpotentialpricevolatilityismoderated.EnhancingChina'sETSforCarbonNeutrality:Chapter4.EnhancedETSdesignsFocusonPowerSectorforcarbonneutralityPAGE64IEA.Allrightsreserved.Figure4.6Allowancepricebyscenario,2020-2035IEA.Allrightsreserved.Box4.1ETSandtechnologicalinnovationThecost-effectivenessofaclimatepolicyovertimeisalsoinfluencedbythedegreetowhichitcanincentivisetechnologicalinnovationtobringdownthefuturecostsofdecarbonisation.Intheshort-term,anETSdeliverscost-effectiveemissionsreductionsifitsdesigncanensurethatoperationalandinvestmentdecisionsbygeneratorsleadtothecheapestabatement:forexample,ifacompanydecidestorunitslessefficientcoalplantslessanditsmoreefficientonesmore,aswellasdeploymaturelow-carbontechnologiessuchassolarPVduetotheriseinCO2priceortighterbenchmarks.Overthelong-termanETScanensurecost-effectivenessifthesystemcangenerateaconsistentandsufficientsignalofrisingCO2pricesinthefuture,toleadacompanytodeploymorenascenttechnologiessuchasCCUSwiththeexpectationoffuturegainsduetothisinvestmentortoincreaseR&DexpenditureforlessmaturerenewablesorCCUSforcheaperdeploymentinthefuture.Thus,thedesignofanETSdecidesonwhetheritcandeliveremissionsabatementcost-effectivelyforthenear-andlong-term.Inanycase,however,asanETScanonlyprovideafinancialsignalthatwouldoftennotbesufficientfornascenttechnologies,additionalcompanionpoliciestargetingtechnologicalinnovationandnecessaryinfrastructure–whichareessentialelementsofanycomprehensiveenergypolicy–willalwaysberequiredtocomplementanETS(IEA,2011).InChina’scase,anintensity-basedETSwithfreeallocationcansupporttechnologicalinnovationonlyifacorrespondingbenchmarkexists.TheresultsofthemodellingindicatethatChina’scurrentdesignespeciallysupportsgradual0501001502002503003502020202520302035CNY/tCO₂RPS-ETSETS+BMETS+AuctionETS+CapEnhancingChina'sETSforCarbonNeutrality:Chapter4.EnhancedETSdesignsFocusonPowerSectorforcarbonneutralityPAGE65IEA.Allrightsreserved.efficiencyimprovementswithintheunabatedcoalfleet,whileby2030alsoincentivisingrelativelymoreexpensive,lessmatureCCUS.Anintensity-basedETSwithpartialauctioningcouldcombinebothincentivesfornear-termandlongertermcost-effectivenesstosomeextentbyenablingrenewablesdeploymentandCCUS.Acap-and-tradedesign,ontheotherhand,wouldprovidethestrongestincentivefordeployingcost-competitiverenewables,whilespecialprovisionssuchasadditionalfreeallowancesfornascenttechnologieswouldlikelybeneededtostrengthenitssignalfortechnologyinnovation.Inallcases,however,additionalpoliciesthatcomplementtheETSwillbenecessarytoensureadiversifiedpackageofdecarbonisationsolutionsforthelong-term.Forexample,themodellinginthisreportassumesa45%costreductioninCCUScapitalcostsby2035asaresultofexogenoussupportfactorssuchasgovernmentandcorporateR&Dsupportaswellasinternationallearningeffects.TheEU’sInnovationFundisagoodexampleofcomplementaryinnovationsupportforanETS:thefundisfinancedthroughsomeoftheproceedsgeneratedfromallowanceauctioningintheEUETSandaimstosupportearly-stage,breakthroughlow-carbontechnologies(EuropeanCommission,2022).Crucially,thestrongestincentiveforinnovationthatChina’sETScanprovideistocreateregulatorytransparencyandclarityforbenchmarktighteningorcapreduction–dependingontheETSdesign–overalongtimehorizonthatenablesmarketparticipantstorobustlyforecastrisingstringencyand,asaresult,risingcarbonprices.Acarbonfloorpricethatestablishesaminimumcarbonprice,asintheUK,canbeanadditionaldesignfeaturetocreategreaterpredictabilityandtocontributetode-riskinginvestmentsinmorenascenttechnologies.ImpactsofCO2costsontechnologiesTheCO2costsignalfordifferentgenerationtechnologiesvariesdependingontheETSdesign.Inanintensity-basedETSwith100%freeallocation(RPS-ETSScenarioandETS+BMScenario),theimpactoftheETSonfossil-basedgeneratorsdependsontheallowancepricelevelandagenerator’srelativeperformancecomparedtotheapplicablebenchmarks.ThoseunderperformingthebenchmarkincuraneffectiveCO2cost,thoseoutperformingitintermsofemissionsintensitycanmakeafinancialgain.Inthesescenarios,howbenchmarkcategoriesaredefined,andtheirstringencyarethekeydriverforETSimpact.Withtheintroductionofpartialauctioning(ETS+AuctionScenario),theETS’sincentivefordecarbonisationisenhancedasiteffectivelyreducesthenumberoffreeallowancesandincreasestheeffectiveCO2costwithouthavingtolowertheemissionsintensitybenchmarkasmuch.However,italsoreducespartoftheCO2“subsidy”receivedbybenchmarkoutperformers.EnhancingChina'sETSforCarbonNeutrality:Chapter4.EnhancedETSdesignsFocusonPowerSectorforcarbonneutralityPAGE66IEA.Allrightsreserved.Transitioningtoacap-and-tradedesignwouldshifttheETS’sfocusfromencouragingemissionsintensityimprovementsinbenchmark-coveredfossil-basedgenerationtoreducingabsoluteemissions.Inaddition,itallowsdifferentemissionsreductionsmeasurestocontributetomeetingtheemissionscap.TheCO2costsignalprovidedbyacap-and-tradesystemdependsontheallowanceprice,agenerators’absoluteemissionsandtherelativecostcompetitivenessofgenerationtechnologies,ratherthanhowtheiremissionsintensitycomparesagainsttheirrespectiveintensitybenchmark.Asaresult,asufficientlyhighCO2costsignalcanbetransmittedwithamuchlowerallowancepriceintheETS+CapScenariothaninthetwoETS+Scenarioswithintensity-basedETSdesigns(Figure4.7).However,asthecap-and-tradedesignencouragesthemostcost-effectivedecarbonisationoptionsacrosstheentiregenerationmix,itdoesnotincentiviseCCUSadoptionascoalpowerwithCCUScannotcompetewithrenewablesonacostbasisto2035.InallthreeEnhancedETSScenarios(ETS+),strengthenedETSdesignsleadtoasignificantlyhigherCO2costsignalforunabatedcoalpowerby2035.Inthosescenarios,theCO2costsforunabatedcoalgenerationreachCNY0.080-0.100/kWhcomparedtoCNY0.020/kWhinRPS-ETS(Figure4.7).WhenitcomestocoalwithCCUSandgaspower,theETS’CO2costsignalvariesconsiderablydependingonscenarioandETSdesign.Anintensity-basedETSwithfreeallocation(ETS+BM)providesthestrongestincentivetoCCUS-equippedcoalpowerwithaCO2“subsidy”(i.e.anegativeCO2cost)ofCNY0.160/kWh–illustratingthepowerfuleffectofonlyallowingtheactiveparticipationoffossilgenerationthroughtechnology-specificcoalandgaspowerbenchmarksincomplyingwiththeETSand,hence,coalpowerwithCCUSoutperformingthecoalbenchmark.Thiseffectisreducedunderpartialauctioning(ETS+Auction)duetoadecreaseinthequantityoffreeallowancesreceivedthroughthebenchmarksandremovedunderacap-and-trade(ETS+Cap)thatallowsallgenerationsourcestoparticipateintheETS.Gaspoweronaveragereceivesasmall“subsidy”ofCNY0.010/kWhintheETS+BMScenariobutfacesapositiveCO2costsignalunderauctioningandacap-and-tradedesign.IntroductionofauctioningortransitioningtoacapwouldthussignificantlyreducetherelativeattractivenessofCCUSadoptioninfavourofrenewables.EnhancingChina'sETSforCarbonNeutrality:Chapter4.EnhancedETSdesignsFocusonPowerSectorforcarbonneutralityPAGE67IEA.Allrightsreserved.Figure4.7AllowancepriceandaverageCO2costsignalbytechnologybyscenario,2035IEA.Allrightsreserved.Note:Incontrasttoscenarioswithanintensity-basedETS,theCO2costsbytechnologyintheETS+CapScenarioneedtobeinterpretedasopportunitycostsratherthaneffectiveCO2coststhatgeneratorspayforallowancepurchasesintheotherscenarios.TheETS+CapcostsshownwouldbetheaverageCO2opportunitycosttoageneratorforproducingakWhofelectricitywiththerespectivetechnologyifnotswitchingtoanon-fossiltechnology.TheresultingCO2costsfromthedifferentETSdesignenhancementscausesubstantialchangesingenerationcostsacrosstechnologiesandscenarios(Figure4.8)whichexplainsthedecarbonisationandgenerationmixpatternsinthedifferentscenarios.AcrossallETS+Scenarios,by2035,theCO2costincreasestheaveragegenerationcostofunabatedcoalpowersignificantlybyabout25%toalmostCNY0.5/kWh.31Correspondingly,italsopushesupwardstherangeofgenerationcostsforunabatedcoalpoweracrossChina’sdifferentprovinces.Inaddition,astheETS+designsleadtolessunabatedcoalpowerproductionandlowerrunninghours,thesescenariosalsoimpactothercostcomponentsforcoalpowergenerationonaperkWhbasis,inturnfurtherdecreasingitscostcompetitivenessvis-à-visother,lesscarbon-intensivetechnologies.AscoalpowerequippedwithCCUSreceivesasizeableCO2“subsidy”intheintensity-basedETSdesigns(RPS-ETS,ETS+BMandETS+AuctionScenarios),itsaveragegenerationcostdropsnotablyfrommorethanCNY0.40/kWhtoaroundCNY0.25-0.30/kWhinregionswherecoalfuelcostsarerelativelylow.32ThisenablescoalwithCCUSinsuchregionstobecompetitivewithrenewablesinthesescenarios.IntheETS+CapScenario,however,thetransitionfromintensity-basedbenchmarksforfossilpowergenerationtoastringent,absolute31IntheETS+CapScenario,theCO2costsrepresentanopportunitycostforcontinuingfossil-basedgenerationincontrasttoaneffectiveCO2costasappliedintheotherscenarios.32Plantrunninghoursarearesultofthemodeloptimisingtotalsystemcostsundereconomicdispatchandpolicyconstraints(suchastheadoptionofanRPSandETS).Amaximum85%capacityfactorissetforcoalplants.Asaresult,themodelproduceshigheraveragerunninghoursforCCUS-equippedcoalplantsthanforunabatedcoalplants.-400-300-200-1000100200300400-0.20-0.15-0.10-0.050.000.050.100.150.20RPS-ETSETS+BMETS+AuctionETS+CapCO₂allowanceprice(CNY/tCO₂)CO₂costs(CNY/kWh)CoalCoalwithCCUSGasCO₂allowancepricein2035(rightaxis)EnhancingChina'sETSforCarbonNeutrality:Chapter4.EnhancedETSdesignsFocusonPowerSectorforcarbonneutralityPAGE68IEA.Allrightsreserved.emissionscapwithnotechnology-specificbenchmarksremovestheCO2“subsidy”thatCCUScouldreceivebyoutperformingthebenchmarksinanintensity-basedsystem.Thisleavesmaturerenewablesasthemostcost-competitivegenerationsourcesintheETS+CapScenario,whichleadstoagenerationmixdominatedbymaturerenewables.ThefollowingsectionsdiscussinmoredetailhoweachETSdesignimpactstheCO2costfortechnologies.Figure4.8Generationcostsbytechnologyandscenario,2035IEA.Allrightsreserved.Notes:Generationcostsinallscenariosareimpactedbyrunninghoursandgeographicaldistributionundereconomicdispatch.CoalpowerequippedwithCCUSisonlydeployedinregionswithlowcoalfuelcosts(InnerMongolia,Xinjiang,ShanxiandNingxia).AsnocoalpowerequippedwithCCUSisdeployedintheETS+CapScenario,therangeandaveragecostvaluesrepresenthypotheticalgenerationcosts.Incontrasttoscenarioswithanintensity-basedETS,CO2costsintheETS+CapScenarioneedtobeinterpretedasopportunitycostsratherthaneffectiveCO2coststhatgeneratorspayforallowancepurchases.ThisaverageCO2opportunitycostisthecosttoageneratorforproducingonekWhofelectricitywiththerespectivefossilfuelinsteadofswitchingtoanon-fossiltechnology.Increasedbenchmarkstringencyinanintensity-basedETSInanETSthatcontinuestoadoptanintensity-baseddesignwithfreeallocation,asintheETS+BMScenario,tighteningtheemissionsintensitybenchmarksovertimeiskeytodrivingmoreemissionreductions.Inordertodelivertheadditionalemissionsreductionsneededtomeetacarbonneutralitytrajectory,theETS+BMScenariorequirescoalbenchmarkstobeabout20%lowerby2035thanintheRPS-ETSScenario.ThisincreasedbenchmarkstringencyresultsinasubstantialincreaseinCCUS-equippedcoalgenerationassuchplantscanoutperformthebenchmarks.Ontheotherhand,unabatedcoalgenerationproducesalargerallowancedeficitaseventhemostefficientultra-supercriticalcoalplantsreachtechnicallimitsforfurtheremissionsintensityreductions.Asaresult,unabatedcoalgeneratorsneedtopurchaseanincreasingamountofallowancesfromthemarkettoenablecomplianceandtheCO2costmakesthempartlyuncompetitivecomparedtoCCUS-equippedcoalpowerplants.Thisisbecausethegreaterbenchmarkstringencyrequiresthedevelopmentoffossil-basedgenerationwithlowemissions0.00.20.40.60.81.0RPS-ETSETS+BMETS+AuctionETS+CapRPS-ETSETS+BMETS+AuctionETS+CapRPS-ETSETS+BMETS+AuctionETS+CapRPS-ETSETS+BMETS+AuctionETS+CapRPS-ETSETS+BMETS+AuctionETS+CapRPS-ETSETS+BMETS+AuctionETS+CapCoalCoalCCUSGasWindSolarPVHydroCNY/kWhRegionalgenerationcostrangeNationalAverageNationalAveragewithoutCO₂costs2.52.7EnhancingChina'sETSforCarbonNeutrality:Chapter4.EnhancedETSdesignsFocusonPowerSectorforcarbonneutralityPAGE69IEA.Allrightsreserved.intensitythatcanoutperformcoalbenchmarkstobalanceallowancedemandandsupply.Thesupportfornon-fossilgenerationsuchasrenewablesornuclearremainsverylimitedbecausetheycannotactasasourceofallowancesupply,andincaseoffuelswitchingtonon-fossilgeneration,thegeneratorwouldlosethefreeallowancesallocatedtohisreducedcoal-orgas-firedpowerproduction,thuscannotdirectlygainallowancesurplusfromtheswitching.Efficientgasgenerationcanonlymarginallyoutperformthegasbenchmark.Inturn,suchasystemalsoproducesahigherallowancepricethanifawiderrangeoftechnologies–includingcheaperabatementoptionsthanCCUS–cancontributetomeetingtheallowancedemandundertheETS.IntheETS+BMScenariowithhighlystringentcoalbenchmarks,theallowancepricerisestooverCNY300/tCO2in2035.TheeffectiveCO2costforunabatedcoalgenerationintheETS+BMScenarioreachesonaverageCNY0.080/kWhin2035.Atthesametime,CCUS-equippedcoalgenerationreceivesanabatement“subsidy”ofCNY0.160/kWhin2035asthetechnologybenefitsfromsellingsurplusallowances.GasgenerationbenefitsatamuchlowerlevelofCNY0.010/kWh.Overall,financialincentivesforswitchingfromunabatedtoCCUS-equippedcoalgenerationamounttonearlyCNY0.250/kWhin2035intheETS+BMScenario–takingintoaccounttheavoidedCO2costforunabatedcoalandtheavailablefinancialgainforCCUS-equippedcoalgeneration.ThisiscomparedtolessthanCNY0.090/kWhforgasgeneration(Figure4.7).Partialauctioninginanintensity-basedETSIntroducingpartialauctioningintoanintensity-basedETS–asdoneintheETS+AuctionScenario–enhancesthestringencyofthesystembyincreasingtheshareofallowancesthatgeneratorsneedtopurchase,thusincreasingtheeffectiveCO2costthatfossil-basedgeneratorswouldface.Therefore,anintensity-basedETSwithauctioningdoesnotneedtotightenthebenchmarksasmuchasinafreeallocationsystem(seeETS+BMScenario).Itdoesnotrequireasmuchdevelopmentoffossil-basedgenerationwithlowemissionsintensitytoenablecomplianceandallowthesystemtobalanceallowancedemandandsupply.Partialauctioningreducestheamountoffreelyallocatedallowancestofossil-basedpowergenerators,forboththosethatoutperformandunderperformtheirrespectivebenchmarks.Forexample,if20%ofallowancesareauctioned,generatorsreceive80%ofallowancesforfree.Generatorsthatalreadyhaveahigheremissionsintensitythanthebenchmarkwouldneedtopurchase20%oftheoriginallyfreelyallocatedallowancesontopoftheallowancestheyarerequiredtopurchaseforunderperformingthebenchmark.Generatorsthatoutperformbenchmarksbyamoderatemargin(e.g.5%)wouldfaceanallowancedeficitinsteadofanallowancesurplus,aspartialauctioningof20%wouldrequireEnhancingChina'sETSforCarbonNeutrality:Chapter4.EnhancedETSdesignsFocusonPowerSectorforcarbonneutralityPAGE70IEA.Allrightsreserved.themtopurchasearound15%ofallowancesthattheycouldreceiveunderfullyfreeallocation.Forgeneratorsthatsignificantlyoutperformbenchmarks,suchasCCUS-equippedcoalpower,auctioningwouldreducethelevelofsurplusfreeallowancestheyreceive,inturndecreasingtheirfinancialgain.Inthisway,partialauctioningcanincreasetheeffectiveCO2costforunabatedfossil-basedgenerationandincreaseincentivestoswitchtolow-carbontechnologies.Atthesametime,italsoreducesthe“subsidy”providedtofossil-basedemissionsreductionssolutionsandenhancestherelativeattractivenessofotherdecarbonisationoptionssuchasnon-fossiltechnologies.Witharoundaquarterofallowancesauctionedin2035,theaverageeffectiveCO2costforunabatedcoalpowerincreasestoCNY0.100/kWhintheETS+AuctionScenario.ThiscomparestoCNY0.020/kWhintheRPS-ETSScenario,whichhasthesamebenchmarkstringencybutallocatesallallowancesforfree.Forgasgeneration,theCO2costincreasestoCNY0.030/kWhin2035comparedtoa“subsidy”ofCNY0.010/kWhintheRPS-ETSScenario.AuctioningalsoreducestheconsiderablefinancialbenefitavailabletoCCUS-equippedcoalpowerfromCNY0.160/kWhintheRPS-ETSScenariotoCNY0.120/kWh.ThishigherCO2costforallunabatedcoalandgasgeneration,aswellasalowerincentiveforCCUS,alsoholdsincomparisontotheETS+BMScenario(Figure4.7).ThischangeineffectiveCO2costsandsubsidiesallowstheETStoincentivisemorefuelswitchingtonon-fossilgeneration,whilestillprovidingsomesupporttoCCUSdeployment.Consequently,theshareofrenewablesintheETS+AuctionScenariois9%higherin2035thanintheRPS-ETSScenario,reaching59%ofgeneration.CCUS-equippedcoalreaches3%ofthegenerationmix.Cap-and-tradeThetransitionfromanintensity-basedsystemtoacap-and-tradesystemwithanabsoluteemissionscapwouldsignificantlychangehowtheETSdrivespowersectordecarbonisation.Suchadesignevolutionwouldshiftthesystem’sfocusfromemissionsintensityimprovementtoabsoluteemissionsreductions,andallowdifferentemissionsreductionsmeasurestocontributetomeetingtheemissionsconstraint(i.e.thecap).Thiswouldprovideamoreeffectivesupporttofuelswitchingtonon-fossilgeneration.IntheETS+CapScenario,theshareofrenewablesreaches63%in2035,thehighestlevelacrossallEnhancedETSScenarios.ItistheonlyscenariothatshowsnoCCUSdeploymentby2035.Theinclusionofanabsoluteemissionscappredeterminesthetotalallowancessupplyand,providedthatthecapissufficientlystringent,requiresdecarbonisationmeasurestobetakenuntiltotalemissionsfromcoveredentitiesarereducedtomeettheabsolutecap.Incontrasttoanintensity-basedsystem,increasingfossil-basedgenerationoutputcannotleadtomorefreeallowancesinthesystem.EnhancingChina'sETSforCarbonNeutrality:Chapter4.EnhancedETSdesignsFocusonPowerSectorforcarbonneutralityPAGE71IEA.Allrightsreserved.Therefore,thecap-and-tradesystemvaluesthereductionofonetonneofCO2equally–whetherachievedbyefficiencyoremissionsintensityimprovementorbyfuelswitching.Throughthis,thesystemincentivisesthemostcost-effectivedecarbonisationopportunities.Withacap-and-tradedesign,theETSsendsauniformCO2pricesignaltoallpowergeneratingtechnologies–notjustasubsetoffossil-fuelledones,asisthecaseinanintensity-basedsystem.TheCO2pricerepresentsanopportunitycostfornotswitchingtothenextcheapestlower-carbongeneration,takingintoaccounttheallowanceprice,relativetechnologycostandemissionscaplevel.Withastringentcapthatdecreasesovertime,fossil-basedgeneratorsmustcontinuouslydecreaseemissions;thosethatdonotreceiveenoughfreeallowanceswouldneedtopurchaseadditionalallowancesfromothergenerators,oravoidthiscostbyreducingemissions.ForgeneratorsthatdoreceivesufficientfreeallowancesforETScompliance,thereisanopportunitycostforemittingratherthanpotentiallygainingbysellingunusedallowances.Underacap-and-tradesystem,generatorsmustweightheopportunitycostforkeepinganemittinggenerationassetandthecostforadoptingalower-carbonsolution,andtoreduceemissionswherethelatterischeaper.Atthesametime,asgeneratorswillseektopassthroughthisopportunitycosttoelectricitycustomersinaneconomicdispatchsystem,partialauctioningcanbeusefulinmitigatingpotentialwindfallprofits.Asaresultofgivingemissionsreductionsfromfuelswitchingtocost-competitivenon-fossiltechnologiesequalvalue,asufficientlyhighCO2costsignalcanbetransmittedwithamuchlowerallowanceprice:theCO2costsignalforunabatedcoalreachesonaverageCNY0.070/kWhin2035intheETS+CapScenario–asimilarlevelasinETS+BM.ThisiswhiletheallowancepriceremainsataroundCNY104/tCO2,about65%lowerthanintheETS+BMScenario(Figure4.7).ETSeffectsonlow-carbonalternativeswouldalsochangesignificantlywithatransitiontoacap-and-tradedesign.Withoutthebenchmark-induced‘subsidy’forlower-intensityfossilgeneration,acap-and-tradeETSwouldprovidethestrongestincentiveforswitchingfromunabatedcoaltonon-fossiltechnologies.TheETSwithacap-and-tradedesignthusenhancesinparticularthecompetitivenessofrenewablesrelativetoothergenerationsources.Meanwhile,by2035,theincentiveforswitchingfromunabatedtoCCUS-equippedcoalintheETS+CapScenarioisnotsufficienttomakeCCUScost-competitivewithotherlow-carbongenerationsources.Asaresult,itdoesnotenterthepowermixasunabatedcoalgenerationisphaseddown.EnhancingChina'sETSforCarbonNeutrality:Chapter4.EnhancedETSdesignsFocusonPowerSectorforcarbonneutralityPAGE72IEA.Allrightsreserved.PolicyinteractionsofETSandRPS:impactongreenelectricitypremiumThegreenelectricitypremiumprovidesanindicatorforunderstandinghowthedifferentETSdesignsinteractwiththeRPSpolicy,andinparticularthefinancialsupportprovidedtonon-hydrorenewables.InallthreeETS+Scenarios,thegreenelectricitypremiumneededtosupportthetargetednon-hydrorenewablessharedecreasesastheETSdesignisfurtherenhancedpost2025.ThisindicatesthatthemorestringentETSdesignsprovideanincentivethatmakesnon-hydrorenewablesmorecost-competitiverelativetoothergenerationsources.ThelevelofsupportvariesunderdifferentETSdesigns,andthelowerthegreenelectricitypremiumgeneratedbythemodel,thehighertheETSincentivetowardsnon-hydrorenewables.IntheETS+BMScenario,onlylimitedsupportforrenewablesdeploymentisgenerated.In2030,thegreenelectricitypremiumfallstoCNY0.017/kWhwhichis25%lowerthanintheRPS-ETSScenariowithlessbenchmarktightening.However,astheETS+BMScenariostillproducesapositivegreenelectricitypremium,theenhancedintensity-basedETSdoesnotyetprovidesufficientincentivestoreachthetargeted25.9%shareby2030andcomplementaryfinancialsupportwouldbeneededthrough,forexample,thegreencertificatescheme.By2035,however,thegreenelectricitypremiumpriceintheETS+BMScenariofallstozero–inotherwords,thesystemcouldbythenprovidetherequiredsupporttonon-hydrorenewablestoreacha36%shareinpowergeneration.Nevertheless,thepremiumlevelisalreadynearzerointheRPS-ETSScenarioby2035,showingthatlittleadditionalsupportisneeded;meanwhile,theETS+BMScenarioincreasestheshareofnon-hydrorenewablesonlymarginallycomparedtothe36%target(Figure4.9).Theseshowthatanintensity-basedETSwithfreeallocation,evenwithhighlystringentbenchmarks,canonlyprovideminoradditionalsupporttorenewables'competitivenessanddeployment,andcomplementaryfinancialsupportwouldstillberequiredtodrivehigherrenewablesuptake.ETSsupportfornon-hydrorenewablesissignificantlystrongerintheETS+AuctionScenarioandintheETS+CapScenario.Inbothscenarios,thegreenelectricitypremiumalreadyfallstozeroby2030,indicatingthatnoadditionalfinancialsupportthroughRPSwouldberequiredbythentoreachthetargetedshare.Thisisalsocoherentwiththegenerationmixoutcomewheretheshareofnon-hydrorenewablesfarexceedstheRPStargetinbothscenarios.EnhancingChina'sETSforCarbonNeutrality:Chapter4.EnhancedETSdesignsFocusonPowerSectorforcarbonneutralityPAGE73IEA.Allrightsreserved.Figure4.9Greenelectricitypremiumandnon-hydrorenewablessharebyscenario,2025-2035IEA.Allrightsreserved.Overall,thegreenelectricitypremiumindicatesthattheETScouldevolvetobetheprimaryinstrumentindrivingahighershareofrenewablesintheelectricitysector–however,onlythroughtheintroductionofallowanceauctioningorwithatransitiontoacap-and-tradesystem.BystreamliningtheETSandRPSpolicies–forexample,asintheETS+AuctionorETS+CapScenarios–thecost-effectivenessofthepolicymixcouldbeimprovedandadditionalfinancialsupportformatureandcost-competitiverenewablescouldbeavoidedorphasedoutovertime.Atthesametime,theseresultssuggestthatpotentialETSenhancementscouldimpactexistingrenewablespolicybyputtingdownwardpressureonthepricelevelinthegreencertificatemarket.This,inturn,wouldrequireco-ordinationandfurtherpolicyinterventiontomanagemarketexpectationsandtoguideinvestmentdecisions.Strengtheningpolicyco-ordinationinaccordancewiththechannelsandmagnitudeofpolicyinteractionswillhelptoseizepolicysynergiesandenhancetheeffectivenessofthepolicymix.EnhancingChina'sETSforCarbonNeutrality:Chapter4.EnhancedETSdesignsFocusonPowerSectorforcarbonneutralityPAGE74IEA.Allrightsreserved.Box4.2PotentialimplicationsforCCERoffsetsinclusionTheinclusionofChineseCertifiedEmissionsReduction(CCER)offsetcreditsinChina’sETS,inparticularcreditsgeneratedfromrenewables,forestryandmethaneutilisationprojects(China,MEE,2021a;China,StateCouncilGeneralOffice,2021),providesanopportunityfordecarbonisationmeasuresthatdonotdirectlyfallwithinthebenchmarkcoveragetogenerateallowancesfortheintensity-basedsystemandmakefinancialgainsfromtheETS.However,theinclusionofoffsetcreditsinanETSneedstobecarefullymanagedsoasnottoundermineETSstringencyandpricesignals,aswasthecaseinthesecondphaseoftheEUETS.Toavoidsuchadverseeffects,ChinahassetalimitforCCERuseforcompliancepurposesofupto5%ofverifiedemissions.ThismeansthatwhileCCERinclusionoffersawayfortheETStoprovidedirectincentivestosomeprojectsthatdonottargetreducingemissionsintensityoffossil-basedgeneration,itwouldnotfundamentallyreshapethefunctioningofanintensity-basedETS.Inparticular,itdoesnotchangethefactthatnon-fossilgenerationcannotserveasasourceofallowancesupplyinasystemicmanner.Furthermore,CCERsupplyiscurrentlylimitedasrulesgoverningCCERprojectshavebeenunderrevisionsince2017,suspendingissuanceandapprovalofnewcredits.NewCCERrulesandfurtherclarityontheirinclusioninthenationalETSareexpectedin2022.EvenassumingamplesupplyofCCERcredits,however,unabatedfossil-basedgeneratorswouldlikelyfaceallowancedeficitshigherthan5%oftheirverifiedemissionsasbenchmarksaretightenedovertime.EvenifCCERinclusionoffersacheapopportunityforETScompliance,demandwouldlikelyoutpacesupplysignificantlyleadingtoasimilardynamicasdemonstratedintheETS+BMScenario.Therefore,CCERsprovideanopportunitytosomewhatdiversifythesourcesofallowancesupplyinanintensity-basedETS.However,theyareunlikelytoprovideameansofreducingoverallCO2costsfacedbygenerators,norasystematicandlarge-scalechanneltoincentiviserenewables–especiallynottotheextentofETSdesignevolutionssuchaspartialallowanceauctioningortransitioningtoacap-and-tradedesign.Nevertheless,CCERscanprovidesomefinancialincentivestoprojectsthatcurrentlyreceivelimitedpolicysupportsuchasmethanereductionandforestry.EnhancingChina'sETSforCarbonNeutrality:Chapter5.PolicyinsightsFocusonPowerSectorPAGE75IEA.Allrightsreserved.Chapter5.PolicyinsightsChina'sshifttoacarbonneutralitytargettransformsthelong-termpolicypriorityawayfromimprovingemissionsintensitytoreducingabsoluteemissions.Consequently,theETSdesignwilllikelyneedtoevolvetoreflectthischangeandthereareseveraldesignoptionsthatcanaccelerateelectricitysectoralignmentwithacarbonneutralitytrajectory.Nevertheless,eachdesignoptionhasdifferentimpactsontheelectricitysectorandtherearedifferentparametersthatcanbeprioritisedwithdifferentdesignchoices.Thischapterproposespolicyinsightsbycomparingthescenarioresultspresentedinthepreviouschapterswithrespecttotheirabilitytoachievethedifferentpolicypriorities:optimisingtotalsystemcost,diversifyingthegenerationmix,drivingrenewablesdeployment,improvinganddecarbonisingthefossilfuelpowerfleet,andETSrevenuegeneration.Whileconsiderationsregardingenergysecurity,distributionalimpactsandemploymentarealsoimportantparametersforpolicydesign,theyareoutsideofthescopeofthisreport.DifferentETSdesignoptionsshouldbeconsideredindepthwithrespecttomostrelevantpolicyprioritiesTotalsystemcostafter2025islowestintheETS+CapScenariowheretheintensity-basedETSistransformedintoacap-and-tradeETS.Thisisbecauseacap-and-tradeETSallowscoveredentitiestoidentifyandinvestinthelowest-costabatementoption,therebyreducingtheallowancepriceanddrivinglower-costrenewablesgeneration.ThisisfollowedbytheETS+AuctionScenariowhichhelpstodrivesignificantrenewablesdeploymentthroughtheaddedCO2costfrompurchasingallowances.TheETS+AuctionScenarioalsohasalowerallowancepricethantheETS+BMScenario,whichhasthehighesttotalsystemcost.ThesignificantbenchmarktighteningleadstoahighallowancepriceandthedeploymentofasignificantshareofCCUS,whichiscomparativelymoreexpensivethanrenewablesdeployment.Themostdiversegenerationmix,however,canbedeliveredbytheETS+AuctionScenarioasitprovidesmeaningfulincentivesforcoalpowerwithCCUS,renewablesdeployment,aswellassomeadditional,efficientgaspowergeneration.Thisisbecausethebenchmarktighteningoftheintensity-basedETSprovidesafinancialincentiveforcoalpowerwithCCUSandefficientgasgeneration,whiletheaddedCO2costthroughauctioningdecreasesthecostcompetitivenessoffossil-basedpowercomparedwithrenewables.TheETS+BMScenario,ontheotherhand,leadstosignificantdeploymentofcoalpowerwithEnhancingChina'sETSforCarbonNeutrality:Chapter5.PolicyinsightsFocusonPowerSectorPAGE76IEA.Allrightsreserved.CCUSwhilepromotingrenewablesonlymarginally.TheETS+CapScenarioresultsinagenerationmixthatisdominatedbyrenewableswithnoCCUS-equippedcoalpowerby2035.Consequently,ifdrivingrenewablesdeploymentisapriorityofChina’sETS,theETS+CapScenarioperformsbest,followedbytheETS+AuctionandthentheETS+BMScenarios.Thisisbecauseacap-and-tradeETSallowsrenewablestodirectlyparticipateintheemissionsreductionrequiredbythesystemandtherefore,asalow-carbonpowersource,gainasignificantcompetitiveadvantageoverfossil-basedgeneration.Ifintroducingpartialauctioninginanintensity-basedETS,thiseffectisreducedbecauserenewablesarenotconsidereddirectlyinthesystemthroughbenchmarksbutratherbenefitfromtheaddedcarboncostappliedtothemostcarbon-intensivepowergenerationsources.IntheETS+BMScenariowithsignificantlytightenedbenchmarks,thereisalmostnoincentiveforadditionalrenewablesdeploymentfromtheETSbecausethesystemrequirestheallowancedeficittobebalancedwithlower-carbonfossilfuelgenerationcoveredbybenchmarks–inotherwords,bycoalandgaspowerwithCCUS.Ontheotherhand,ifapriorityoftheETSistoenhancetheefficiencyandreducetheemissionsintensityoftheexistingfossilfuelpowerfleet,andtoencouragedevelopmentanddeploymentofcurrentlyimmatureCCUStechnologyforenergysecurity,gridflexibilityandemploymentconsiderations,thenanintensity-basedETS,whetherwithfreeallocationbutstringentbenchmarksorpartialauctioning,wouldhaveastrongereffectthanacap-and-tradeETSastheformerdirectlytargetstheemissionsintensityofcoalandgaspower.Inthecaseofacap-and-tradeETS,thesepolicygoalscouldbesupportedthroughspecialprovisionssuchasadditionalfreeallowancesforCCUS-equippedunits,orthroughcompanionpoliciesdedicatedtoefficiencyimprovementandCCUSuptake.Forthelong-termcarbonneutralitytarget,therewillhoweverbelimitsontechnicalefficiencyimprovementsforexistinginfrastructureandstoragecapacityforCCUSand,thus,theirpotentialtodeliveremissionsreductions.Furthermore,thedeploymentofCCUStechnologywouldalsorequireco-ordinationwithpolicysupporttoCCUSR&Danddemonstrationprojectsinthenear-andmedium-term,aswellassupportforCO2transportandstorageinfrastructure.Thegenerationofcarbonrevenuestoaddress,forexample,distributionalconcerns,energyefficiencyortosupportR&Dinearly-stagelow-carbontechnologiescanbeanotherpriority.Suchapriority,however,canonlybeaddressedthroughtheintroductionofallowanceauctioningasmodelledintheETS+AuctionScenario.Theintroductionofallowanceauctioningisofcoursealsopossibleinacap-and-tradeETS,whichhas,however,notbeenpartoftheETS+CapScenariopresentedinthisreport.EnhancingChina'sETSforCarbonNeutrality:Chapter5.PolicyinsightsFocusonPowerSectorPAGE77IEA.Allrightsreserved.Thus,dependingonthepolicymakers’prioritiesaswellastheabilitytonavigateandnegotiatecomplexpolicyco-ordinationacrossseveralministries,theimpactsandconsequencesofthedifferentETSdesignoptionsshouldbecarefullyconsidered.Suchpolicyco-ordinationcanbeaidedbyintroducingapolicyco-ordinationprocessinvolvingallrelevantgovernmentinstitutionsthataimstoanalyseex-antetheimpactofdifferentpolicymixesinordertoavoidunintendedconsequences.ExamplesforthisaretheroleoftheDeputySecretaryGeneralforPolicyCo-ordinationandtheRegulatoryScrutinyBoardattheEuropeanCommission.Finally,notallofthedifferentETSdesignoptionsneedtobemutuallyexclusive.TheimplementationofacombinationofdesignoptionspresentedinthedifferentETS+Scenariosisconceivable.Anexampleisthetransitiontoacap-and-tradesystemwithpartialauctioning.ETSasakeyinstrumenttoachievecarbonneutralityinChinaIrrespectiveofthecompetingpriorities,establishingtheETSasameanstodeliverrenewablestargetscost-effectively–and,indeed,alsotodrivedeploymentofCCUSovertime–couldbeacriticalcornerstonetoachievecarbonneutrality.IntroducingpartialauctioninginthecomingyearswouldallowChina’sETStoprovidesuchincentiveswiththeintensity-baseddesign,aswellastoimprovepricediscoveryandgenerateanadditionalrevenuesource.Bystillinvolvingmeaningfulbenchmarkreduction,itcouldincentivisethedeploymentofcoalpowerwithCCUSandsignificantlyreducetheemissionsintensityofthecurrentcoalpowerfleet.Atthesametime,theaddedCO2costforfossil-basedgenerationresultingfromhavingtopurchaseauctionedallowancesimprovesthecostcompetitivenessofrenewables,especiallycomparedtounabatedcoalpower.TheintroductionofpartialauctioningwouldalsoincreasemarketliquidityandstrengthenpricediscoveryinChina’sETS.Theauctionrevenuescouldthenbeusedtofurtheracceleratetechnologyinnovation,toinvestinenergyefficiencyandtoaddressdistributionalconcerns(e.g.forelectricityend-consumers)–aspectsthatwouldlowerthelongertermcostofChina’scarbonneutralitypathandimprovetheacceptabilityoftheETS.Theintroductionofpartialauctioningcouldbecoupledwithafastimplementationofannouncedplansonanextensiontoothersectors(e.g.industry)andagradualtransitiontoacap-and-tradeETStowardstheendofthedecade.ThesewouldfurtherreducetheoverallcostofachievingcarbonneutralitybyexpandingthepossibleoptionsforemissionsreductionsandincreasingtheliquidityoftheETS.Openingmarketparticipationtonon-complianceentitiessuchasfinancialintermediariescould,inaddition,servetoimprovetheliquidityandfunctioningofthemarketand–especiallyinaneconomicdispatchelectricitymarket–allowpowergeneratorstohedgeagainstcarbonpricevolatility.ThegreaterEnhancingChina'sETSforCarbonNeutrality:Chapter5.PolicyinsightsFocusonPowerSectorPAGE78IEA.Allrightsreserved.cost-effectivenessisachievedthroughthemarket-baseddesignoftheETSwhichincentivisesthelowestcostemissionsreductions–irrespectiveofthesectororindustry.Greaterliquidityinthesystemisgeneratedthroughanincreasednumberofactorstradingallowances,whichshouldimprovepricediscovery,moderatepriceswingsandinturnaidtheacceptanceofthesystem.Furthermore,anextensionoftheETS’coveragecanalsohelptoreducethenumberandcomplexityofadditionalsectoralpoliciestoachieveChina'spathtocarbonneutrality.FurtherdesignelementsofsuchanETScanalsosupportthemanagementofpolicyinteractions:flexibilitymechanismstomanageallowancevolumeorpricevolatilitysuchasallowancereservesorpricecorridors.ThesecanprovidepredictableandrapidadjustmentsiftheETSisnotprovidingtheintendedpricesignalorcausingnegativeimpactsdueto,forexample,overlappingpoliciesorexternalshocks.Similarly,communicatingthefutureplansforChina’sETSwellinadvance,includingtechnicaldetailssuchasbenchmarkorcaptrajectories,willbecrucialtoprovidevisibilityandplanningcertaintyformarketparticipants,guideplantmanagementandinvestmentsdecisions(includingfortechnologicalinnovationandnecessaryinfrastructureforCCUS)aswellastoaccelerategenerators’alignmentwiththecarbonpeakingandcarbonneutralitygoals.Ultimately,toensurefullalignmentoftheETSwiththecarbonneutralitytarget,agradualshifttoacap-and-tradeETStowardstheendofthedecadewouldturnabsoluteemissionsreductionsintotheoverarchingobjectiveoftheETS.Suchasystemwouldintroducegreatertechnologyneutralityandachievegreatercost-effectivenessbyincreasingtheincentiveforfuelswitchingtolower-costrenewablesovertime–allthewhileensuringtheenvironmentaleffectivenessofthesystemthroughacapalignedwiththecarbonneutralitygoal.Partialauctioningcouldremainpartofsuchasystem,whichwouldfurtherstrengthenthepricesignal,createrevenue,andalsomitigatepotentialwindfallprofitsforcompanieswherecostpass-throughispossible.Freeallowances,allocatedusingforexample,product-basedbenchmarks33(insteadoffuelortechnology-specificones),canbeusedtoaddresscompetitivenessconcerns–especiallyifextendingtheETStoindustry–ortomitigatetheimpactofrisingCO2pricesonelectricityend-consumers.33Product-basedbenchmarksforfreeallocationcouldmean,forexample,onebenchmarkforelectricitygenerationirrespectiveofthefuelortechnology.Inthecaseofindustry,theproductcouldbethemainoutputsuchascrudesteelfortheironandsteelsector.EnhancingChina'sETSforCarbonNeutrality:GeneralannexFocusonPowerSectorPAGE79IEA.Allrightsreserved.GeneralannexREPOmodelandmodellingdesignIntroducingtheREPOmodelTheRenewableElectricityPlanningandOperation(REPO)modelisacapacityexpansionanddispatchmodelforChina’spowersystem.Itisdisaggregatedattheprovinciallevelandextendstheopen-sourceBalmorelmodel(Ravn,2001)whileincorporatingimportanttechnologyandpolicycharacteristicsparticulartoChina(Yangetal.,2018).Themodelintegratesanendogenouscapacityexpansionmoduleandappliesanobjectivefunctiontominimisethediscountedtotalcostofthepowersystem.Thetotalpowersystemcostcomprisescapacityinvestmentcosts,operationsandmaintenancecosts,fuelexpenses,unitcommitmentcosts,transmissioncostsandtaxesandsubsidies.TheREPOmodelcoversChina’s32provincial-leveladministrativedivisions(TableA.1).34These32divisionscanbegroupedintosixmajorgridregions:NortheastGrid(NEG),NorthwestGrid(NWG),NorthGrid(NG),CentralGrid(CG),EastGrid(EG)andSouthGrid(SG).Electricityandheatdemand,resourcepotential,existingpowerandco-generationinstallationsandexistingtransmissioncapacityareallrepresentedattheprovinciallevel.Themodelallowsinterprovincialtradeuptothelimitoftransmissioncapacity.Themodeltakes2015asthebaseyearandtheniteratesto2035infive-yearincrements.Ineachiteration,themodeloptimisescapacityexpansionandgridoperationsforoneyear.Withinthatyear,themodelselects12outof52weeksasrepresentativeseasons,and6hoursofatypicaldayineachweekasrepresentativetimeslots.These72representativehoursofayeararesimulatedforeachareaandeachtimeperiod.Themodel’sprovincialloadcurveprojectionsto2035aregeneratedbasedonelectricitydemandchangesandtheaccurateloadcurvesfor2015.Themodelcoverscoal-fired,gas-fired,nuclear,hydro,wind,solarandbiomasspower.Italsoincludespumpedhydro,compressedairandchemicalstorage.34ThespecialadministrativeregionsofHongKong(China)andMacau(China)arenotincludedinthisstudy.InnerMongoliaisdisaggregatedintoEasternandWesternInnerMongolia.EnhancingChina'sETSforCarbonNeutrality:GeneralannexFocusonPowerSectorPAGE80IEA.Allrightsreserved.FigureA.1REPOmodelframeworkTableA.1Chinapowersector’s6gridregionsandREPOmodel’s32provincialareasGridregionProvincescoveredNortheastGridHeilongjiang,Jilin,Liaoning,EasternInnerMongoliaNorthwestGridShaanxi,Gansu,Qinghai,Ningxia,Xinjiang,TibetNorthGridHebei,Beijing,Tianjin,Shanxi,Shandong,WesternInnerMongoliaCentralGridHubei,Hunan,Jiangxi,Chongqing,Sichuan,HenanEastGridShanghai,Jiangsu,Anhui,Fujian,ZhejiangSouthGridGuangdong,Guangxi,Guizhou,Hainan,YunnanTheREPOmodel’simportantconstraintsare:powerbalanceconstraints,powergenerationconstraints,renewableenergyresourceconstraints,transmissionconstraints,storageconstraints,unitcommitmentconstraintandplanningreserveconstraint.Thepowerbalanceconstraintsensurethatpowergenerationplusnetimportsequalpowerdemandandlosses,whilepowergenerationconstraintsensurethatthepowergenerationofeachtechnologyateachhourdoesnotexceeditscapacity.Aspowergenerationfromvariablerenewableenergy(VRE)resourcessuchasrun-of-riverhydro,wind(Rieneckeretal.,2011)andsolar(ChinaMeteorologicalAdministration,2016)isalsolimitedbyresourceavailability,therenewableenergyresourceconstraintsensurethateachVREtechnology’sgenerationdoesnotexceeditsresourcelimit.TheresourcelimitcomprisestwoEnhancingChina'sETSforCarbonNeutrality:GeneralannexFocusonPowerSectorPAGE81IEA.Allrightsreserved.aspects:full-loadhoursandthemaximumgenerationprofileforeachrenewablegeneratorineachregion.ForeachVREtechnology,generationislimitedtotheproductofitsfull-loadhours,installedcapacityandshareoftotalmaximumgenerationforonetimesegment.Withthemodelrecognisingallinterprovincialtransmissionlinesofmorethan220kV,itstransmissionconstraintsensurethattheamountofpowertransportedfromoneregiontoanotherdoesnotexceedthetransmissioncapacitybetweenthetworegions.Thestorageconstraintsensurethatthecharginganddischargingrateofeachstoragetechnologydoesnotexceeditspowercapacityandthatenergystoragedoesnotexceeditsenergycapacity.Theunitcommitmentconstraintandplanningreserveconstraintensurecapacitymarginforthetypicalloadofeachrepresentativehourandforannualpeakload.TheREPOmodelcomputesthefuturecapacityexpansionandpowergenerationofeachtechnologyineachprovince,inadditiontoitsCO2emissions.Inlinewithmostcapacityexpansionmodels,noconstructiontimesareconsidered.ThesedataareusedtoanalysetheeffectsofETSpoliciesonthepowersystem.TobetterrepresentthermalpowertechnologiesintheREPOmodel,wedisaggregatedcoal-firedandgas-firedpowerintoadditionalsubcategories.Eachtechnologyisdescribedbyseveralparameters,includingitsefficiency,installationcosts,fixedoperationsandmaintenance(O&M)costs,variableO&Mcosts,lifespan,typicalsize,rampingup/downrate,startup/shut-downcostsandminimumloadshare.Coal-firedpowertechnologiesaredisaggregatedintosevendetailedcategories:ultra-supercritical,supercritical600MW,supercritical300MW,subcritical600MW,subcritical300MW,high-pressureandultra-high-pressure,andcirculatingfluidisedbed(CFB).Gas-firedpowertechnologiesaredividedintotwocategories:F-classandbelowF-class.AnETSmoduleisbuiltintotheREPOmodeltodescribethenationalETS.ThetechnologiesinvolvedinthenationalETSandtheirbenchmarksaredescribedinthemodel,withonlycoal-andgas-firedpowertechnologiescoveredbythenationalETSfrom2020.Benchmarkvaluesaredefinedbytechnologyandyear.SomeequationsandconstraintshavebeenintegratedintotheETSmoduletorepresenttheallowanceallocationrules.KeydatainputsandassumptionsThissectiondetailskeydatainputsandassumptionsusedinthemodellingforthisreport,includingonelectricitydemand,dispatchrules,initialcapacitymix,costsassumptionsandemissionsfactors.Electricitydemandfor2015and2020arebasedonCECdata.AssumptionsforfutureelectricitydemandarealignedwiththeIEA’sAnnouncedPledgesScenario(APS)(IEA,2021b)(TableA.2).EnhancingChina'sETSforCarbonNeutrality:GeneralannexFocusonPowerSectorPAGE82IEA.Allrightsreserved.TableA.2Electricitydemandassumptions202520302035Electricitydemand(TWh)93001020011800Themodelassumespartlyplanneddispatchin2020andeconomicdispatchfrom2025onwards,whileallowingforinterprovincialtradeuptothelimitoftransmissioncapacity,andoptimisescapacityandgenerationmixesaccordingly.Minimumoperatinghours(2500hoursperyear)areassumedforgas-firedplantstoreflectthepoliticalincentivesforgas-firedpowergeneration.Themodeluses2015asthebaseyearandtheniteratesinfive-yearincrementstoassesspotentialpolicyimpactsupto2035.InitialnationalandprovincialcapacityandgenerationmixesarebasedondatafromtheChinaElectricityCouncil(CEC).Afterclassifyingcoal-andgas-firedpowerplantsintotheirsubcategories,thecapacityforeachtechnologyforthebaseyear2015wasverifiedbyaggregatingunit-leveldataandmatchingitwithprovincialdatafromtheChinaElectricityCouncil(CEC).Uncategorisedpowerunitsforwhichthetechnologycannotbeidentifiedaredefinedasfollows:Gas-firedpowerunitsareconsideredas“belowF-class”Coal-firedpowerunitsbelow300MWareclassifiedas“high-pressureandultra-high-pressure”Coal-firedpowerunitsabove300MWaredefinedas“subcritical300MW”.Totalcoal-firedpowercapacityin2015was900GW,madeupof17%ultra-supercritical,20%supercritical600MW,4%supercritical300MW,11%subcritical600MW,29%subcritical300MW,13%high-pressureandultra-high-pressure,and5%CFBtechnologies.Totalgas-firedpowercapacityin2015was66GW,withF-classaccountingfor63%andbelowF-classmakingup37%.Investmentsinfuturepowertechnologiesareoptimised,andunitsareassumedtoretireuponreachingtheendoftheiroperationallifetimeformosttechnologies.Forcoal-firedplants,alifetimeassumptionof30yearsismade,andearlyretirementstrategiescanbeactivatedwhenthefleet’saveragerunninghoursfallbelowapredefinedthreshold.Simulationsfor2020havebeenstronglycalibratedbasedon2020statistics.Technologyandstoragecostassumptions(TableA.3andTableA.4)arebasedonseveralsources,includingCECdata(CEC,2016),CostofElectricPowerProjects(China,EPPEIandCREEI,2017),WorldEnergyOutlook2020(IEA,2020b),ChinaPowerSystemTransformation(IEA,2019),studiesonstoragedevelopment(Liuetal.2017;IRENA,2017),andaNationalRenewableEnergyEnhancingChina'sETSforCarbonNeutrality:GeneralannexFocusonPowerSectorPAGE83IEA.Allrightsreserved.Laboratory(NREL)study(Vimmerstedtetal.,2019).TheO&McostsfordifferenttechnologiesareadoptedfromtheNRELreport.ThisstudymakestheassumptionthatCCUStechnologyallowsforthecaptureof92%ofplantemissions.EfficiencylossofCCUS-equippedplantsisconsidered.CostsforCO2transportandstorage,andliabilityorinsurancecostsforleakagefromCO2storagefacilitieshavenotbeentakenintoaccount.TableA.3CostassumptionsbytechnologyCapitalcosts(CNY/W)VariableO&Mcosts(CNY/MWh)FixedO&Mcosts(CNY/kW-yr)201520202035Coal3.7-4.53.63.631214CoalwithCCUS23.623.612.858449Gas2.7-3.12.62.62396Biomass1210.810.835712Nuclear13.115.615.014629Hydro7.510100203-268Windonshore7.97.06.30340Windoffshore2015110881SolarPV8.15.32.80106CSP-29.822.427438Notes:CSP=concentratedsolarpower.VariableO&McostsinthistabledonotincludefuelexpensesorCO2cost,whichareclassifiedinthemodelasaseparatecostcomponent.TableA.4CostassumptionsbystoragetechnologyCapacitycost(CNY/Wh)VariableO&Mcosts(CNY/MWh)FixedO&Mcosts(CNY/MW-yr)dischargingduration(hours)2020203520202035Pumpedhydro0.50.511458Batterystorage1.50.7751411254Compressedairstorage0.330.27520201.520TheassumptionspertainingtocoalandgaspricesvaryamongChina’sregions.Theregionalcoalpricesfor2015and2020arebasedondatafromtheChinaCoalTransportationandDistributionAssociation(CCTD)(TableA.5),whileregionalgaspricesfor2015and2020arebasedonthegatepriceforgasinChinaandonEnhancingChina'sETSforCarbonNeutrality:GeneralannexFocusonPowerSectorPAGE84IEA.Allrightsreserved.theIEANewPoliciesScenario(NPS)FullflexcaseinChinaPowerSystemTransformation(IEA,2019).AverageannualfuelpricegrowthfollowstheWorldEnergyOutlook(WEO)STEPS(IEA,2020b).CoalpricesinXinjiang,EasternInnerMongoliaandWesternInnerMongoliaarethelowest,followedbyNingxiaandShanxi,whileinotherregionstheyarerelativelyhighandcanbemorethandoubletheXinjiangprice.GaspricesinXinjiangandQinghaiarerelativelylowcomparedwithotherregionsofChina.TableA.5Coalpriceassumptionsbyarea,2020RegionCoalpricein2020(CNY/GJ)Xinjiang12EasternInnerMongolia12WesternInnerMongolia13Ningxia17Shanxi17Others≥21Thetransmissioncostcontainstwocomponents:transmissionlineinstallationcostsandO&Mcosts.Thecostofinstallingtransmissionlinesbetweentworegionsincludessetcostsrelatedtocapacity(CNY1.5million/MW,USD0.23million/MW)andtodistance(CNY1000/MWperkm,(USD155/MWperkm).TheannualO&Mcostissetat3%ofthetransmissionlineinstallationcost.ThemodelincludesenergyefficiencymeasuresasoneleverforreducingCO2emissions.ThecostsforCO2emissionreductionfromenergyefficiencyareshowninTableA.6,whicharesetatthreelevelsforeachtechnology.EnhancingChina'sETSforCarbonNeutrality:GeneralannexFocusonPowerSectorPAGE85IEA.Allrightsreserved.TableA.6AssumptionsonemissionsreductioncostsfromenergyefficiencymeasuresLevel1(CNY/tCO2)Level2(CNY/tCO2)Level3(CNY/tCO2)CFB355369383High-pressure342355369Subcritical-300MW363377391Subcritical-600MW396410424Supercritical-300MW369383396Supercritical-600MW410424437Ultra-supercritical410-465437-478451-492Gas2175-22752200-23002225-2325TheRPSpolicyisincludedasthemainpolicydriverforrenewablesdeployment,andismodelledbyagenerationconstraintwheretheshareofelectricityfromnon-hydrorenewablesinthetotaldemandshouldbenolessthantherequiredtarget.Thisanalysisassumesthenon-hydrorenewablessharetargettobe25.9%by2030and36%by2035,basedonNEA’sconsultationdraftonindicativeRPStargetsfor2022-2030(China,NEA,2021a),andtheassumptionofamoderateaccelerationinannualtargetincreasefor2031-2035(TableA.7).TableA.7Assumptionsforthenon-hydrorenewablessharetargetundertheRPSpolicy202520302035Non-hydroRPS18.6%25.9%36.0%Forhydro(excludingpumpedhydro),acapacityrangeisassumedthatincreasesmoderatelyovertime.Nuclearcapacityisassumedtomorethandoubleby2035,inlinewiththepaceofcapacityinstallationsinthepastfiveyearsandplansupto2025.EnhancingChina'sETSforCarbonNeutrality:GeneralannexFocusonPowerSectorPAGE86IEA.Allrightsreserved.ReferencesAldy,J.E.andR.N.Stavins(2012),Thepromiseandproblemsofpricingcarbon:Theoryandexperience,TheJournalofEnvironment&Development,21(2),152–180,https://doi.org/10.1177/1070496512442508.BrookingsInstitute(2015),ControllingcarbonemissionsfromU.S.powerplants:Howatradableperformancestandardcomparestoacarbontax,https://www.brookings.edu/research/controlling-carbon-emissions-from-u-s-power-plants-how-a-tradable-performance-standard-compares-to-a-carbon-tax/.CEC(ChinaElectricityCouncil)(2021),2020-2021年度全国电力供需形势预测报告[AnalysisandForecastofChinaPowerDemand-SupplySituation2020-2021],https://english.cec.org.cn/detail/index.html?3-1128.CEC(2016),ChinaElectricityIndustryDevelopmentAnnualReport2016,https://english.cec.org.cn/detail/index.html?3-1128.China,CCCPC(CentralCommitteeoftheCommunistPartyofChina)andStateCouncil(2021),中共中央国务院关于完整准确全面贯彻新发展理念做好碳达峰碳中和工作的意见[WorkingGuidanceforCarbonDioxidePeakingandCarbonNeutralityinFullandFaithfulImplementationoftheNewDevelopmentPhilosophy],https://en.ndrc.gov.cn/policies/202110/t20211024_1300725.html.China,CCCPCandStateCouncil(2015),关于进一步深化电力体制改革的若干意见（中发9号）[Opinionsonfurtherdeepeningthereformofpowersystem(DocumentNo.9)],https://shupeidian.bjx.com.cn/html/20150410/606700.shtml.China,EPPEI(ElectricPowerPlanningandEngineeringInstitute)andCREEI(ChinaRenewableEnergyEngineeringInstitute)(2017),CostofElectricPowerProjectsduring12thFiveYearPeriod,http://news.bjx.com.cn/html/20171024/857253.shtml.Chinagreencertificatetradingplatform(2021),http://www.greenenergy.org.cn(accessed3January2022).ChinaMeteorologicalAdministration(2016),中国太阳能资源辐射总量空间分布[SpatialdistributionoftotalsolarenergyradiationinChina],http://data.cma.cn/.China,MEE(MinistryofEcologyandEnvironment)(2022),全国碳市场第一个履约周期顺利结束[ThefirstcomplianceperiodofthenationalETSsuccessfullyclosed],https://www.mee.gov.cn/ywgz/ydqhbh/wsqtkz/202112/t20211231_965906.shtml.China,MEE(2021a),碳排放权交易管理办法（试行）[Interimrulesforcarbonemissionstradingmanagement],https://www.mee.gov.cn/xxgk2018/xxgk/xxgk02/202101/t20210105_816131.html.China,MEE(2021b),关于做好全国碳排放权交易市场第一个履约周期碳排放配额清缴工作的通知[Noticeonsurrenderingthecarbonemissionsallowancesinthefirstcomplianceperiodofthenatio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ilogrammekWhKilowatthourMtMilliontonnestTonneThispublicationreflectstheviewsoftheIEASecretariatbutdoesnotnecessarilyreflectthoseofindividualIEAmembercountries.TheIEAmakesnorepresentationorwarranty,expressorimplied,inrespectofthepublication’scontents(includingitscompletenessoraccuracy)andshallnotberesponsibleforanyuseof,orrelianceon,thepublication.Unlessotherwiseindicated,allmaterialpresentedinfiguresandtablesisderivedfromIEAdataandanalysis.Thispublicationandanymapincludedhereinarewithoutprejudicetothestatusoforsovereigntyoveranyterritory,tothedelimitationofinternationalfrontiersandboundariesandtothenameofanyterritory,cityorarea.IEA.Allrightsreserved.IEAPublicationsInternationalEnergyAgencyWebsite:www.iea.orgContactinformation:www.iea.org/about/contactTypesetinFrancebyIEA–May2022Coverdesign:IEAPhotocredits:©Shutterstock

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