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China's power sector is undergoing profound changes. Undoubtedly, the country’s "3060" decarbonization goa constitute the strongest external drivers of change in the power industry. And endogenous technological developments, including various types of renewable energy, energy storage, and thermal retrofit technologies are beginning to shape the new paradigm of the power grid. In addition, the government's push to move from a planned economy to a market economy is driving change in the electric power industry through market-oriented reforms.
The total electricity production and consumption in China has grown rapidly in recent decades as the economy and production and living standards have taken off. According to data provided by BP's Statistical Review of World Energy 2022, China's electricity generation grew nearly 14-fold from 1991 to 2021, from 677 TWh (terawatt hours, or billion kilowatt hours) to 8,534 TWh, while the rest of world's total electricity generation grew from 10,546 TWh to 19,932 TWh over the same period, an increase of only 1.9 times. China's share of the world's electricity generation jumped from 5.2% to 30.0%.
Exhibit 1. Electricity generation in China and Worldwide, 1991-2021 (TWh)
Source：bp, MioTech Research
Over the past 20 years, coal power generation in China has grown at almost the same rate as electricity consumption, ensuring that China's electricity supply is abundant and affordable. But this has also led to a significant increase in China's greenhouse gas emissions, slowing the country's low-carbon transition. According to International Energy Agency (IEA), China's electricity and heat generation sector caused 639 million tons of CO2 emissions in 1990, accounting for 30 percent of the country's carbon emissions. In 2019, this figure reached 5,238 million tons, accounting for more than half (53%) of the country's carbon emissions.
Because fossil-fuel combustion has remained the biggest source of China’s electricity as well as its carbon emissions, China began actively investing in renewable energy in 2010, with wind and solar power figuring prominently in the effort to reduce the country’s dependence on fossil fuel.
Worldwide, there are several different sources of energy that can provide electricity. The most important sources of electricity worldwide, in order of generation, are coal (36%), natural gas (23%), hydro (15%), nuclear (10%), wind (7%), solar (4%) and oil (3%), with the above sources together providing about 100% of the world's electricity in 2021. But this does not represent the structure of electricity supply in every country. For example, in Canada, 59% of electricity in 2021 is supplied by hydro power. In China, the top sources of electricity in 2021 are coal (63%), hydro (15%), wind (8%), nuclear (5%), solar (4%), natural gas (3%) and other renewables (2%), with the above sources together providing nearly 100% of China's electricity in 2021.
Exhibit 2. Power supply structure of China and world average, 2021
Source: bp, MioTech Research
Note: Other renewable energy includes electricity generated from geothermal, biomass and other not-itemized renewable energy sources.
In addition to the low-carbon transition, there is another side to the impact of climate change on electricity. In recent years, recurring abnormal climate events such as droughts and extreme high temperatures occur across continents, in places such as U.S. California, South Africa, and China’s Sichuan and Yunnan provinces, posing reliability challenges to regional grids that rely heavily on non-fossil energy sources (e.g., hydropower and photovoltaics).
The current climate change model shows that today's extreme heat waves will become more common, putting even greater pressure on the stability and reliability of countries' electric energy supplies. Geopolitical conflicts in Russia- Ukraine and the middle east have increased tensions over energy crisis for importing countries, and the role played by traditional fossil energy sources may be reassessed.
Exhibit 3. Cumulative installation capacity by different power generation sources in China, 2008- 2022 (GW)